Why Has Inequality Been Growing?

Effective remedies for growing income disparities require a clear understanding of the forces that have caused them. In their recent book, Winner-Take-All Politics, Jacob Hacker and Paul Pierson have argued that explosive salary growth at the top has been fueled by a more lax regulatory environment purchased with campaign contributions. That’s a spot-on description of what happened in the financial services industry, which is of course the principal target of the OWS movement.

But it’s an unsatisfactory account of why inequality has been rising in other occupations. The same pattern of income growth we’ve seen for the population as a whole has been replicated for virtually every subgroup that’s been studied. It holds for dentists, real-estate agents, authors, attorneys, newspaper columnists, musicians, and plastic surgeons. It holds for electrical engineers and English majors. And in none of those instances has it been primarily the result of regulatory favors.

To be sure, executives sometimes pack their boards with cronies who reward them with exorbitant salaries and bonuses. But such abuses are no worse now than they’ve always been. On the contrary, improved communications and falling transportation costs have almost certainly made them less serious. Executive hiring committees may not be perfectly informed, but they have more information than they used to, and this makes reputation a more effective predictor of performance. Similarly, increased vigilance from institutional shareholders and growing threats of hostile takeovers have placed additional constraints on executive pay abuse.