When Gains at the Top Hurt Those at the Bottom

Wealth isn't necessarily bad in and of itself, but a new report suggests there's a correlation between the rich getting richer and everyone else getting left behind.

Richard Drew / AP

It’s all but impossible to dispute: Extreme wealth is growing in America. The top 1 percent accounted for less than 10 percent of total earned income in the 1970s. By the end of 2012, they held more than 20 percent, according to Emmanuel Saez, a professor at UC Berkeley.  What’s more, between 1993 and 2012, the top 1 percent saw their incomes grow 86.1 percent, while the bottom 99 percent saw just 6.6 percent growth, according to Saez’s research.

Wealth is not necessarily a bad thing. People with more money could spend it on goods and services that help employ people at the bottom. But do they? And why do gains for workers at the top seem to come at the same time that it is becoming harder for everyone else to see their wages increase?

Generally, economists have found that it is becoming increasingly difficult to move up to a higher income bracket during the course of a career: If you start off as a low-income earner, you’re more likely to stay there. But no one is yet sure why.

A new paper from the left-leaning Roosevelt Institute takes a look at why workers are having a harder time climbing the income ladder—something I’ve written about before—and argues that there is a correlation between the rich getting richer and everyone else getting left behind. The paper, authored by Mike Konczal and Marshall Steinbaum, finds that people aren’t able to move up the career ladder because demand for workers has decreased, in large part because there are fewer businesses being formed and expanding.

The authors look at data from 741 metropolitan areas between 2000 and 2015, examining whether there was a correlation between lackluster earnings growth and people leaving jobs. They found that in metro areas where there weren’t that many jobs available, earnings grew more slowly. That is because there has been a shift in the way new firms emerge to compete with ones that already exist. Big companies merge to create behemoths that upstarts can’t displace, and those big companies can then control what they pay the people whose jobs they haven’t cut.

What does this have to do with income inequality? The authors say that management and shareholders are hoarding more of a company’s resources for themselves, spending less on workers, and thus creating fewer jobs. “It’s driven by changing power dynamics within corporations,” Steinbaum told me.

There are a series of incentives that make it more worthwhile for management and shareholders to focus on profits, rather than investing in the workforce, the authors argue. Shareholders demand profits that lead to cost-cutting, which often means eliminating jobs or replacing full-time workers with temps. CEOs are incentivized by bonus structures to grow revenues each quarter and cut costs. “The workings of the capitalist economy are slowly malfunctioning,” they write.

Konczal and Steinbaum say that declining tax rates for the very rich are also causing some of this behavior. The rich of today make a lot more of their money in wages and benefits than did the wealthy of the past, who predominantly got their wealth by inheriting and investing it. And since the 1980s, the very rich have had to pay a lot less in income taxes.

In 1948, people in the top tax bracket—at the time, those making over $200,000—paid a whopping 91 percent of their income in federal income taxes. That rate for top earners dropped to 70 percent in the 1970s and early 1980s, then to 50 percent in 1982 and 38.5 percent in 1987. It’s hovered around 39 percent since 1993.

U.S. Top Marginal Tax Rate, 1913-2013

When CEOs were seeing 70 percent of their income go toward taxes, they cared less how much money they or their company made; much of it would go to the government anyway, Konczal and Steinbaum argue. But now they can keep most of that money, which makes them more likely to seek out more income by restricting competition when possible, Konczal and Steinbaum write.

It’s a pessimistic view of how companies work, but it’s one that’s backed up in other recent research. Thomas Piketty, Emmanuel Saez, and Stefanie Stancheva analyzed how top earners respond when marginal tax rates change, and found that increases in earnings for the top income brackets—which often come alongside tax decreases—do not translate into higher economic growth. When tax rates are lower, those researchers found, top earners are more likely to negotiate for a larger share of the pie in terms of wages and benefits.

Konczal and Steinbaum take this a step further, arguing that when marginal tax rates are lower, management and shareholders undertake a number of steps to increase their share of the pie. And those steps cut jobs and wages of workers who make up the lower ranks of companies.

Of course, it might be worth taking his argument with a grain of salt. The Roosevelt Institute, as a recent New York Times Magazine story emphasized, is trying to channel the energy of the Occupy movement into national politics. Steinbaum admits that many economists would disagree that there’s a relationship between wages at the top and those at the bottom. But, he said, “it’s in the fringes of the field but the center of reality.”

But Steinbaum and Konczal have some good points. The top rates for the highest earners have gone down significantly. And in the past two decades, new business formation has decreased, as wages have remained stagnant. One of the only things that has gone up during that time period: the earnings of the people at the very top.