Wednesday, July 02, 2014

Picking Piketty Apart (4) Inequality

Part 3 of Capital is called Structures of Inequality. In this part, Piketty analyses the nature of inequality. He says that,

By definition, in all societies, income inequality is the result of adding up these two components: inequality of income from labour and inequality of income from capital. The more unequally distributed each of these two components is, the great the total inequality.

The third decisive fact is the relation between these two dimensions of inequality: to what extent do individuals with high income from labour also enjoy high income from capital.

The distribution of capital ownership (and income from capital) is always more concentrated than the distribution of income from labour.
To analyse inequality, he divides the population of society into three groups.
  • Lowest fifty percent
  • Middle forty percent
  • Top ten percent (top decile)
To understand what is happening in the top ten percent, he sometimes investigates the top one percent (percentile).

Piketty prefers this approach to analysing equality over other measures like Gini coefficients. His approach makes sense, because it describes inequality very graphically.

In the United States, the top decile owns 70 percent of the wealth. The bottom fifty percent owns only 5 percent, and there are five times as many of them. The middle forth percent owns only 25 percent of the wealth, and there are many of them too.

The big change in the twentieth century was the emergence of the middle class. In 1910, this group held very little wealth. Their share increased significantly during the century. This was achieved mainly through the ownership of residential housing and superannuation.

The other big change in last few decades is the emergence of the super salaries in the top decile.
The final and perhaps most important point is the increase in very high incomes and very high salaries of “supermanagers,” that is , top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labour.
This has made the top ten percent more dependent on labour income.

The last chapter of this part looks at inheritances.
We find a spectacular decrease in the flow of inheritances between 1910 and 1950 followed by a steady rebound thereafter, with an acceleration in the 1980s.

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