Profits are up, share prices are up. What do you think should happen to the wages of people hired to increase profits and share prices?
This raises the question: what is the link between top incomes and profits?
My chart sheds light here. I‘m taking the share of the top 0.5% of incomes in total incomes from Emmanuel Saez‘s data, and profits from national accounts data.
This shows that, over the long-run, there is a rough correlation: both shares have a U-shaped pattern, troughing in the mid-70s.
However, since the late 80s, the correlation is less obvious. The share of profits in GDP was lower in 2005 (the latest year for Saez’s data) than in the late 80s. But the share of the top 0.5% in total incomes doubled during this time.
In recent years, then, moves in aggregate profits cannot explain moves in top incomes. The power of capital to exploit labour hasn’t changed much, but the power of top earners to seize incomes has increased.
I suspect there are two big reasons for this.
One lies in efficiency wage theory. Top bosses and bankers must increasingly be bribed not to seize corporate assets for themselves - partly because these assets consist more of portable things like goodwill or financial products and less of hard physical capital. At the same time, the need to bribe ordinary workers to behave well has declined as IT allows more direct monitoring of them.
Another lies in managerialist ideology. Firms believe that success requires them to hire super-talented managers, and so there’s a bidding war for talent.
In large part, there’s a fallacy of composition here. In aggregate, profits depend upon macroeconomic and institutional factors, not the skill of managers in total.
But what if there’s a germ (or more!) of truth in this ideology? Could it be that success for individual businesses today really does depend more upon the skill of managers and less upon corporate-specific assets, such as monopoly power or product quality?
If this is the case, then the rise of top incomes is, in a sense, a symptom of the fragility of capitalism - because a firm that’s dependent upon the talent of individuals is one that is highly vulnerable to failure.