Abstract
Marta Spreafico in this chapter, titled ‘Is the Share of Income of the Top One Percent Due to the Marginal Product of Labour or Managerial Power?’, argues that the last 30 years have seen a rapid increase in the share of income of the top one per cent, especially in the USA. This has led to increasing concern in some quarters about the consequences of the increase in income inequality. However, for a long time, neoclassical economics has generally ignored the problem. This is largely because of its uncritical acceptance that all employees, including the highest paid, are paid their marginal products in competitive labour markets and receive their ‘just deserts’. The recent increase in overall inequality is also attributed to skill-biased technical change and the race between technology and education. These explanations are examined in light of empirical and theoretical arguments that question the existence of the aggregate production function and the marginal productivity theory of distribution. It is concluded that the explanation for the increase in income of the top one per cent must lie elsewhere such as an increase in managerial power.
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Notes
- 1.
See Felipe and McCombie (2013) for a compendium of their research.
- 2.
See Solow (2014) for compelling criticisms of some of Mankiw’s arguments.
- 3.
Note that if prices are determined by a mark-up on unit labour costs, labour’s share is given by 1/(1+π). The mark-up will be determined by the state of competition in both the product and the labour market.
- 4.
In terms of the aggregate CES production function with constant returns to scale and factors paid their marginal products, capital’s share equals (1 − a) = δ(K/Y)(σ − 1)/σt and σ is the elasticity of substitution.
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- 6.
- 7.
- 8.
Note that this is different from the identity derived from neoclassical production theory where the value of output is pQ where p is the price in, say, £s per unit output. It is theoretically possible to recover the physical volume of output from this and theoretically estimate the production function in terms of physical units.
- 9.
However, as Haldane et al. (2010) suggested, the conventional way that output of the finance sector is calculated in the NIPA is likely to have provided an overestimate in the run up to the subprime crisis.
- 10.
- 11.
See also Stout (2014).
- 12.
The regression results pass all the usual diagnostic texts. Tests for structural breaks (Clemente–Montañés–Reyes and Zivot–Andrews unit root tests) reveal that a breakpoint in the (ln) CEO’s annual compensation series occurred in 1993. Both the augmented Dickey–Fuller test (t-statistic equal to −3.462, 5% critical value being −2.955) and the Johansen tests for co-integration (t-statistic equal to 16.1067 for the null of no co -integration , 5 per cent critical value being 15.41; t-statistic equal to 0.4939 for the null hypothesis of at most one co-integrating equation, 5 per cent critical value being 3.76) reject the null hypothesis of no co -integration.
- 13.
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Spreafico, M.R.M. (2018). Is the Share of Income of the Top One Per cent Due to the Marginal Product of Labour or Managerial Power?. In: Arestis, P. (eds) Alternative Approaches in Macroeconomics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-69676-8_7
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