June 29, 2015
A recent NBER paper showing that most of the increase in inequality over the last few decades has been between firms rather than within firms has gotten a great deal of interest. Several people have noted that this story may not be quite as compelling as initially advertised. For example, Matt Bruenig points out that the analysis is complicated by the breaking up of firms. He gives the example of McDonalds where the bulk of lower paid employees are at franchises that would appear as independent businesses. Nick Bunker noted that the top coding of the 0.001 percent, along with sampling bias, would miss a substantial portion of the upward redistribution over this period.
However there is another important issue that would affect the reported earnings of high-income individuals in this sample. Many of the top earners are in the financial sector working at hedge funds, private equity funds, and real estate investment trusts. In these cases, most of the earnings of the top paid individuals would take the form of carried interest. This would not be recorded as wage income, but rather as capital gains income, even though it is quite explicitly payment for work.
The sums involved are likely to be substantial. According to Institutional Investor, the top 25 hedge fund managers earned $11.6 billion in 2014 and $21.1 billion in 2013. It is likely that the vast majority of this income took the form of carried interest rather than salary and therefore would not appear as labor income in data from the Social Security Administration used in the analysis. There are likely to be several thousand individuals at these funds with substantial amounts earnings in the form of carried interest. While we don’t have good data on the total amount of carried interest income, it is likely to run into the tens of billions of dollars annually. This would be a substantial portion of the income that has been redistributed to those in the top 1.0 percent and especially the 0.01 percent.
