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).
What did they find? From 1978 to 2012, effectively all of the increase in wage inequality nationally has been due to increasing disparities from company to company. As the researchers note, "the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population." The researchers also found, by the way, that the male-female wage gap within companies has shrunk noticeably.
If we want to understand trends in inequality, we have to ask why some companies are outpacing others.
Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration.