(Bloomberg View) — The most important recent research on income inequality is not, as news reports might suggest, Thomas Piketty’s famous book. It is new research out this week from a team of economists explaining the role that companies play in wage differences.
The popular conception that increasing inequality is explained mostly by widening gaps between top earners and lower earners within each company is, to put it gently, wrong. It’s not that your manager is increasingly earning a lot more than you are; it’s that companies are becoming ever less similar to one another.
Consider Apple and McDonald’s. The Piketty perspective is that inequality rises because the top executives at both companies get much bigger raises than the rank-and-file. But the other possibility is that the average pay at Apple rises a lot relative to the average pay at McDonald’s, even as the wage gaps within each firm stay about the same.
That’s a different story, and it appears to be a more accurate one, as the new research confirms — with the most definitive data so far.
The researchers, led by Jae Song of the Social Security Administration had access to confidential Social Security earnings data, including companies’ tax identification numbers. They were thus able to look at all earnings (not just those capped at some threshold) and they were able to examine whole firms rather than just establishments (with the difference being that a company may have multiple locations).