The Wall Street Journal had a very interesting article on the research of two distinguished Kellogg faculty (OK, one of them is me) here. While it is well–documented that the income share of the top 1% of earners has more than doubled since 1980 (and the top 0.01% of earners more than quadrupled), the article documents another fundamental shift that has accompanied this. While prior to 1980, the cyclicality of the top earnings was less than that of the average household, since the mid-1980’s it is much greater. These phenomena are linked, across income groups, across decades, and across countries. The change of top incomes from relatively safe to cyclical is consistent with the idea that the increase in top income shares has been driven by an increase in the ability of high-skill individuals to scale their skills. More scalable skills means lower diminishing returns to scale, which means lower average margins, which means more exposure to fluctuations in price or cost. Our full paper is here.
The article sounds interesting, but could you fix the links? They take me to the Kellogg outlook web app.
The link is now fixed. Thanks for pointing it out!
Isn’t the volatility in earnings of “the rich” just another way of saying that they took more risk, which generally also means more reward? Generally.
Also, a la the Sharpe ratio, shouldn’t incomes be normalized for volatility? If the Highland Pk Park Dist head makes $200K with zero volatility and a businessman makes $300K with a lot of volatility, the $200K is probably “worth” more…no?
Also, I’ve never looked at the raw data, but, when I see bell-curve income distributions, they truncate at zero income. I know from experience that one can have negative income. I wonder how distributions would look if they allowed for negative income. Does the raw data allow for that? (Sorry for such a basic question.)
[…] Rising Top Incomes are Linked to Rising Business-Cycle Exposure – Jonathan Parker blogs about that same research and provides a link to the original paper (pdf). […]