Would you believe the answer to that question is “We don’t know.” It sounds strange, but details on any group of individual income earners is, for the most part, non-existant, and the rich are no exception.
We do know a little about the occupations of the very top income earners (those at or above the 0.1% bracket), which I’ll come to later. First, though, I want to take a bird’s eye view. From US Census Bureau data we do have a rough estimate of American demographics by income quintile. You can see that some reasons for income inequality are simply a result of these demographics. For instance, in the lowest quintile there is only .42 income earners per household while in the top fifth there are nearly two (1.97 to be exact). This fact also hints at the importance of adjusting for household size when tracking changes in income inequality. You can read my previous post here for the broad trends in income inequality, which adjust for these, and other, important demographic factors.
The data above was compiled by Mark Perry.
It’s also clear that a much higher percentage of high-income households are likely to be married (78% for the rich versus 17% for the poor); are in their prime working age between 35 and 64 years old (74% for the rich versus 43% for the poor); are more likely to be working full-time (77% for the rich versus 17% for the poor); and are much more likely to have at least a bachelor’s degree (60% for the rich versus 12% for the poor).
Note that based on this demographic data some of those in the bottom quintile are merely there because of the employment life cycle, while other at the bottom because of structural factors (though I will not attempt to speculate in this post on the exact mix of each). On the life cycle side, the poor might consist of a widowed retiree who — although once in a higher income quintile — is now making little or zero income while drawing down on savings. Likewise, it might contain a young unmarried couple with only the male member of the household working while his partner is at home pregnant. After the woman reenters the labor force and both members of the household gain job experience they may well climb into higher income brackets. Undoubtedly, the poor also consist of single parents working part-time while trying to raise a family or others who are in the bottom quintile long-term. The structural side of income differences results from a variety of factors like educational opportunities for particular groups, cycles of poverty, geographic constraints, culture and norms, various types of mental, social, and physical pathologies, and particular types of government regulation (e.g. occupational licensing), to name just a few. Commenting on the particular details of these structures would be pure speculation and is undoubtedly as deep a topic and robust a discourse as exists in the social sciences. Nevertheless, I will address some of these structural factors in brief in a later post when I discuss income mobility.
Now, on to the more specific data we have. Thanks to a 2009 paper by Steven Kaplan and Joshua Rauh, both of the University of Chicago Graduate School of Business, we know something about the occupations of the top 0.1% of income earners. Note that in this case we are no longer talking about households, but rather about specific income earners. Kaplan and Rauh used a variety of data sources and estimates to try to categorize the occupations of those at the very top of the income ladder.
They examined the percentage of top income earners who fell into one of the following four categories:
- The five highest ranking executives of each of the non-financial firms listed in the S&P 500, S&P Midcap 400, and S&P Smallcap 600.
- “Financial service sector employees from investment banks, hedge funds, private equity (PE) funds, and mutual funds.”
- Lawyers (partners) at major legal practices.
- Celebrities (such as actors and actresses) and professional athletes in the NBA, NFL, and MLB.
To get a sense of how difficult it is to really know who the top income earners are, consider that even after careful study, Kaplan and Rauh estimate that the groups they consider comprise at most 26.5% of income earners at or above the top 0.1% (and at least 15%). They note that:
While our estimates represent a substantial portion of the top income groups, they clearly miss a large number of high-earning individuals. We suspect that some of the missing individuals are trial lawyers, successful entrepreneurs, owners and executives of privately held companies, highly paid doctors, and independently wealthy individuals who have a high AGI [Adjusted Gross Income]. While some of the missing individuals may also be non-top ﬁve executives of publicly traded companies, the pay of the ﬁfth highest paid executives suggests that this number is negligible for the top 0.01% and above.
One primary reason that the data is so hard to come by is that companies that are not publicly traded have different Securities and Exchange Commission reporting requirements and thus don’t have as stringent a set of publicly release requirements.
Some interesting results from their research (all results are from 2004, the last year data was available):
- The top five executives at non-financial firms comprised just over 2.5% of the top 0.1% income bracket. The percentage of law partners in the top 0.1% of income earners is roughly the same.
- Professional athletes comprise only 0.8% of the top 0.1% of income earners.
- Data for financial professionals is more coarse, but the authors estimate that “the professionals in hedge, VC, and PE funds include roughly the same number of individuals in the top 0.1% of the AGI income distribution as the top nonfinancial executives.”
- The top 25 hedge fund managers combined earned more income than all S&P 500 CEOs combined. The authors estimate that in 2007 the top five hedge fund managers will earn as much as all S&P 500 CEOs.
As for why there has been increasing skewness in top income brackets relative to lower income earners, the authors quickly cite the substantial literature on the matter. A variety of explanations have been offered by economists across dozens of studies. These explanations include trade or globalization theories, increasing returns to generalists rather than specialists, theories of managerial power, social norms, greater scale, skill-biased technological change, and superstars. Like in the case of determining who the highest income earners are, it is somewhat surprising that there isn’t more of a consensus on why top earners have increased their incomes at a rate so much faster than the rest of us. I think the lack of knowledge in both cases speaks to the complexity of the issue and suggests a degree of humility that is missing from public discourse from those who are both sure who the richest Americans are and how they got that way.