The Magnitude of Inequality

Wage inequality is just the tip of the iceberg

Last week’s news that Walmart is raising its internal minimum wage—to $9 per hour—highlighted the issue of wage inequality, which has become increasingly pressing as the unequal recovery from the financial crisis has left huge swathes of the population behind. Given the cost of modern life, $9 an hour—or $18,000 per year, before payroll taxes, and assuming 40-hour work weeks that many Walmart workers can’t count on—doesn’t seem like a lot. But it remains difficult to grasp just how unequal is the distribution of the fruits of collective labor.

The underlying problem is that the human mind is not well equipped to comprehend anything involving extremely large numbers, like the age of the universe. Over at Fortune, Tom Huddleston calculated that, at $9 per hour, you would have to work full time for more than 1,360 years—that’s with no days off—to make as much as Walmart CEO Doug McMillon made in 2014. (Basically Huddleston rediscovered the ratio of the CEO’s salary to the salary of the lowest-paid employee.) But what does that really mean, given that none of us can understand how long 1,360 years really is?

This level of wage inequality, extreme as it is, only tells part of the story. McMillon has been making millions of dollars for years and will make tens of millions of dollars for years to come. Since he’s probably investing a lot of that money in the stock market—presumably largely in Walmart stock, which went up a decent 10% in the past year—he should have a healthy and growing stream of investment income to complement his princely compensation package. The ratio of the CEO’s investment income to that of the lowest-paid employee is easy to calculate: it’s infinite, since many workers have no accumulated savings, no investments, and hence no investment income.

When we add investment income to labor income, we get total income inequality, often represented by the 1% income share charts—showing what percentage of national income is received by 1% of the population—made famous by Emmanuel Saez and Thomas Piketty. Here’s the latest:

This is still hard to understand, however. What does it really mean that 1% of our population takes home about 20% of all income?

Furthermore, inequality of labor income, or even total income, is dwarfed by inequality of wealth: many people don’t have any assets at all. And wealth inequality is in some ways more pernicious than income inequality. It’s hard to deny that some people are more productive than others and therefore deserve more for their labor—if not in a defensible moral sense, at least in the utilitarian, incentive-promoting sense. But the idea that people can make money by doing nothing, harvesting the fruits of their past labor—or their grandfather’s past labor—is harder for most people to come to terms with. Wealth inequality also tends to compound itself over time because the rate of return on investments exceeds the rate of growth of the economy as a whole: that’s the central lesson of Piketty’s Capital in the Twenty-First Century, which was all the rage a year ago.

There are certainly economic justifications for making money from investments: without savings and invested capital, we would still be in the Stone Age. In addition, the prospect of living off of accumulated savings in the future is itself an incentive to work today. But how much wealth inequality is a good thing? Piketty has calculated that, in France, of the cohort born in 1970, 12% of people will inherit more money than the average person will earn from a whole lifetime of work.

Current levels of wealth inequality are, of course, even harder to comprehend than current levels of wage inequality. This is the top 0.1% wealth share in the United States, from Saez and Gabriel Zucman, Figure 1:

In the previous chart, 1% of the population received 20% of the income; here, 0.1% of the population owns 20% of all the stuff. But that might not be so terrible — if, for example, the other 80% was shared more or less equally by everyone else. But that’s not the case. This is a chart I drew of the complete wealth distribution, based on data from Saez and Zucman:

Imagine all the families in the United States lined up from left to right along the X-axis, from poorest to richest; the red line shows the total value of (almost) everything they own, minus their debts. All household wealth is represented by the area under the red line. The problem with understanding this picture, however, is that the red line is indistinguishable from zero for the vast majority of the population—all the wealth is crammed into the right-hand part of the chart—so it’s hard to get a sense of the relative magnitudes.

I was writing the introduction to a paper on inequality and tax policy. To try to make the scale of wealth inequality more concrete, I came up with this analogy.

Imagine a town with 10,000 families. In this town, square feet of living space is proportional to wealth. (That is, someone with ten times as much money as someone else has a house that’s ten times as big. What does such a town look like?

On the outskirts of town sits a massive housing project: ten towers, each thirty stories high, each floor containing 6,000 square feet of living space, divided into thirty tiny apartments, each with one or two small rooms. This complex houses nine thousand families.

Photo by Edward Blake (CC BY 2.0)

Next to the project is a suburban-style community with free-standing houses ranging from 2,000 to 4,000 square feet; nine hundred families live here.

Photo by (CC BY 2.0)

Scattered through the foothills at the edge of town are ninety enormous mansions ranging from 10,000 to 30,000 square feet — the kind that each have a dozen bedrooms, a pool, and an indoor movie theater.

Photo by Roger (CC BY-SA 2.0)

Nine families own large estates in the surrounding countryside and live in sprawling complexes with about 100,000 square feet — roughly the size of a Home Depot.

Photo by Don ((CC BY 2.0)

And one family lives in a one million square foot building that used to be a major museum.

Photo by Arad (CC BY-SA 3.0)

The distribution of living space in this fictional town is similar to the actual distribution of wealth in the United States.

That is, roughly speaking, the world we live in today. Is it right? Is it fair? One can debate those questions without end. But first it’s important to try to conceive of the scale of inequality in contemporary society. Otherwise we have no idea what we’re talking about.

James Kwak is, among other things, an associate professor at the University of Connecticut School of Law. Find more at Twitter, Medium, The Baseline Scenario,The Atlantic, or