Extreme wage inequality – new evidence

New evidence on the growth in pay at the very top of the wage distribution has been presented in a paper by researchers at the LSE's Centre for Economic Performance. The authors point out that the remarkable rise in the share of income and wages taken by those toward the very top of the distribution is a missing element in much recent research.

Key findings

  • Between 1979 and 2007, the top decile in the UK increased their share of total income by 14 percentage points, from 28.4 per cent to 42.6 per cent. But the top percentile accounted for fully two-thirds of these gains, seeing their share rise from 5.9 per cent to 15.4 per cent. Interestingly, the magnitude of these gains is almost identical to those observed in the USA.
  • Those working in the financial sector have been the key winners over the last decade. 60 per cent of the increase in income share accruing to the top percentile has gone to financial service employees – even though they account for only around one-fifth of such workers.
  • Among those bankers at the top of the distribution, bonuses have played an increasingly important role. Indeed, none of the gains in wage share accruing to financial sector workers have occurred through changes in salary.
  • Firms with higher institutional ownership tend to reward CEOs when performance is strong, but penalise them equally aggressively when corporate performance falters. By contrast, in firms with less institutional ownership negative performance is not punished by lower pay.

Source: Brian Bell and John Van Reenen, Extreme Wage Inequality: Pay at the Very Top, Occasional Paper 34, Centre for Economic Performance (London School of Economics)