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Journal of Economic Perspectives: Vol. 27 No. 3 (Summer 2013)

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It's the Market: The Broad-Based Rise in the Return to Top Talent

Article Citation

Kaplan, Steven N., and Joshua Rauh. 2013. "It's the Market: The Broad-Based Rise in the Return to Top Talent." Journal of Economic Perspectives, 27(3): 35-56.

DOI: 10.1257/jep.27.3.35

Abstract

One explanation that has been proposed for rising inequality is that technical change allows highly talented individuals, or "superstars" to manage or perform on a larger scale, applying their talent to greater pools of resources and reaching larger numbers of people, thus becoming more productive and higher paid. Others argue that managerial power has increased in a way that allows those at the top to receive higher pay, that social norms against higher pay levels have broken down, or that tax policy affects the distribution of surpluses between employers and employees. We offer evidence bearing on the different theories explaining the rise in inequality in the United States over recent decades. First we look the increase in pay at the highest income levels across occupations. We consider the income share of the top 1 percent over time. And we turn to evidence on inequality of wealth at the top. In looking at the wealthiest Americans, we find that those in the Forbes 400 are less likely to have inherited their wealth or to have grown up wealthy. The Forbes 400 of today also are those who were able to access education while young and apply their skills to the most scalable industries: technology, finance, and mass retail. We believe that the US evidence on income and wealth shares for the top 1 percent is most consistent with a "superstar"-style explanation rooted in the importance of scale and skill-biased technological change. It is less consistent with an argument that the gains to the top 1 percent are rooted in greater managerial power or changes in social norms about what managers should earn.

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Authors

Kaplan, Steven N. (U Chicago)
Rauh, Joshua (Stanford U)

JEL Classifications

D31: Personal Income, Wealth, and Their Distributions
H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
J31: Wage Level and Structure; Wage Differentials
O33: Technological Change: Choices and Consequences; Diffusion Processes

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