Posted by: Mark Gimein on October 21, 2011 at 1:45 PM
One of the most prominent thinkers on income in the United States is Berkeley’s Emmanuel Saez, a French trained economist who, with his collaborator Thomas Picketty, has done some very comprehensive analyses of the subject. The best known finding of their work is that around 1982 incomes of those at the top—the top 10% and especially the top 1%—started diverging dramatically from those below at an accelerating rate. Saez and Picketty’s charts illustrating what’s happened to incomes in the US and other countries have been widely publicized, and you can dig into their data in the new international database of top incomes.
Though his work has been a major influence in the wealth debate, Saez’s voice has not been as prominent as some others recently—perhaps in part because he has been careful about drawing hard conclusions about just why this shift has taken place. There’s one reason he suggests, though, that hasn’t gotten much play and should scare folks in the upper end of the income distribution: it’s that executives could be benefitting from a management pay bubble.
Corporate executives and managers, as well as some economists, like to think that the increasing pay of senior employees has to do with increasing returns for their specialized skills. Over email, Saez offered me a much less flattering explanation: it’s not that managers have become more valuable. It’s that, as he puts it, there’s no good way to measure objectively the productivity of an executive. That lends itself to what Saez calls “bubble phenomena” in their perceived value—to put things bluntly, they benefit from being seen as more important than they are.
If that’s the case and managers do not have some special growing value, then the same forces that have put pressure on wages lower down the ladder—labor mobility, ease of hiring and firing—will eventually apply to them, too. We may already be seeing the beginnings of that with CEO salaries. Whether in a slow seep or a big bang, every bubble will deflate.