Thursday, July 2, 2009

Wealth and Technology

Rising inequality is commonly thought to be a major problem of rich economies in the last few decades. It is not due however to an increase of the share of capital versus a decrease of the labor’s share in the overall pie writes Thomas F. Cooley, professor at New York University and dean of the Stern School of Business there. The labor’s share of output has remained remarkably constant at roughly 70% from 1950 to 2008. It is the result of a gilded age for the top 1 % earners, a new group of super-rich, as the above graph from Emmanuel Saez (earner himself of the John Bates Clark award given to the best economist under 40) makes clear.

Contrary to extensive arguments in the literature, this, in turn, is not due, in the main, to tax cuts or extraordinary executive compensation, but according to recent research, to technological change favoring those with the “right” human capital. The spike in the 1920s was due to electrification. Today, it is the result of the information and communication revolution: Let’s think for example about the income and capital value of the owners of Microsoft, Apple or Google … All the others have also benefited from the overall growth (at least in the economies that have been growing but such as the U.S. one, but less so in Europe). Despite that fact, the good fortune of the richest 1% has left many feel impoverished, but in a subjective sense, and relatively, not in income terms.

Here is the paper .

Thanks to Greg Mankiw for signaling it on his blog.

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