Commenter Link asked me to post on an interview I did on Counterpoint last Monday. In fact the transcript is up on the ABC website so I’m not sure there’s a need. But because it’s there I’ll put up an edited version of it below the fold. Might be a good discussion starter for comments below. I contrasted the remarkable rise in income at the very top – quite pronounced here but hugely overshadowed by what’s going on in the US.
The upshot is that where a vast proportion of US growth has gone to those at the very top, a lesser proportion has done so here leaving a fair bit more room for those throughout the income distribution. The Howard Govt stuck with the family payments system introduced by the previous government, and fortunately preferred lifting tax thresholds to lowering the top tax rate (though it nibbled at this in the last budget). These things and the tossing of six hundred dollars at every child before elections has meant that income distribution has been quite good lower down in the last few years.
I suspect that the NATSEM studies on which I’m relying are missing one thing which is the way in which superannuation is allowing wealthy people over 45 to pay the flat 15% tax (that the ALP introduced) within the super regime rather than pay the top marginal rate.
I also wanted to speak about the market for lemons in the labour market and the O-ring theory of production. You’ll find these briefly outlined in this post from last year.
Anyway the edited interview is over the fold and here’s the full transcript.
PS: It turns out I only removed very little of the interview, so if you read what’s overleaf, there’s not much more in the original transcript.
Michael Duffy: Nicholas, welcome back to Counterpoint. . . . In broad terms, Nicholas, where has the money gone? Who has benefited most and least?
Nicholas Gruen: A nice way of trying to explain this would be to contrast us with the States because what’s happened here is a little mini version of what’s happened in the States. . . . In both places the really big winners are the people of plenty, to use your theme’s title, the people right at the top. And by the ‘top’ I don’t really mean the top 10% and I don’t even mean the top 1%, I mean the top 0.5%, the top 0.1%. So to give you some numbers, I’ll actually compare the United States with Australia. In the United States a similar kind of growth has worked out such that the top 10% of people got half of the whole growth of the economy, and the bottom 90% got the other half.
Within that 10%, the people at the bottom of that top 10% just get the average return, their income has gone up by about 34% over the last 30-odd years. The top 1%? Their income went up by 90%. The top 0.1%…these are people with incomes at the moment of about $US1.6 million. Their income nearly trebled. And the top 0.01%, that is the top one in 10,000 people with incomes of around $US6 million a year, their income has increased sixfold. Now, that’s a pretty big story. In Australia we’ve had a similar story but it has been much less pronounced and that’s meant that we’ve actually pushed quite a lot of money back further down the food chain, so we’ve had more broadly based growth across the economy and across most income groups.
Michael Duffy: Just as a matter of interest, where do those people right up the top, where does that money come from? Is it mainly investment income or business activity?
Nicholas Gruen: That’s changed over the last 100 years. The people at the top, their income used to be dominated by investment income, and now that’s changed so that gradually over the century more and more has come from wages and salaries and bonuses. The people at the top end have still got very large amounts of investment income, as you would expect, but relatively speaking that’s gone down.
Michael Duffy: Right, they work for Macquarie Bank.
Nicholas Gruen: Well, indeed. The CEO of Macquarie Bank picked up 2% of the entire company’s profits last year. That’s not bad work if you can get it. . . .
Michael Duffy: Although I suppose in terms of personal wealth the increase in house prices that occurred in the late 90s would have made a big difference to a lot of…certainly older people anyway who already owned their houses.
Nicholas Gruen: Absolutely, and there’s a massive generational story there and that’s no surprise to people. People kind of notice the fact that if you’re in your 20s you’ve missed out on a huge boom, but there are a whole lot of other things that are reinforcing that. For instance, people in their 30s and 40s have picked up the vast amount of growth in incomes in the labour market. So people in their 20s have not…they’ve received increased wages but that’s as they’ve grown older, but the cohort of people…if you look at wages paid to 25-year-olds year after year for the last 20 or 30 years, wages have not moved much, whereas if you look at wages paid to 35-year-olds over the last 20 years you see very substantial growth, that’s where a lot of the returns have gone.
Michael Duffy: Let’s talk about some of the implications of this, almost social ones, and there’s a few concepts here that I know you’re interested in that I’d just like you to talk to us about. The first one is the role of non-cogitative skills.
Nicholas Gruen: Yes, I suppose towards the end of the 90s…this is particularly the work of a guy who won the Nobel Prize, a guy called James Heckman, and he won the Nobel Prize for various econometric things that he did to try to untangle the relationship between a series of statistics that are highly correlated. So, for instance, you can ask yourself the question; how much is people’s return in the labour market due to their persistence – their sticking with a job, and how much of it is due to their skills, how good an accountant they are? The problem is that the perseverance is going to give them the good skills in accountancy, so it’s very difficult to untangle those two things.
When James Heckman and various other researchers tried to do this, they were trying to unpack from the information we have how much what they called non-cognitive skills were responsible for people’s success and failure in the labour market, and how much the sort of skills they learned at school and university were responsible for those skills. And when they did that work they found that non-cognitive skills were worth about half…explained about half of the difference. One of the things James Heckman says, quite cutely I think, is that economists spend a lot of their time trying to convince themselves of things that people out there in commonsense land know already.
But this was really pretty important stuff and I think it helps explain what’s going on at the top end because people who are being paid $6 million a year are not being paid $6 million a year because their accounting is six times better than an accountant who’s getting $1 million a year or 60 times better than an accountant getting $100,000 a year. I think that these non-cognitive skills-things like social skills, perseverance and so on-are actually very important, as well as at the top, they’re very important in trying to understand what’s going on at the bottom of the labour market and trying to understand why it is that, say, with unemployment now down near 4%, this is really hard going to try and really deal with these people who are still not employed.
Michael Duffy: Do you think the way that the economy and the society, indeed, has changed in the past 20 years has made things better or worse for people with poor non-cognitive skills?
Nicholas Gruen: Worse. I can give you a very simple one-word answer. Clearly it has made things better for the people at the top and all . . . the $6 million dollars a year men and women. And generally in the labour market the range of skills that we’re being required to have is broadening and it’s broadening into these non-cognitive skills. Some people at the National Institute of Labour Studies have been doing some work on the skills that are projected to be required in jobs into the future, and certainly just looking back over the last ten years, social skills, non-cognitive skills, their importance has been growing.
They give the example of an electrician. They say that 20 years ago an electrician learned how to be an electrician, they didn’t need great social skills, they didn’t need great problem-solving skills, they were out there in the workplace doing the things that they were trained to do. Now an electrician needs to have a constructive and problem-solving relationship with clients. . . . They may be working in a large building, the building will contain a whole range of different systems which will require a whole range of problem-solving requirements, will actually require skills of social interaction of quite a high order as well. More and more of these things are being required of people if they want to do well in the workplace.
Michael Duffy: And I guess if these skills are substantially innate, that’s a bad prognosis for people in that situation, isn’t it? If they can be learned then we can do something about it.
Nicholas Gruen: The trouble is the institution that teaches these skills overwhelmingly is the family, and Heckman, the economist I referred to earlier, says that the more he learns about this and analyses it, the more he finds that it’s families that are the fundamental economic institution. This then gets back to the early childhood development stuff which, again, Heckman is quite central in. And if you were to ask me what the most important thing we can do about these phenomena is . . . the most powerfully cost effective thing we know how to do is to do things which won’t really have major payoffs for another ten years, and that’s to try and minimise the number of children who end up with an upbringing that leaves them without these kinds of skills.
Michael Duffy: Nicholas, there were two other things I wanted to talk to you about but I think we’ve only got time for one of them, they were o-rings and the market for lemons. Would you like to make a choice?
Nicholas Gruen: Okay, let’s go with the market for lemons. The market for lemons is an idea that another Nobel Prize-winning economist George Akerlof wrote about in the early 70s, and he posed this problem…he was actually thinking about the labour market and the market for credit but he wrote the idea up as an idea about used cars. Why is it, he asked, that when you drive a car out of the new car yard, if you drive it back into the used car yard you have to knock about $5,000 off the price? The reason is that the used car market is full of lemons. That is, the people who end up in the used car market are the people who drove the car out of the showroom, had it for a few weeks, the wipers fell off, the doors wouldn’t work, and they took it back to the used car yard. So this is a problem where the buyer doesn’t know quite what they’re buying and so they discount all of the cars in the used car yard because they can’t know whether they’re getting a good car or a lemon.
Now, think about someone trying to hire a person on the basic wage. They know that more and more [as the labour market tightens] are people who really might have a nice manner, they might work in the place for a few weeks, a month or two until they learn the ropes and then they might decide they want to do something else. In that case the firm has got itself a lemon and they’ve just spent two or three months investing in something for nothing. The upshot of that of course is that they will discriminate against this group, even though there are plenty of people in that group who will do a good job.
Michael Duffy: Why is this a particular problem now?
Nicholas Gruen: I think it’s becoming more and more of a problem. I guess it is to do with the diversity in the community. Thirty or 40 years ago when cultural mores, social mores were more uniform, I think basically it was usual for an employee not to think that this was really a pretty big break that they’d been given, given a job, and that there was a strong sense of mutual loyalty and obligation. And of course one hopes that was reciprocated by the employer. As that goes, this problem of (in the jargon) asymmetric information, the problem of the market for lemons, the problem of discrimination against a whole class of people for the behaviour of only some of them becomes more and more of a problem.
Michael Duffy: Nicholas, thanks for joining us today, you’ve given us a great deal to think about.
Nicholas Gruen: Thanks, Michael.