Sunday, March 26, 2017

Corporations in the Age of Inequality: A Skeptic's Take

Nick Bloom contributes an article to the Harvard Business Review: "Corporations in the Age of Inequality". It's also an interesting read, based on his "Firming Up Inequality" paper, which I also recommend. The story of inequality they tell is also one which is essentially technology based (IT and outsourcing), as they find that inequality is almost entirely driven by changes in between firm inequality. They deserve credit for presenting an interesting set of facts.

However, while intriguing, I'm not yet totally convinced this is the key to understanding inequality. Macromon also had an excellent discussion of this research awhile back. The key question she had is about the definition of a firm -- the authors use tax ID numbers, but the average # of tax ID numbers per corporation listed on the NYSE is 3.2. If it's just a story about a growing number of tax IDs per corporation, then it becomes much less interesting. A similar problem is that one could also imagine that if a firm used to employ a janitor, but then outsources it to a different company, within firm inequality could fall or be flat even as wages between the janitor and others working in the same building increase. Thus, their decomposition doesn't necessarily teach us much about why inequality is increasing, and is perfectly consistent with the institutions story I've told in a previous blog post (or many other stories one might dream up).

However, I did notice that the institutions story went unmentioned in their paper and in Bloom's article. As I wrote before, the insights of Piketty, Saez and coauthors seem to have had surprisingly little influence, particularly since the explanation seems perfectly adequate, and has a lot of explanatory power. (Actually, in his book, Piketty also barely mentions the institutions story, which is a major theme of some of his joint papers with Saez and coauthors...) This is where the lack of comment papers in economics is frustrating. Many top people apparently don't buy the institutions story. Why not? Perhaps they have good reasons to be skeptical. I'd like to know what they are. (I'd certainly like to know what Nick Bloom thinks...) The evidence looks quite compelling to me.

I took issue with this comment "Since 1980, income inequality has risen sharply in most developed economies". As my blog readers know, income inequality has not risen dramatically in Germany, France, Japan, or Sweden according to Alvaredo et al.. Thus, this comment threw me: "This means that the rising gap in pay between firms accounts for the large majority of the increase in income inequality in the United States. It also accounts for at least a substantial part in other countries, as research conducted in the UK, Germany, and Sweden demonstrates." Right, but the increases in inequality in Germany and Sweden have been quite minor relative to the US, and are also associated with changes in top marginal tax rates. So, between firm inequality isn't actually explaining much is what I'm hearing. 

Bloom attributes rising inequality to "the rise of outsourcing, the adoption of IT, and the cumulative effects of winner-take-most competition". I agree that outsourcing could be causing the rise of measured firm-level inequality, although this could be happening even while having scant impact on overall inequality. Particularly given that "One study found that from 1980 to 2008, the share of workers in Germany employed by temp agencies or cleaning, logistics, or security firms more than tripled, from roughly 2% to 7%." My question with adoption of IT is going to sound familiar: don't the Germans, Swedes, and Japanese also have IT? And why did winner-take-most competition only happen in Reagan-Thatcher countries since 1980? I would point to the savage cuts in top marginal tax rates, as well as to other institutional changes (other tax changes, declining importance of the minimum wage, and declining influence of labor). 

In any case, it's still a nice article and I found myself mostly agreeing with his policy recommendations. I particularly liked his focus on the role that luck plays in determining careers and income. If you take two people with the same skills, and put one at Google in 1999 and another at, say, General Motors, the one lucky enough to have chosen Google would have gotten wildly rich. This is another argument for higher top marginal tax rates, which I support. 


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