4 Pages Essay: Does Capitalism Promote (Social) Equality?

piketty_inequality1 piketty

Topic of your essay: Choose one of the following questions and answer them using at least one of the readings from the first part of the course. This means that you should not simply write down what you think is a good answer. The task is that you engage with the selected reading and the author’s arguments or data when responding to the question. You may also use additional academic writings (more chapters from the same book, other books and articles from academic journals, but no internet sources) to substantiate your arguments, but you have to show that you have read and understood at least one of the readings from the first part of the course.

Here are the questions:

• Why is capitalism superior to other economic systems?

• Is there a limit for increasing profits in capitalist economies?

• Who or what drives innovation in capitalist economies?

• Why should the state support demand in capitalist economies?

• How does capitalism generate waste and why is this a problem?

• Is capitalism the best of all economic systems for granting freedom?

• Does capitalism promote (social) equality? I use this question

• Does capitalism provide (social) justice?

Format: The essay should be between 1,000 and 1,500 words long, include an introduction and a conclusion (1 paragraph each), provide 3 to 5 arguments (presented in separate paragraphs) and make substantial references to at least one reading (direct or indirect quotes; direct quotes should not be longer than 3 lines). Use double-space lines, New Roman 12 point font, and add page numbers. Write your name, student number, and section number at the top of the first page. Use Word-format or and equivalent text procession format.

Quotation: For quotations use the name of the author, the year of the publication, and the page number of the quote. If you quote directly from the text, put the quote in parentheses. Direct quotes should not be longer than three lines. If you summarize the argument or content of the text in your own words use indirect quotes. You can also add the name of the author in the text.

“The rain in Spain falls mainly on the plain” (Jones, 2011: 54).

The rain in Spain usually falls on the plain (Jones, 2011: 54).

Jones (2011: 54) argues that “[t]he rain in Spain falls mainly on the plain”.

Jones (2011: 54) argues the rain in Spain usually falls on the plain.

Bibliography: Add a bibliography with the sources you quote in the text. Note that this may mean that you need more information for a text than the one given in the syllabus. Part of the exercise is that you show that you are able to find it.

Book: Last name, first name (year of publication): Title. Publisher. Location.

Chapter from a book: Last name, first name (year of publication): Title of the chapter. Editors of the book. Title of the Book. Publisher. Location. From page ? to page ?

Article: Last name, first name (Year of publication): Title of the article. Title of the journal. Volume and number of the journal. From page ? to page ?

Harvey, David (2005): A Brief History of Neoliberalism. Oxford: Oxford University Press.

Dumenil, Gerard and Dominique Levy (2005): The Neoliberal (Counter-)Revolution. In Alfredo Saad-Filho and Deborah Johnston (eds.). Neoliberalism A Critical Reader. London: Pluto Press, pp. 9-19.

Hermann, Christoph (2014): Structural Adjustment and Neoliberal Convergence in Labour Markets and Welfare. Competition and Change Vol 18 No. 2, pp. 111-130.

Evaluation:

Your essays will be evaluated according to the following criteria

• Format, style, references (introduction & conclusion; each argument a separate paragraph; correct referencing; correct and complete bibliography)

• Essay substantially engages is one of the readings from the first part of the class

• Essay responds to question

• Arguments are clear and convincing

• Overall impression

Thomas Piketty

Inequality

Thomas Piketty
• Born 1971
• Studied at the École Normale

Supérieure (ENS) in Paris.
• Professor at the Paris School of

Economics
• Authors of Capital in the Twenty-

First Century (2013/14)
• Academic bestseller: As of January

2015, the book had sold 1.5 million
copies

The Kuznets Curve

• Simon Kuznets investigated in the 1950s the

relationship between capitalism and inequality
• His conclusion became known as the Kuznets Curve:

Inequality first increases up to a certain level of income
per capita and then decreases with growing wealth

• The Kuznets Curve became the dominant view on the
relationship between capitalism and inequality in the
postwar period

Kuznets curve

Piketty’s correction

• Piketty starts his investigation where Kuznets left off: He

continues analysis of inequality based on US tax records
• The result is a time series that lasts from 1910 to 2010;

inequality is measured by the share of the top 1 or top 10%
income earners in total income earned in the US

• Piketty finds that inequality in the US has indeed increased
until 1930 and then decreased until 1980

• But contrary to Kuznets’ prediction, inequality started to
increase again in the 1980s, exceeding the high point of the
1920s

Piketty’s findings (distribution of income) I

• The share of the top 10% in total income in the US
almost reached 50% before the Great Depression
and exceeded 50% on the eve of the Great
Recession

• In 1970 the richest 10% in the US earned about
35% of total income

• Capital gains explain some of the growing the
inequality, but certainly not the whole story

Presenter
Presentation Notes
In the US income inequality increased until the Great Depression and then fell sharply until the end of the Second World War (this is roughly wat Kuznets had observed). Then it remained at a historically low level until the 1980s, after which is started to increase again – exceeding the highpoint of the late 1920s. Capital gains played an important role in the rebound of inequality, but was not the determining factor. Capital gains account for approximately 5% of the growing income share of the top 10%.

Piketty’s findings (distribution of income) II

• If we look more closely at the top 10%: what we
see is that is was actually the top 1% (annual
income above 352,000 $) that has gained most

• The share of the top 1% increased from less than
10% in 1970s to almost 25% before the outbreak
of the Great Recession

• Piketty: “Income inequality has exploded.”

Presenter
Presentation Notes
If we look more closely at the top 10%: what we see is that is was actually the top 1% (annual income above 352,000 $) has benefited mostly from growing inequality: the share of the top 1% increased from less than 10% in 1970s to almost 25% before the outbreak of the crisis. Piketty: income inequality has exploded.

Piketty’s findings (distribution of income) III

• In the US rising inequality is mainly the result of

growing wage inequality and in particular high
remuneration among top managers of large firms
(the top 1% of the wages)

• Piketty calls this development “the rise of the super
manager”

• He doubts that this development has something to
do with the growing importance of skills in the
Knowledge Economy because this is largely a US
phenomenon

Presenter
Presentation Notes
In the US rising inequality was mostly the result of growing wage inequality and in particular high remuneration among top managers of large firms (the top 1% of the wages). Piketty calls this development “the rise of the super manager” and it is particular pronounced in the Anglo-Saxon world: “In all English-speaking countries the primary reason for increased income inequality in recent decades is the rise of the supermanager in both the financial and nonfinancial sectors.”
He doubts that this development has something to do with the growing importance of skills in the Knowledge Economy because this is largely a US phenomenon.

Piketty’s findings (distribution of income) IV

• The growth of inequality is greater in the US than
in Europe; while in the US the income share of the
top 10% accounted for almost 50% of total income
before the crisis, in Europe it accounted for 35%

• But inequality also increased in Europe: the share
of the top 10% income earners increased from
30% in 1980 to 35% in 2010

Presenter
Presentation Notes
At the start of the 20th century income inequality was higher in Europe than in the US. Inequality decreased even further than in the US during the postwar period. Inequality also increased in Europe since 1980 – the share of the top 10% increased from 30 to 35% -but to a lesser extent than in the United States.

Piketty’s findings (distribution of income) V

• There are significant differences within Europe:
Income inequality in the UK is much higher than
in Sweden, with Germany and France being in the
middle

• This should not surprise: According to the
Varieties of Capitalism literature, the UK has the
same variety of capitalism as the US

Presenter
Presentation Notes
There are significant differences within Europe. In Sweden, France, and Germany inequality increased much less than in the United Kingdom (varieties of capitalism)

Piketty’s findings (distribution of income) VI

• The main difference between northern and
continental Europe and the US-UK is that the
share of top 1% increased to a much lesser extent

• Continental Europe the top 1% earns between 7
and 11% of total income; in the US 25%

Presenter
Presentation Notes
The main difference between northern and continental Europe and the US-UK is that the share of top 1% increased to a much lesser extent (and certainly did not explode).

Piketty’s findings (distribution of income) VII

• Income inequality also increased in the developing
world: In China the top 1% share in national income
increased from less than 5% in the mid 1980s to
10% in the 2000s

• You can also see the growth of inequality in India
and South Africa since 1980: In South Africa the top
1% managed to almost double their share of
income since the end of apartheid

Presenter
Presentation Notes
Income inequality also increased in the developing world. In China the top 1% share in national income increased from less than 5% in the mid 1980s to 10% in the 2000s – which is roughly what we also see in Continental Europe. You can also see the growth of inequality in India and South Africa since 1980. In South Africa the top 1% managed to almost double their share of income since the end of apartheid.

Piketty’s findings: Distribution of wealth

• The share of capital income as proportion of total
income has increased from between 15 and 25%
in 1970 to between 25 and 30% in 2010

• Whereas income inequality in the US exceeds the
peak before the war, inequality in wealth has not
reached the level before the war yet

Presenter
Presentation Notes
Inequality in the distribution of wealth has also increased significantly since the 1970s – again to a lower extent in Europe than in the US. But: whereas income inequality in the US exceeds the peak before the war, inequality in wealth has not reached the level before the war yet.
The US top 10% share in wealth was 70-80% between 1870 and 1910; fell to 60-70% from 1950 to 1980 and then increased again to more than 70%
In Europe the top 10% owned close to 90% of total wealth in 1910; the proportion then decreased to 60% in 1970 and increased again to 65% in 2010.

Why is inequality increasing? I

• Piketty’s main conclusion is that inequality

increases when the growth of the rate of return to
capital (r) exceeds economic growth (g) (r= profits,
rents, dividends, interest etc.)

• From this perspective falling inequality during the
postwar period was the result of high economic
growth rates and low returns on capital

• Piketty argues for the introduction of a global
wealth tax to tackle inequality

whereas income inequality in the US exceeds the peak before
the war, inequality in wealth has not reached the level before
the war yet.

Presenter
Presentation Notes
Piketty’s main conclusion: Inequality increases when the rate of return on capital exceeds the rate of growth. A long-term analysis shows us that the postwar period with high economic growth rates (between 2 and 4%) and comparable low returns on capital (between 1 and 3 %) was an exception in capitalist development. If the current patterns continue (growth rates of less than 2% and returns on capital of more than 4%) inequality will further increase in the coming decades.
Piketty’s solution: A global wealth tax.

Why is inequality increasing? II

• Others (e.g. Dumenil and Levy) have argued, the
increase of inequality since the 1980s has to do with
the “neoliberal counter-revolution”

• The revolution included tax-cuts for the rich, welfare
state retrenchment, attacks against trade unions,
wage stagnation etc.

Thomas Piketty�Inequality

Thomas Piketty

The Kuznets Curve

Kuznets curve

Piketty’s correction

Piketty’s findings (distribution of income) I

Slide Number 7

Piketty’s findings (distribution of income) II

Slide Number 9

Piketty’s findings (distribution of income) III

Slide Number 11

Piketty’s findings (distribution of income) IV

Slide Number 13

Piketty’s findings (distribution of income) V

Slide Number 15
Piketty’s findings (distribution of income) VI
Slide Number 17
Piketty’s findings (distribution of income) VII
Slide Number 19

Piketty’s findings: Distribution of wealth

Slide Number 21

Why is inequality increasing? I

Slide Number 23

Why is inequality increasing? II

271

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Two World

I have now precisely defi ned the notions needed for what follows, and I have
introduced the orders of magnitude attained in practice by in e qual ity with
respect to labor and capital in various societies. Th e time has now come to look
at the historical evolution of in e qual ity around the world. How and why has
the structure of in e qual ity changed since the nineteenth century? Th e shocks
of the period 1914– 1945 played an essential role in the compression of in e qual-
ity, and this compression was in no way a harmonious or spontaneous occur-
rence. Th e increase in in e qual ity since 1970 has not been the same everywhere,
which again suggests that institutional and po liti cal factors played a key role.

A Simple Case: Th e Reduction of In e qual ity in France
in the Twentieth Century

I will begin by examining at some length the case of France, which is particu-
larly well documented (thanks to a rich lode of readily available historical
sources). It is also relatively simple and straightforward (as far as it is possible
for a history of in e qual ity to be straightforward) and, above all, broadly repre-
sentative of changes observed in several other Eu ro pe an countries. By “Eu ro-
pe an” I mean “continental Eu ro pe an,” because in some respects the British
case is intermediate between the Eu ro pe an and the US cases. To a large extent
the continental Eu ro pe an pattern is also representative of what happened in
Japan. Aft er France I will turn to the United States, and fi nally I will extend
the analysis to the entire set of developed and emerging economies for which
adequate historical data exist.

Figure 8.1 depicts the upper decile’s share of both national income and
wages over time. Th ree facts stand out.

First, income in e qual ity has greatly diminished in France since the Belle
Époque: the upper decile’s share of national income decreased from 45– 50
percent on the eve of World War I to 30– 35 percent today.

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AN: 663460 ; Piketty, Thomas, Goldhammer, Arthur.; Capital in the Twenty-first Century
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The Structure of In e qual ity

272

Th is drop of 15 percentage points of national income is considerable. It
represents a decrease of about one- third in the share of each year’s output go-
ing to the wealthiest 10 percent of the population and an increase of about a
third in the share going to the other 90 percent. Note, too, that this is roughly
equivalent to three- quarters of what the bottom half of the population re-
ceived in the Belle Époque and more than half of what it receives today.1 Re-
call, moreover, that in this part of the book, I am examining in e qual ity of
primary incomes (that is, before taxes and transfers). In Part Four, I will show
how taxes and transfers reduced in e qual ity even more. To be clear, the fact
that in e qual ity decreased does not mean that we are living today in an egali-
tarian society. It mainly refl ects the fact that the society of the Belle Époque
was extremely inegalitarian— indeed, one of the most inegalitarian societies
of all time. Th e form that this in e qual ity took and the way it came about would
not, I think, be readily accepted today.

Second, the signifi cant compression of income in e qual ity over the course
of the twentieth century was due entirely to diminished top incomes from
capital. If we ignore income from capital and concentrate on wage in e qual ity,

40%

35%

30%

25%

20%

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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Share of top income decile
in total income

Share of top wage decile in
total wage bill

Figure 8.1. Income in e qual ity in France, 1910– 2010
In e qual ity of total income (labor and capital) has dropped in France during the twen-
tieth century, while wage in e qual ity has remained the same.
Sources and series: see piketty.pse.ens.fr/capital21c.

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we fi nd that the distribution remained quite stable over the long run. In the
fi rst de cade of the twentieth century as in the second de cade of the twenty-
fi rst, the upper decile of the wage hierarchy received about 25 percent of total
wages. Th e sources also indicate long- term stability of wage in e qual ity at the
bottom end of the distribution. For example, the least well paid 50 percent
always received 25– 30 percent of total wages (so that the average pay of a mem-
ber of this group was 50– 60 percent of the average wage overall), with no clear
long- term trend.2 Th e wage level has obviously changed a great deal over the
past century, and the composition and skills of the workforce have been to-
tally transformed, but the wage hierarchy has remained more or less the same.
If top incomes from capital had not decreased, income in e qual ity would not
have diminished in the twentieth century.

Th is fact stands out even more boldly when we climb the rungs of the social
ladder. Look, in par tic u lar, at the evolution of the top centile (Figure 8.2).3
Compared with the peak in e qual ity of the Belle Époque, the top centile’s
share of income literally collapsed in France over the course of the twentieth
century, dropping from more than 20 percent of national income in 1900– 1910

20%

14%

12%

10%

0%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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Share of top income percentile
in total income
Share of top wage percentile
in total wage bill

Figure 8.2. Th e fall of rentiers in France, 1910– 2010
Th e fall in the top percentile share (the top 1 percent highest incomes) in France
between 1914 and 1945 is due to the fall of top capital incomes.
Sources and series: see piketty.pse.ens.fr/capital21c.

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The Structure of In e qual ity

274

to 8 or 9 percent in 2000– 2010. Th is represents a decrease of more than half
in one century, indeed nearly two- thirds if we look at the bottom of the curve
in the early 1980s, when the top centile’s share of national income was barely 7
percent.

Again, this collapse was due solely to the decrease of very high incomes
from capital (or, crudely put, the fall of the rentier). If we look only at wages,
we fi nd that the upper centile’s share remains almost totally stable over the
long run at around 6 or 7 percent of total wages. On the eve of World War I,
income in e qual ity (as mea sured by the share of the upper centile) was nearly
three times greater than wage in e qual ity. Today it is a nearly a third higher
and largely identical with wage in e qual ity, to the point where one might
imagine— incorrectly—that top incomes from capital have virtually disappeared
(see Figure 8.2).

To sum up: the reduction of in e qual ity in France during the twentieth
century is largely explained by the fall of the rentier and the collapse of very
high incomes from capital. No generalized structural pro cess of in e qual ity
compression (and particularly wage in e qual ity compression) seems to have
operated over the long run, contrary to the optimistic predictions of Kuznets’s
theory.

Herein lies a fundamental lesson about the historical dynamics of the
distribution of wealth, no doubt the most important lesson the twentieth
century has to teach. Th is is all the more true when we recognize that the
factual picture is more or less the same in all developed countries, with minor
variations.

Th e History of In e qual ity: A Chaotic Po liti cal History
Th e third important fact to emerge from Figures 8.1 and 8.2 is that the history
of in e qual ity has not been a long, tranquil river. Th ere have been many twists
and turns and certainly no irrepressible, regular tendency toward a “natural”
equilibrium. In France and elsewhere, the history of in e qual ity has always
been chaotic and po liti cal, infl uenced by convulsive social changes and driven
not only by economic factors but by countless social, po liti cal, military, and
cultural phenomena as well. Socioeconomic inequalities— disparities of in-
come and wealth between social groups— are always both causes and eff ects
of other developments in other spheres. All these dimensions of analysis are

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inextricably intertwined. Hence the history of the distribution of wealth is
one way of interpreting a country’s history more generally.

In the case of France, it is striking to see the extent to which the compres-
sion of income in e qual ity is concentrated in one highly distinctive period:
1914– 1945. Th e shares of both the upper decile and upper centile in total in-
come reached their nadir in the aft ermath of World War II and seem never to
have recovered from the extremely violent shocks of the war years (see Figures 8.1
and 8.2). To a large extent, it was the chaos of war, with its attendant eco-
nomic and po liti cal shocks, that reduced in e qual ity in the twentieth century.
Th ere was no gradual, consensual, confl ict- free evolution toward greater equal-
ity. In the twentieth century it was war, and not harmonious demo cratic or
economic rationality, that erased the past and enabled society to begin anew
with a clean slate.

What were these shocks? I discussed them in Part Two: destruction caused
by two world wars, bankruptcies caused by the Great Depression, and above
all new public policies enacted in this period (from rent control to national-
izations and the infl ation- induced euthanasia of the rentier class that lived on
government debt). All of these things led to a sharp drop in the capital/income
ratio between 1914 and 1945 and a signifi cant decrease in the share of income
from capital in national income. But capital is far more concentrated than
labor, so income from capital is substantially overrepresented in the upper
decile of the income hierarchy (even more so in the upper centile). Hence
there is nothing surprising about the fact that the shocks endured by capital,
especially private capital, in the period 1914– 1945 diminished the share of the
upper decile (and upper centile), ultimately leading to a signifi cant compres-
sion of income in e qual ity.

France fi rst imposed a tax on income in 1914 (the Senate had blocked this
reform since the 1890s, and it was not fi nally adopted until July 15, 1914, a few
weeks before war was declared, in an extremely tense climate). For that rea-
son, we unfortunately have no detailed annual data on the structure of in-
come before that date. In the fi rst de cade of the twentieth century, numerous
estimates were made of the distribution of income in anticipation of the im-
position of a general income tax, in order to predict how much revenue such a
tax might bring in. We therefore have a rough idea of how concentrated in-
come was in the Belle Époque. But these estimates are not suffi cient to give us
historical perspective on the shock of World War I (for that, the income tax

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The Structure of In e qual ity

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would have to have been adopted several de cades earlier).4 Fortunately, data
on estate taxes, which have been levied since 1791, allow us to study the evolu-
tion of the wealth distribution throughout the nineteenth and twentieth
centuries, and we are therefore able to confi rm the central role played by the
shocks of 1914– 1945. For these data indicate that on the eve of World War I,
nothing presaged a spontaneous reduction of the concentration of capital
ownership— on the contrary. From the same source we also know that in-
come from capital accounted for the lion’s share of the upper centile’s income
in the period 1900– 1910.

From a “Society of Rentiers” to a “Society of Managers”
In 1932, despite the economic crisis, income from capital still represented the
main source of income for the top 0.5 percent of the distribution (see
Figure 8.3).5 But when we look at the composition of the top income group

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

P90–95 P95–99 P99–99.5 P99.5–99.9 P99.9–99.99 P99.99–100

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Labor income
Capital income
Mixed income

Figure 8.3. Th e composition of top incomes in France in 1932
Labor income becomes less and less important as one goes up within the top decile of
total income. Notes: (i) “P90– 95” includes individuals between percentiles 90 to 95,
“P95– 99” includes the next 4 percent, “P99– 99.5” the next 0.5 percent, etc.; (ii) Labor
income: wages, bonuses, pensions. Capital income: dividends, interest, rent. Mixed
income: self- employment income.
Sources and series: see piketty.pse.ens.fr/capital21c.

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today, we fi nd that a profound change has occurred. To be sure, today as in
the past, income from labor gradually disappears as one moves higher in the
income hierarchy, and income from capital becomes more and more predomi-
nant in the top centiles and thousandths of the distribution: this structural
feature has not changed. Th ere is one crucial diff erence, however: today one
has to climb much higher in the social hierarchy before income from capital
outweighs income from labor. Currently, income from capital exceeds income
from labor only in the top 0.1 percent of the income distribution (see Figure
8.4). In 1932, this social group was 5 times larger; in the Belle Époque it was 10
times larger.

Make no mistake: this is a signifi cant change. Th e top centile occupies a
very prominent place in any society. It structures the economic and po liti cal
landscape. Th is is much less true of the top thousandth.6 Although this is a
matter of degree, it is nevertheless important: there are moments when the
quantitative becomes qualitative. Th is change also explains why the share of
income going to the upper centile today is barely higher than the upper centile’s

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

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P90–95 P95–99 P99–99.5 P99.5–99.9 P99.9–99.99 P99.99–100

Mixed income
Capital income
Labor income

Figure 8.4. Th e composition of top incomes in France in 2005
Capital income becomes dominant at the level of the top 0.1 percent in France in 2005,
as opposed to the top 0.5 percent in 1932.
Sources and series: see piketty.pse.ens.fr/capital21c.

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share of total wages: income from capital assumes decisive importance only in
the top thousandth or top ten- thousandth. Its infl uence in the top centile as a
whole is relatively insignifi cant.

To a large extent, we have gone from a society of rentiers to a society of
managers, that is, from a society in which the top centile is dominated by
rentiers (people who own enough capital to live on the annual income from
their wealth) to a society in which the top of the income hierarchy, including
to upper centile, consists mainly of highly paid individuals who live on income
from labor. One might also say, more correctly (if less positively), that we have
gone from a society of superrentiers to a less extreme form of rentier society,
with a better balance between success through work and success through
capital. It is important, however, to be clear that this major upheaval came
about, in France at any rate, without any expansion of the wage hierarchy
(which has been globally stable for a long time: the universe of individuals
who are paid for their labor has never been as homogeneous as many people
think); it was due entirely to the decrease in high incomes from capital.

To sum up: what happened in France is that rentiers (or at any rate nine-
tenths of them) fell behind managers; managers did not race ahead of rentiers.
We need to understand the reasons for this long- term change, which are not
obvious at fi rst glance, since I showed in Part Two that the capital/income
ratio has lately returned to Belle Époque levels. Th e collapse of the rentier be-
tween 1914 and 1945 is the obvious part of the story. Exactly why rentiers have
not come back is the more complex and in some ways more important and
interesting part. Among the structural factors that may have limited the con-
centration of wealth since World War II and to this day have helped prevent
the resurrection of a society of rentiers as extreme as that which existed on the
eve of World War I, we can obviously cite the creation of highly progressive
taxes on income and inheritances (which for the most part did not exist prior
to 1920). But other factors may also have played a signifi cant and potentially
equally important role.

Th e Diff erent Worlds of the Top Decile
But fi rst, let me dwell a moment on the very diverse social groups that make
up the top decile of the income hierarchy. Th e boundaries between the vari-
ous subgroups have changed over time: income from capital used to predomi-

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nate in the top centile but today predominates only in the top thousandth.
More than that, the coexistence of several worlds within the top decile can help
us to understand the oft en chaotic short- and medium- term evolutions we see
in the data. Income statements required by the new tax laws have proved to be
a rich historical source, despite their many imperfections. With their help, it
is possible to precisely describe and analyze the diversity at the top of the in-
come distribution and its evolution over time. It is particularly striking to
note that in all the countries for which we have this type of data, in all peri-
ods, the composition of the top income group can be characterized by inter-
secting curves like those shown in Figures 8.3 and 8.4 for France in 1932 and
2005, respectively: the share of income from labor always decreases rapidly as
one moves progressively higher in the top decile, and the share of income
from capital always rises sharply.

In the poorer half of the top decile, we are truly in the world of managers:
80– 90 percent of income comes from compensation for labor.7 Moving up to
the next 4 percent, the share of income from labor decreases slightly but re-
mains clearly dominant at 70– 80 percent of total income in the interwar pe-
riod as well as today (see Figures 8.3 and 8.4). In this large “9 percent” group
(that is, the upper decile exclusive of the top centile), we fi nd mainly individuals
living primarily on income from labor, including both private sector manag-
ers and engineers and se nior offi cials and teachers from the public sector. Here,
pay is usually 2 to 3 times the average wage for society as a whole: if average
wages are 2,000 euros a month, in other words, this group earns 4,000– 6,000
a month.

Obviously, the types of jobs and levels of skill required at this level have
changed considerably over time: in the interwar years, high school teachers
and even late- career grade school teachers belonged to “the 9 percent,” whereas
today one has to be a college professor or researcher or, better yet, a se nior
government offi cial to make the grade.8 In the past, a foreman or skilled tech-
nician came close to making it into this group. Today one has to be at least a
middle manager and increasingly a top manager with a degree from a pres-
tigious university or business school. Th e same is true lower down the pay
scale: once upon a time, the least well paid workers (typically paid about half
the average wage, or 1,000 euros a month if the average is 2,000) were farm
laborers and domestic servants. At a later point, these were replaced by less
skilled industrial workers, many of whom were women in the textile and food

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pro cessing industries. Th is group still exists today, but the lowest paid work-
ers are now in the ser vice sector, employed as waiters and waitresses in restau-
rants or as shop clerks (again, many of these are women). Th us the labor mar-
ket was totally transformed over the past century, but the structure of wage
in e qual ity across the market barely changed over the long run, with “the
9 percent” just below the top and the 50 percent at the bottom still drawing
about the same shares of income from labor over a very considerable period of
time.

Within “the 9 percent” we also fi nd doctors, lawyers, merchants, restaura-
teurs, and other self- employed entrepreneurs. Th eir number grows as we move
closer to “the 1 percent,” as is shown by the curve indicating the share of “mixed
incomes” (that is, incomes of nonwage workers, which includes both compen-
sation for labor and income from business capital, which I have shown sepa-
rately in Figures 8.3 and 8.4). Mixed incomes account for 20– 30 percent of
total income in the neighborhood of the top centile threshold, but this per-
centage decreases as we move higher into the top centile, where pure capital
income (rent, interest, and dividends) clearly predominates. To make it into
“the 9 percent” or even rise into the lower strata of “the 1 percent,” which means
attaining an income 4– 5 times higher than the average (that is, 8,000– 10,000
euros a month in a society where the average income is 2,000), choosing to
become a doctor, lawyer, or successful restaurateur may therefore be a good
strategy, and it is almost as common (actually about half as common) as the
choice to become a top manager in a large fi rm.9 But to reach the stratosphere
of “the 1 percent” and enjoy an income several tens of times greater than aver-
age (hundreds of thousands if not millions of euros per year), such a strategy
is unlikely to be enough. A person who owns substantial amounts of assets is
more likely to reach the top of the income hierarchy.10

It is interesting that it was only in the immediate postwar years (1919–
1920 in France and then again 1945– 1946) that this hierarchy was reversed:
mixed incomes very briefl y surpassed income from capital in the upper levels
of the top centile. Th is apparently refl ects rapid accumulation of new fortunes
in connection with postwar reconstruction.11

To sum up: the top decile always encompasses two very diff erent worlds:
“the 9 percent,” in which income from labor clearly predominates, and “the 1
percent,” in which income from capital becomes progressively more impor-
tant (more or less rapidly and massively, depending on the period). Th e transi-

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tion between the two groups is always gradual, and the frontiers are of course
porous, but the diff erences are nevertheless clear and systematic.

For example, while income from capital is obviously not altogether absent
from the income of “the 9 percent,” it is usually not the main source of income
but simply a supplement. A manager earning 4,000 euros a month may also
own an apartment that she rents for 1,000 euros a month (or lives in, thus
avoiding paying a rent of 1,000 euros a month, which comes to the same thing
fi nancially). Her total income is then 5,000 euros a month, 80 percent of which
is income from labor and 20 percent from capital. Indeed, an 80– 20 split be-
tween labor and capital is reasonably representative of the structure of income
among “the 9 percent”; this was true between the two world wars and remains
true today. A part of this group’s income from capital may also come from sav-
ings accounts, life insurance contracts, and fi nancial investments, but real es-
tate generally predominates.12

Conversely, within “the 1 percent,” it is labor income that gradually be-
comes supplementary, while capital increasingly becomes the main source of
income. Another interesting pattern is the following: if we break income from
capital down into rent on land and structures on the one hand and dividends
and interest from mobile capital on the other, we fi nd that the very large share
of income from capital in the upper decile is due largely to the latter (espe-
cially dividends). For example, in France, the share of income from capital in
1932 as well as 2005 is 20 percent at the level of “the 9 percent” but increases to
60 percent in the top 0.01 percent. In both cases, this sharp increase is ex-
plained entirely by income from fi nancial assets (almost all of it in the form of
dividends). Th e share of rent stagnates at around 10 percent of total income
and even tends to diminish in the top centile. Th is pattern refl ects the fact
that large fortunes consist primarily of fi nancial assets (mainly stocks and
shares in partnerships).

Th e Limits of Income Tax Returns
Despite all these interesting patterns, I must stress the limits of the fi scal
sources used in this chapter. Figures 8.3 and 8.4 are based solely on income
from capital reported in tax returns. Actual capital income is therefore under-
estimated, owing both to tax evasion (it is easier to hide investment income
than wages, for example, by using foreign bank accounts in countries that do

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not cooperate with the country in which the taxpayer resides) and to the exis-
tence of various tax exemptions that allow whole categories of capital income
to legally avoid the income tax (which in France and elsewhere was originally
intended to include all types of income). Since income from capital is over-
represented in the top decile, this underdeclaration of capital income also
implies that the shares of the upper decile and centile indicated on Figures 8.1
and 8.2, which are based solely on income tax returns, are underestimated (for
France and other countries). Th ese shares are in any case approximate. Th ey
are interesting (like all economic and social statistics) mainly as indicators of
orders of magnitude and should be taken as low estimates of the actual level
of in e qual ity.

In the French case, we can compare self- declared income on tax returns
with other sources (such as national accounts and sources that give a more di-
rect mea sure of the distribution of wealth) to estimate how much we need to
adjust our results to compensate for the underdeclaration of capital income. It
turns out that we need to add several percentage points to capital income’s
share of national income (perhaps as many as 5 percentage points if we choose
a high estimate of tax evasion, but more realistically 2 to 3 percentage points).
Th is is not a negligible amount. Put diff erently, the share of the top decile in
national income, which according to Figure 8.1 fell from 45– 50 percent in
1900– 1910 to 30– 35 percent in 2000– 2010, was no doubt closer to 50 percent
(or even slightly higher) in the Belle Époque and is currently slightly more
than 35 percent.13 Nevertheless, this correction does not signifi cantly aff ect
the overall evolution of income in e qual ity. Even if opportunities for legal tax
avoidance and illegal tax evasion have increased in recent years (thanks in par-
tic u lar to the emergence of tax havens about which I will say more later on),
we must remember that income from mobile capital was already signifi cantly
underreported in the early twentieth century and during the interwar years.
All signs are that the copies of dividend and interest coupons requested by the
governments of that time were no more eff ective than today’s bilateral agree-
ments as a means of ensuring compliance with applicable tax laws.

To a fi rst approximation, therefore, we may assume that accounting for
tax avoidance and evasion would increase the levels of in e qual ity derived from
tax returns by similar proportions in diff erent periods and would therefore
not substantially modify the time trends and evolutions I have identifi ed.

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Note, however, that we have not yet attempted to apply such corrections
in a systematic and consistent way in diff erent countries. Th is is an important
limitation of the World Top Incomes Database. One consequence is that our
series underestimate— probably slightly— the increase of in e qual ity that can
be observed in most countries aft er 1970, and in par tic u lar the role of income
from capital. In fact, income tax returns are becoming increasingly less accu-
rate sources for studying capital income, and it is indispensable to make use of
other, complementary sources as well. Th ese may be either macroeconomic
sources (of the kind used in Part Two to study the dynamics of the capital/
income ratio and capital- labor split) or microeconomic sources (with which it
is possible to study the distribution of wealth directly, and of which I will
make use in subsequent chapters).

Furthermore, diff erent capital taxation laws may bias international com-
parisons. Broadly speaking, rents, interest, and dividends are treated fairly
similarly in diff erent countries.14 By contrast, there are signifi cant variations
in the treatment of capital gains. For instance, capital gains are not fully or
consistently reported in French tax data (and I have simply excluded them al-
together), while they have always been fairly well accounted for in US tax
data. Th is can make a major diff erence, because capital gains, especially those
realized from the sale of stocks, constitute a form of capital income that is
highly concentrated in the very top income groups (in some cases even more
than dividends). For example, if Figures 8.3 and 8.4 included capital gains, the
share of income from capital in the top ten- thousandth would not be 60 per-
cent but something closer to 70 or 80 percent (depending on the year).15 So as
not to bias comparisons, I will present the results for the United States both
with and without capital gains.

Th e other important limitation of income tax returns is that they contain
no information about the origin of the capital whose income is being re-
ported. We can see the income produced by capital owned by the taxpayer at
a par tic u lar moment in time, but we have no idea whether that capital was
inherited or accumulated by the taxpayer during his or her lifetime with in-
come derived from labor (or from other capital). In other words, an identical
level of in e qual ity with respect to income from capital can in fact refl ect very
diff erent situations, and we would never learn anything about these diff er-
ences if we restricted ourselves to tax return data. Generally speaking, very

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high incomes from capital usually correspond to fortunes so large that it is
hard to imagine that they could have been amassed with savings from labor
income alone (even in the case of a very high- level manager or executive). Th ere
is every reason to believe that inheritance plays a major role. As we will see in
later chapters, however, the relative importance of inheritance and saving has
evolved considerably over time, and this is a subject that deserves further
study. Once again, I will need to make use of sources bearing directly on the
question of inheritance.

Th e Chaos of the Interwar Years
Consider the evolution of income in e qual ity in France over the last century.
Between 1914 and 1945, the share of the top centile of the income hierarchy
fell almost constantly, dropping gradually from 20 percent in 1914 to just 7
percent in 1945 (Figure 8.2). Th is steady decline refl ects the long and virtually
uninterrupted series of shocks sustained by capital (and income from capital)
during this time. By contrast, the share of the top decile of the income hierar-
chy decreased much less steadily. It apparently fell during World War I, but
this was followed by an unsteady recovery in the 1920s and then a very sharp,
and at fi rst sight surprising, rise between 1929 and 1935, followed by a steep
decline in 1936– 1938 and a collapse during World War II.16 In the end, the top
decile’s share of national income, which was more than 45 percent in 1914, fell
to less than 30 percent in 1944– 1945.

If we consider the entire period 1914– 1945, the two declines are perfectly
consistent: the share of the upper decile decreased by nearly 18 points, accord-
ing to my estimates, and the upper centile by nearly 14 points.17 In other words,
“the 1 percent” by itself accounts for roughly three- quarters of the decrease in
in e qual ity between 1914 and 1945, while “the 9 percent” explains roughly one-
quarter. Th is is hardly surprising in view of the extreme concentration of capi-
tal in the hands of “the 1 percent,” who in addition oft en held riskier assets.

By contrast, the diff erences observed during this period are at fi rst sight
more surprising: Why did the share of the upper decile rise sharply aft er the
crash of 1929 and continue at least until 1935, while the share of the top centile
fell, especially between 1929 and 1932?

In fact, when we look at the data more closely, year by year, each of these
variations has a perfectly good explanation. It is enlightening to revisit the

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chaotic interwar period, when social tensions ran very high. To understand
what happened, we must recognize that “the 9 percent” and “the 1 percent”
lived on very diff erent income streams. Most of the income of “the 1 percent”
came in the form of income from capital, especially interest and dividends
paid by the fi rms whose stocks and bonds made up the assets of this group.
Th at is why the top centile’s share plummeted during the Depression, as the
economy collapsed, profi ts fell, and fi rm aft er fi rm went bankrupt.

By contrast, “the 9 percent” included many managers, who were the great
benefi ciaries of the Depression, at least when compared with other social
groups. Th ey suff ered much less from unemployment than the employees who
worked under them. In par tic u lar, they never experienced the extremely high
rates of partial or total unemployment endured by industrial workers. Th ey
were also much less aff ected by the decline in company profi ts than those who
stood above them in the income hierarchy. Within “the 9 percent,” midlevel
civil servants and teachers fared particularly well. Th ey had only recently been
the benefi ciaries of civil ser vice raises granted in the period 1927– 1931. (Recall
that government workers, particularly those at the top of the pay scale, had
suff ered greatly during World War I and had been hit hard by the infl ation of
the early 1920s.) Th ese midlevel employees were immune, too, from the risk of
unemployment, so that the public sector’s wage bill remained constant in nomi-
nal terms until 1933 (and decreased only slightly in 1934– 1935, when Prime
Minister Pierre Laval sought to cut civil ser vice pay). Meanwhile, private sec-
tor wages decreased by more than 50 percent between 1929 and 1935. Th e se-
vere defl ation France suff ered in this period (prices fell by 25 percent between
1929 and 1935, as both trade and production collapsed) played a key role in the
pro cess: individuals lucky enough to hold on to their jobs and their nominal
compensation— typically civil servants— enjoyed increased purchasing power
in the midst of the Depression as falling prices raised their real wages. Fur-
thermore, such capital income as “the 9 percent” enjoyed— typically in the
form of rents, which were extremely rigid in nominal terms— also increased
on account of the defl ation, so that the real value of this income stream rose
signifi cantly, while the dividends paid to “the 1 percent” evaporated.

For all these reasons, the share of national income going to “the 9 percent”
increased quite signifi cantly in France between 1929 and 1935, much more
than the share of “the 1 percent” decreased, so that the share of the upper decile
as a whole increased by more than 5 percent of national income (see Figures

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8.1 and 8.2). Th e pro cess was completely turned around, however, when the
Pop u lar Front came to power: workers’ wages increased sharply as a result of
the Matignon Accords, and the franc was devalued in September 1936, result-
ing in infl ation and a decrease of the shares of both “the 9 percent” and the
top decile in 1936– 1938.18

Th e foregoing discussion demonstrates the usefulness of breaking income
down by centiles and income source. If we had tried to analyze the interwar
dynamic by using a synthetic index such as the Gini coeffi cient, it would have
been impossible to understand what was going on. We would not have been
able to distinguish between income from labor and income from capital or
between short- term and long- term changes. In the French case, what makes
the period 1914– 1945 so complex is the fact that although the general trend is
fairly clear (a sharp drop in the share of national income going to the top de-
cile, induced by a collapse of the top centile’s share), many smaller counter-
movements were superimposed on this overall pattern in the 1920s and 1930s.
We fi nd similar complexity in other countries in the interwar period, with
characteristic features associated with the history of each par tic u lar country.
For example, defl ation ended in the United States in 1933, when President
Roo se velt came to power, so that the reversal that occurred in France in 1936
came earlier in America, in 1933. In every country the history of in e qual ity is
political— and chaotic.

Th e Clash of Temporalities
Broadly speaking, it is important when studying the dynamics of the income
and wealth distributions to distinguish among several diff erent time scales. In
this book I am primarily interested in long- term evolutions, fundamental
trends that in many cases cannot be appreciated on time scales of less than
thirty to forty years or even longer, as shown, for example, by the structural
increase in the capital/income ratio in Eu rope since World War II, a pro cess that
has been going on for nearly seventy years now yet would have been diffi cult
to detect just ten or twenty years ago owing to the superimposition of various
other developments (as well as the absence of usable data). But this focus on the
long period must not be allowed to obscure the fact that shorter- term trends also
exist. To be sure, these are oft en counterbalanced in the end, but for the people
who live through them they oft en appear, quite legitimately, to be the most

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signifi cant realities of the age. Indeed, how could it be otherwise, when these
“short- term” movements can continue for ten to fi ft een years or even longer,
which is quite long when mea sured on the scale of a human lifetime.

Th e history of in e qual ity in France and elsewhere is replete with these
short- and medium- term movements— and not just in the particularly chaotic
interwar years. Let me briefl y recount the major episodes in the case of France.
During both world wars, the wage hierarchy was compressed, but in the aft er-
math of each war, wage inequalities reasserted themselves (in the 1920s and
then again in the late 1940s and on into the 1950s and 1960s). Th ese were
movements of considerable magnitude: the share of total wages going to the
top 10 percent decreased by about 5 points during each confl ict but recovered
aft erward by the same amount (see Figure 8.1).19 Wage spreads were reduced
in the public as well as the private sector. In each war the scenario was the
same: in war time, economic activity decreases, infl ation increases, and real wages
and purchasing power begin to fall. Wages at the bottom of the wage scale
generally rise, however, and are somewhat more generously protected from
infl ation than those at the top. Th is can induce signifi cant changes in the
wage distribution if infl ation is high. Why are low and medium wages better
indexed to infl ation than higher wages? Because workers share certain per-
ceptions of social justice and norms of fairness, an eff ort is made to prevent
the purchasing power of the least well- off from dropping too sharply, while
their better- off comrades are asked to postpone their demands until the war is
over. Th is phenomenon clearly played a role in setting wage scales in the pub-
lic sector, and it was probably the same, at least to a certain extent, in the pri-
vate sector. Th e fact that large numbers of young and relatively unskilled
workers were mobilized for ser vice (or held in prisoner- of- war camps) may
also have improved the relative position of low- and medium- wage workers on
the labor market.

In any case, the compression of wage in e qual ity was reversed in both post-
war periods, and it is therefore tempting to forget that it ever occurred. Nev-
ertheless, for workers who lived through these periods, the changes in the
wage distribution made a deep impression. In par tic u lar, the issue of restoring
the wage hierarchy in both the public and private sectors was one of the most
important po liti cal, social, and economic issues of the postwar years.

Turning now to the history of in e qual ity in France between 1945 and 2010,
we fi nd three distinct phases: income in e qual ity rose sharply between 1945

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and 1967 (with the share going to the top decile increasing from less than 30
to 36 or 37 percent). It then decreased considerably between 1968 and 1983
(with the share of the top decile dropping back to 30 percent). Finally, in e-
qual ity increased steadily aft er 1983, so that the top decile’s share climbed to
about 33 percent in the period 2000– 2010 (see Figure 8.1). We fi nd roughly
similar changes of wage in e qual ity at the level of the top centile (see Figures
8.3 and 8.3). Once again, these various increases and decreases more or less bal-
ance out, so it is tempting to ignore them and concentrate on the relative sta-
bility over the long run, 1945– 2010. Indeed, if one were interested solely in
very long- term evolutions, the outstanding change in France during the twen-
tieth century would be the signifi cant compression of wage in e qual ity be-
tween 1914 and 1945, followed by relative stability aft erward. Each way of
looking at the matter is legitimate and important in its own right, and to my
mind it is essential to keep all of these diff erent time scales in mind: the long
term is important, but so are the short and the medium term. I touched on
this point previously in my examination of the evolution of the capital/income
ratio and the capital- labor split in Part Two (see in par tic u lar Chapter 6).

It is interesting to note that the capital- labor split tends to move in the
same direction as in e qual ity in income from labor, so that the two reinforce
each other in the short to medium term but not necessarily in the long run.
For example, each of the two world wars saw a decrease in capital’s share of
national income (and of the capital/income ratio) as well as a compression of
wage in e qual ity. Generally speaking, in e qual ity tends to evolve “procyclically”
(that is, it moves in the same direction as the economic cycle, in contrast to
“countercyclical” changes). In economic booms, the share of profi ts in na-
tional income tends to increase, and pay at the top end of the scale (including
incentives and bonuses) oft en increases more than wages toward the bottom
and middle. Conversely, during economic slowdowns or recessions (of which
war can be seen as an extreme form), various noneconomic factors, especially
po liti cal ones, ensure that these movements do not depend solely on the eco-
nomic cycle.

Th e substantial increase in French in e qual ity between 1945 and 1967 was
the result of sharp increases in both capital’s share of national income and
wage in e qual ity in a context of rapid economic growth. Th e po liti cal climate
undoubtedly played a role: the country was entirely focused on reconstruc-
tion, and decreasing in e qual ity was not a priority, especially since it was com-

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mon knowledge that in e qual ity had decreased enormously during the war. In
the 1950s and 1960s, managers, engineers, and other skilled personnel saw their
pay increase more rapidly than the pay of workers at the bottom and middle
of the wage hierarchy, and at fi rst no one seemed to care. A national minimum
wage was created in 1950 but was seldom increased thereaft er and fell farther
and farther behind the average wage.

Th ings changed suddenly in 1968. Th e events of May 1968 had roots in
student grievances and cultural and social issues that had little to do with the
question of wages (although many people had tired of the inegalitarian pro-
ductivist growth model of the 1950s and 1960s, and this no doubt played a
role in the crisis). But the most immediate po liti cal result of the movement
was its eff ect on wages: to end the crisis, Charles de Gaulle’s government signed
the Grenelle Accords, which provided, among other things, for a 20 percent
increase in the minimum wage. In 1970, the minimum wage was offi cially (if
partially) indexed to the mean wage, and governments from 1968 to 1983 felt
obliged to “boost” the minimum signifi cantly almost every year in a seething
social and po liti cal climate. Th e purchasing power of the minimum wage ac-
cordingly increased by more than 130 percent between 1968 and 1983, while
the mean wage increased by only about 50 percent, resulting in a very signifi –
cant compression of wage inequalities. Th e break with the previous period
was sharp and substantial: the purchasing power of the minimum wage had
increased barely 25 percent between 1950 and 1968, while the average wage
had more than doubled.20 Driven by the sharp rise of low wages, the total
wage bill rose markedly more rapidly than output between 1968 and 1983, and
this explains the sharp decrease in capital’s share of national income that I
pointed out in Part Two, as well as the very substantial compression of in-
come in e qual ity.

Th ese movements reversed in 1982– 1983. Th e new Socialist government
elected in May 1981 surely would have preferred to continue the earlier trend,
but it was not a simple matter to arrange for the minimum wage to increase
twice as fast as the average wage (especially when the average wage itself was
increasing faster than output). In 1982– 1983, therefore, the government de-
cided to “turn toward austerity”: wages were frozen, and the policy of annual
boosts to the minimum wage was defi nitively abandoned. Th e results were
soon apparent: the share of profi ts in national income skyrocketed during
the remainder of the 1980s, while wage inequalities once again increased, and

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income inequalities even more so (see Figures 8.1 and 8.2). Th e break was as
sharp as that of 1968, but in the other direction.

Th e Increase of In e qual ity in France since the 1980s
How should we characterize the phase of increasing in e qual ity that began in
France in 1982– 1983? It is tempting to see it in a long- run perspective as a mi-
crophenomenon, a simple reversal of the previous trend, especially since by
1990 or so the share of profi ts in national income had returned to the level
achieved on the eve of May 1968.21 Th is would be a mistake, however, for sev-
eral reasons. First, as I showed in Part Two, the profi t share in 1966– 1967 was
historically high, a consequence of the restoration of capital’s share that began
at the end of World War II. If we include, as we should, rent as well as profi t
in income from capital, we fi nd that capital’s share of national income actu-
ally continued to grow in the 1990s and 2000s. A correct understanding of
this long- run phenomenon requires that it be placed in the context of the
long- term evolution of the capital/income ratio, which by 2010 had returned
to virtually the same level it had achieved in France on the eve of World War I.
It is impossible to fully appreciate the implications of this restoration of the
prosperity of capital simply by looking at the evolution of the upper decile’s
share of income, in part because income from capital is understated, so that
we tend to slightly underestimate the increase in top incomes, and in part
because the real issue is the renewed importance of inherited wealth, a long-
term pro cess that has only begun to reveal its true eff ects and can be correctly
analyzed only by directly studying the changing role and importance of in-
herited wealth as such.

But that is not all. A stunning new phenomenon emerged in France in the
1990s: the very top salaries, and especially the pay packages awarded to the
top executives of the largest companies and fi nancial fi rms, reached astonish-
ing heights— somewhat less astonishing in France, for the time being, than in
the United States, but still, it would be wrong to neglect this new develop-
ment. Th e share of wages going to the top centile, which was less than 6 per-
cent in the 1980s and 1990s, began to increase in the late 1990s and reached
7.5– 8 percent of the total by the early 2010s. Th us there was an increase of
nearly 30 percent in a little over a de cade, which is far from negligible. If we
move even higher up the salary and bonus scale to look at the top 0.1 or 0.01

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percent, we fi nd even greater increases, with hikes in purchasing power greater
than 50 percent in ten years.22 In a context of very low growth and virtual
stagnation of purchasing power for the vast majority of workers, raises of this
magnitude for top earners have not failed to attract attention. Furthermore,
the phenomenon was radically new, and in order to interpret it correctly, we
must view it in international perspective.

A More Complex Case: Th e Transformation of
In e qual ity in the United States

Indeed, let me turn now to the US case, which stands out precisely because it
was there that a subclass of “supermanagers” fi rst emerged over the past sev-
eral de cades. I have done everything possible to ensure that the data series for
the United States are as comparable as possible with the French series. In par-
tic u lar, Figures 8.5 and 8.6 represent the same data for the United States as
Figures 8.1 and 8.2 for France: the goal is to compare, in the fi rst fi gure of each
pair, the evolution of the shares of income going to the top decile and top

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Excluding capital gains

Share of top decile in total income
(including capital gains)

Figure 8.5. Income in e qual ity in the United States, 1910– 2010
Th e top decile income share rose from less than 35 percent of total income in the 1970s
to almost 50 percent in the 2000s– 2010s.
Sources and series: see piketty.pse.ens.fr/capital21c.

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centile of the wage hierarchy and to compare, in the second fi gure, the wage
hierarchies themselves. I should add that the United States fi rst instituted a
federal income tax in 1913, concluding a long battle with the Supreme Court.23
Th e data derived from US income tax returns are on the whole quite compa-
rable to the French data, though somewhat less detailed. In par tic u lar, total
income can be gleaned from US statements from 1913 on, but we do not have
separate information on income from labor until 1927, so the series dealing
with the wage distribution in the United States before 1927 are somewhat less
reliable.24

When we compare the French and US trajectories, a number of similari-
ties stand out, but so do certain important diff erences. I shall begin by exam-
ining the overall evolution of the share of income going to the top decile
(Figure 8.6). Th e most striking fact is that the United States has become no-
ticeably more inegalitarian than France (and Eu rope as a whole) from the
turn of the twentieth century until now, even though the United States was
more egalitarian at the beginning of this period. What makes the US case
complex is that the end of the pro cess did not simply mark a return to the sit-

25%

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Top 1% (annual incomes above $352,000 in 2010)
Top 5%–1% (annual incomes between $150,000 and $352,000 in 2010)
Top 10%–5% (annual incomes between $108,000 and $150,000 in 2010)

Figure 8.6. Decomposition of the top decile, United States, 1910– 2010
Th e rise of the top decile income share since the 1970s is mostly due to the top
percentile.
Sources and series: see piketty.pse.ens.fr/capital21c.

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uation that had existed at the beginning: US in e qual ity in 2010 is quantita-
tively as extreme as in old Eu rope in the fi rst de cade of the twentieth century,
but the structure of that in e qual ity is rather clearly diff erent.

I will proceed systematically. First, Eu ro pe an income in e qual ity was sig-
nifi cantly greater than US income in e qual ity at the turn of the twentieth
century. In 1900– 1910, according to the data at our disposal, the top decile of
the income hierarchy received a little more than 40 percent of total national
income in the United States, compared with 45– 50 percent in France (and
very likely somewhat more in Britain). Th is refl ects two diff erences. First, the
capital/income ratio was higher in Eu rope, and so was capital’s share of na-
tional income. Second, in e qual ity of own ership of capital was somewhat less
extreme in the New World. Clearly, this does not mean that American soci-
ety in 1900– 1910 embodied the mythical ideal of an egalitarian society of pio-
neers. In fact, American society was already highly inegalitarian, much more
than Eu rope today, for example. One has only to reread Henry James or note
that the dreadful Hockney who sailed in luxury on Titanic in 1912 existed in
real life and not just in the imagination of James Cameron to convince one-
self that a society of rentiers existed not only in Paris and London but also in
turn- of- the- century Boston, New York, and Philadelphia. Nevertheless, capi-
tal (and therefore the income derived from it) was distributed somewhat less
unequally in the United States than in France or Britain. Concretely, US rent-
iers were fewer in number and not as rich (compared to the average US stan-
dard of living) as their Eu ro pe an counterparts. I will need to explain why this
was so.

Income in e qual ity increased quite sharply in the United States during the
1920s, however, peaking on the eve of the 1929 crash with more than 50 per-
cent of national income going to the top decile— a level slightly higher than
in Eu rope at the same time, as a result of the substantial shocks to which Eu-
ro pe an capital had already been subjected since 1914. Nevertheless, US in e-
qual ity was not the same as Eu ro pe an in e qual ity: note the already crucial
importance of capital gains in top US incomes during the heady stock market
ascent of the 1920s (see Figure 8.5).

During the Great Depression, which hit the United States particularly
hard, and again during World War II, when the nation was fully mobilized
behind the war eff ort (and the eff ort to end the economic crisis), income
in e qual ity was substantially compressed, a compression comparable in some

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respects to what we observe in Eu rope in the same period. Indeed, as we saw
in Part Two, the shocks to US capital were far from negligible: although there
was no physical destruction due to war, the Great Depression was a major
shock and was followed by substantial tax shocks imposed by the federal gov-
ernment in the 1930s and 1940s. If we look at the period 1910– 1950 as a whole,
however, we fi nd that the compression of in e qual ity was noticeably smaller in
the United States than in France (and, more generally, Eu rope). To sum up:
in e qual ity in the United States started from a lower peak on the eve of World
War I but at its low point aft er World War II stood above in e qual ity in Eu-
rope. Eu rope in 1914– 1945 witnessed the suicide of rentier society, but noth-
ing of the sort occurred in the United States.

Th e Explosion of US In e qual ity aft er 1980
In e qual ity reached its lowest ebb in the United States between 1950 and 1980:
the top decile of the income hierarchy claimed 30 to 35 percent of US national
income, or roughly the same level as in France today. Th is is what Paul Krug-
man nostalgically refers to as “the America we love”— the America of his
childhood.25 In the 1960s, the period of the TV series Mad Men and General
de Gaulle, the United States was in fact a more egalitarian society than France
(where the upper decile’s share had increased dramatically to well above 35
percent), at least for those US citizens whose skin was white.

Since 1980, however, income in e qual ity has exploded in the United States.
Th e upper decile’s share increased from 30– 35 percent of national income in
the 1970s to 45– 50 percent in the 2000s— an increase of 15 points of national
income (see Figure 8.5). Th e shape of the curve is rather impressively steep, and
it is natural to wonder how long such a rapid increase can continue: if change
continues at the same pace, for example, the upper decile will be raking in 60
percent of national income by 2030.

It is worth taking a moment to clarify several points about this evolution.
First, recall that the series represented in Figure 8.5, like all the series in the
WTID, take account only of income declared in tax returns and in par tic u lar
do not correct for any possible understatement of capital income for legal or
extralegal reasons. Given the widening gap between the total capital income
(especially dividends and interest) included in US national accounts and the
amount declared in income tax returns, and given, too, the rapid development

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of tax havens (fl ows to which are, in all likelihood, mostly not even included
in national accounts), it is likely that Figure 8.5 underestimates the amount by
which the upper decile’s share actually increased. By comparing various avail-
able sources, it is possible to estimate that the upper decile’s share slightly ex-
ceeded 50 percent of US national income on the eve of the fi nancial crisis of
2008 and then again in the early 2010s.26

Note, moreover, that stock market euphoria and capital gains can account
for only part of the structural increase in the top decile’s share over the past
thirty or forty years. To be sure, capital gains in the United States reached
unpre ce dented heights during the Internet bubble in 2000 and again in 2007:
in both cases, capital gains alone accounted for about fi ve additional points of
national income for the upper decile, which is an enormous amount. Th e pre-
vious record, set in 1928 on the eve of the 1929 stock market crash, was roughly
3 points of national income. But such levels cannot be sustained for very long,
as the large annual variations evident in Figure 8.5 show. Th e incessant short-
term fl uctuations of the stock market add considerable volatility to the evolu-
tion of the upper decile’s share (and certainly contribute to the volatility of
the US economy as a whole) but do not contribute much to the structural in-
crease of in e qual ity. If we simply ignore capital gains (which is not a satisfac-
tory method either, given the importance of this type of remuneration in the
United States), we still fi nd almost as great an increase in the top decile’s
share, which rose from around 32 percent in the 1970s to more than 46 per-
cent in 2010, or fourteen points of national income (see Figure 8.5). Capital
gains oscillated around one or two points of additional national income for
the top decile in the 1970s and around two to three points between 2000 and
2010 (excluding exceptionally good and bad years). Th e structural increase is
therefore on the order of one point: this is not nothing, but then again it is
not much compared with the fourteen- point increase of the top decile’s share
exclusive of capital gains.27

Looking at evolutions without capital gains also allows us to identify the
structural character of the increase of in e qual ity in the United States more
clearly. In fact, from the late 1970s to 2010, the increase in the upper decile’s
share (exclusive of capital gains) appears to have been relatively steady and
constant: it passed 35 percent in the 1980s, then 40 percent in the 1990s, and
fi nally 45 percent in the 2000s (see Figure 8.5).28 Much more striking is the
fact that the level attained in 2010 (with more than 46 percent of national

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income, exclusive of capital gains, going to the top decile) is already signifi –
cantly higher than the level attained in 2007, on the eve of the fi nancial crisis.
Early data for 2011– 2012 suggest that the increase is still continuing.

Th is is a crucial point: the facts show quite clearly that the fi nancial crisis
as such cannot be counted on to put an end to the structural increase of in e-
qual ity in the United States. To be sure, in the immediate aft ermath of a
stock market crash, in e qual ity always grows more slowly, just as it always grows
more rapidly in a boom. Th e years 2008– 2009, following the collapse of
Lehman Brothers, like the years 2001– 2002, aft er the bursting of the fi rst
Internet bubble, were not great times for taking profi ts on the stock market.
Indeed, capital gains plummeted in those years. But these short- term move-
ments did not alter the long- run trend, which is governed by other forces
whose logic I must now try to clarify.

To proceed further, it will be useful to break the top decile of the income
hierarchy down into three groups: the richest 1 percent, the next 4 percent,
and the bottom 5 percent (see Figure 8.6). Th e bulk of the growth of in e qual-
ity came from “the 1 percent,” whose share of national income rose from 9
percent in the 1970s to about 20 percent in 2000– 2010 (with substantial year-
to- year variation due to capital gains)— an increase of 11 points. To be sure,
“the 5 percent” (whose annual income ranged from $108,000 to $150,000 per
house hold in 2010) as well as “the 4 percent” (whose income ranged from
$150,000 to $352,000) also experienced substantial increases: the share of the
former in US national income rose from 11 to 12 percent (or one point), and
that of the latter rose from 13 to 16 percent (three points).29 By defi nition, that
means that since 1980, these social groups have experienced income growth
substantially higher than the average growth of the US economy, which is not
negligible.

Among the members of these upper income groups are US academic econ-
omists, many of whom believe that the economy of the United States is work-
ing fairly well and, in par tic u lar, that it rewards talent and merit accurately
and precisely. Th is is a very comprehensible human reaction.30 But the truth is
that the social groups above them did even better: of the 15 additional points
of national income going to the top decile, around 11 points, or nearly three-
quarters of the total, went to “the 1 percent” (those making more than $352,000
a year in 2010), of which roughly half went to “the 0.1 percent” (those making
more than $1.5 million a year).31

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Did the Increase of In e qual ity Cause the Financial Crisis?
As I have just shown, the fi nancial crisis as such seems not to have had an im-
pact on the structural increase of in e qual ity. What about the reverse causal-
ity? Is it possible that the increase of in e qual ity in the United States helped to
trigger the fi nancial crisis of 2008? Given the fact that the share of the upper
decile in US national income peaked twice in the past century, once in 1928
(on the eve of the crash of 1929) and again in 2007 (on the eve of the crash of
2008), the question is diffi cult to avoid.

In my view, there is absolutely no doubt that the increase of in e qual ity in
the United States contributed to the nation’s fi nancial instability. Th e reason is
simple: one consequence of increasing in e qual ity was virtual stagnation of the
purchasing power of the lower and middle classes in the United States, which
inevitably made it more likely that modest house holds would take on debt, es-
pecially since unscrupulous banks and fi nancial intermediaries, freed from
regulation and eager to earn good yields on the enormous savings injected into
the system by the well- to- do, off ered credit on increasingly generous terms.32

In support of this thesis, it is important to note the considerable transfer
of US national income— on the order of 15 points— from the poorest 90 per-
cent to the richest 10 percent since 1980. Specifi cally, if we consider the total
growth of the US economy in the thirty years prior to the crisis, that is, from
1977 to 2007, we fi nd that the richest 10 percent appropriated three- quarters
of the growth. Th e richest 1 percent alone absorbed nearly 60 percent of the
total increase of US national income in this period. Hence for the bottom 90
percent, the rate of income growth was less than 0.5 percent per year.33 Th ese
fi gures are incontestable, and they are striking: what ever one thinks about the
fundamental legitimacy of income in e qual ity, the numbers deserve close scru-
tiny.34 It is hard to imagine an economy and society that can continue func-
tioning indefi nitely with such extreme divergence between social groups.

Quite obviously, if the increase in in e qual ity had been accompanied by
exceptionally strong growth of the US economy, things would look quite dif-
ferent. Unfortunately, this was not the case: the economy grew rather more
slowly than in previous de cades, so that the increase in in e qual ity led to vir-
tual stagnation of low and medium incomes.

Note, too, that this internal transfer between social groups (on the order
of fi ft een points of US national income) is nearly four times larger than the

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impressive trade defi cit the United States ran in the 2000s (on the order of
four points of national income). Th e comparison is interesting because the
enormous trade defi cit, which has its counterpart in Chinese, Japa nese, and
German trade surpluses, has oft en been described as one of the key contribu-
tors to the “global imbalances” that destabilized the US and global fi nancial
system in the years leading up to the crisis of 2008. Th at is quite possible, but
it is important to be aware of the fact that the United States’ internal imbal-
ances are four times larger than its global imbalances. Th is suggests that the
place to look for the solutions of certain problems may be more within the
United States than in China or other countries.

Th at said, it would be altogether too much to claim that the increase of in-
e qual ity in the United States was the sole or even primary cause of the fi nan-
cial crisis of 2008 or, more generally, of the chronic instability of the global
fi nancial system. To my mind, a potentially more important cause of instabil-
ity is the structural increase of the capital/income ratio (especially in Eu rope),
coupled with an enormous increase in aggregate international asset positions.35

Th e Rise of Supersalaries
Let me return now to the causes of rising in e qual ity in the United States. Th e
increase was largely the result of an unpre ce dented increase in wage in e qual-
ity and in par tic u lar the emergence of extremely high remunerations at the
summit of the wage hierarchy, particularly among top managers of large fi rms
(see Figures 8.7 and 8.8).

Broadly speaking, wage in e qual ity in the United States changed in major
ways over the past century: the wage hierarchy expanded in the 1920s, was rela-
tively stable in the 1930s, and then experienced severe compression during
World War II. Th e phase of “severe compression” has been abundantly studied.
An important role was played by the National War Labor Board, the govern-
ment agency that had to approve all wage increases in the United States from
1941 to 1945 and generally approved raises only for the lowest paid workers. In
par tic u lar, managers’ salaries were systematically frozen in nominal terms and
even at the end of the war were raised only moderately.36 During the 1950s,
wage in e qual ity in the United States stabilized at a relatively low level, lower
than in France, for example: the share of income going to the upper decile was
about 25 percent, and the share of the upper centile was 5 or 6 percent. Th en,

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from the mid- 1970s on, the top 10 percent and, even more, the top 1 percent
began to claim a share of labor income that grew more rapidly than the average
wage. All told, the upper decile’s share rose from 25 to 35 percent, and this in-
crease of ten points explains approximately two- thirds of the increase in the
upper decile’s share of total national income (see Figures 8.7 and 8.8).

Several points call for additional comment. First, this unpre ce dented in-
crease in wage in e qual ity does not appear to have been compensated by in-
creased wage mobility over the course of a person’s career.37 Th is is a signifi –
cant point, in that greater mobility is oft en mentioned as a reason to believe
that increasing in e qual ity is not that important. In fact, if each individual
were to enjoy a very high income for part of his or her life (for example, if each
individual spent a year in the upper centile of the income hierarchy), then an
increase in the level characterized as “very high pay” would not necessarily
imply that in e qual ity with respect to labor— measured over a lifetime— had
truly increased. Th e familiar mobility argument is powerful, so powerful that
it is oft en impossible to verify. But in the US case, government data allow us
to mea sure the evolution of wage in e qual ity with mobility taken into account:
we can compute average wages at the individual level over long periods of time

50%

45%

40%

35%

30%

25%

20%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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Share of top wage decile in
total wage bill

Excluding capital gains

Share of top income decile
in total income

Figure 8.7. High incomes and high wages in the United States, 1910– 2010
Th e rise of income in e qual ity since the 1970s is largely due to the rise of wage in e qual ity.
Sources and series: see piketty.pse.ens.fr/capital21c.

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The Structure of In e qual ity

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(ten, twenty, or thirty years). And what we fi nd is that the increase in wage
in e qual ity is identical in all cases, no matter what reference period we
choose.38 In other words, workers at McDonald’s or in Detroit’s auto plants
do not spend a year of their lives as top managers of large US fi rms, any more
than professors at the University of Chicago or middle managers from Cali-
fornia do. One may have felt this intuitively, but it is always better to mea sure
systematically wherever possible.

Cohabitation in the Upper Centile
Furthermore, the fact that the unpre ce dented increase of wage in e qual ity ex-
plains most of the increase in US income in e qual ity does not mean that in-
come from capital played no role. It is important to dispel the notion that
capital income has vanished from the summit of the US social hierarchy.

In fact, a very substantial and growing in e qual ity of capital income since
1980 accounts for about one- third of the increase in income in e qual ity in the
United States— a far from negligible amount. Indeed, in the United States, as

24%

22%

20%

18%

16%

14%

12%

10%

0%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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Share of top wage percentile in
total wage bill

Share of top income percentile
in total income
Excluding capital gains

Figure 8.8. Th e transformation of the top 1 percent in the United States
Th e rise in the top 1 percent highest incomes since the 1970s is largely due to the rise in
the top 1 percent highest wages.
Sources and series: see piketty.pse.ens.fr/capital21c.

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in France and Eu rope, today as in the past, income from capital always be-
comes more important as one climbs the rungs of the income hierarchy. Tem-
poral and spatial diff erences are diff erences of degree: though large, the gen-
eral principle remains. As Edward Wolff and Ajit Zacharias have pointed out,
the upper centile always consists of several diff erent social groups, some with
very high incomes from capital and others with very high incomes from labor;
the latter do not supplant the former.39

In the US case, as in France but to an even greater degree, the diff erence
today is that one has to climb much further up the income hierarchy before
income from capital takes the upper hand. In 1929, income from capital (es-
sentially dividends and capital gains) was the primary resource for the top 1
percent of the income hierarchy (see Figure 8.9). In 2007, one has to climb to
the 0.1 percent level before this is true (see Figure 8.10). Again, I should make
it clear that this has to do with the inclusion of capital gains in income from
capital: without capital gains, salaries would be the main source of income up
to the 0.01 percent level of the income hierarchy.40

P90–95 P95–99 P99–99.5 P99.5–99.9 P99.9–99.99 P99.99–100

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

Sh
ar

e i
n

to
ta

l i
nc

om
e o

f
va

ri
ou

s f
ra

ct
ile

Labor income
Capital income
Mixed income

Figure 8.9. Th e composition of top incomes in the United States in 1929
Labor income becomes less and less important as one moves up within the top income
decile.
Sources and series: see piketty.pse.ens.fr/capital21c.

U.
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The Structure of In e qual ity

302

Th e fi nal and perhaps most important point in need of clarifi cation is that
the increase in very high incomes and very high salaries primarily refl ects the
advent of “supermanagers,” that is, top executives of large fi rms who have
managed to obtain extremely high, historically unpre ce dented compensation
packages for their labor. If we look only at the fi ve highest paid executives in
each company listed on the stock exchange (which are generally the only com-
pensation packages that must be made public in annual corporate reports), we
come to the paradoxical conclusion that there are not enough top corporate
managers to explain the increase in very high US incomes, and it therefore
becomes diffi cult to explain the evolutions we observe in incomes stated on
federal income tax returns.41 But the fact is that in many large US fi rms, there
are far more than fi ve executives whose pay places them in the top 1 percent
(above $352,000 in 2010) or even the top 0.1 percent (above $1.5 million).

Recent research, based on matching declared income on tax returns with
corporate compensation rec ords, allows me to state that the vast majority (60
to 70 percent, depending on what defi nitions one chooses) of the top 0.1 per-
cent of the income hierarchy in 2000– 2010 consists of top managers. By com-

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

Sh
ar

e i
n

to
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l i
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om
e o

f v
ar

io
us

fr
ac

til
es

P90–95 P95–99 P99–99.5 P99.5–99.9 P99.9–99.99 P99.99–100

Labor income
Capital income
Mixed income

Figure 8.10. Th e composition of top incomes in the United States, 2007
Capital income becomes dominant at the level of top 0.1 percent in 2007, as opposed
to the top 1 percent in 1929.
Sources and series: see piketty.pse.ens.fr/capital21c.

U.
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Two Worlds

303

parison, athletes, actors, and artists of all kinds make up less than 5 percent of
this group.42 In this sense, the new US in e qual ity has much more to do with
the advent of “supermanagers” than with that of “superstars.”43

It is also interesting to note that the fi nancial professions (including both
managers of banks and other fi nancial institutions and traders operating on
the fi nancial markets) are about twice as common in the very high income
groups as in the economy overall (roughly 20 percent of top 0.1 percent,
whereas fi nance accounts for less than 10 percent of GDP). Nevertheless, 80
percent of the top income groups are not in fi nance, and the increase in the
proportion of high- earning Americans is explained primarily by the skyrock-
eting pay packages of top managers of large fi rms in the nonfi nancial as well
as fi nancial sectors.

Finally, note that in accordance with US tax laws as well as economic
logic, I have included in wages all bonuses and other incentives paid to top
managers, as well as the value of any stock options (a form of remuneration
that has played an important role in the increase of wage in e qual ity depicted
in Figures 8.9 and 8.10).44 Th e very high volatility of incentives, bonuses, and
option prices explains why top incomes fl uctuated so much in the period
2000– 2010.