The rich get richer: Income and wealth gap grows over the past decade

The nation's income and wealth gap increased in the past decade. Executives and other highly-paid professionals now receive more than one-third of all pay in the United States, according a Wall Street Journal analysis of Social Security data (subscription required).

The base pay of employees whose income was above the Social Security wage cutoff -- now $106,800 -- increased 78 percent, or by almost $1 trillion, from 2002 to 2007. During the same period, income for workers increased just 24 percent.
Executives received a larger slice of the pie

Those in the top income category received 33 percent of all income in 2007, or about $2.1 trillion of the $6.4 trillion in total U.S. pay, up from 28 percent in 2002.

What's more, the data understates executive pay, because it includes only salary and vested, deferred compensation: it doesn't include un-vested employer contributions and un-vested interest credit to deferred-pay accounts, The Journal reported. Nor does it include un-exercised stock options (they aren't subject to the payroll tax until un-exercised), un-vested restricted stock (it isn't taxed until vested, and is taxed as a capital gain). Also not included in total compensation is executive pay never subject to the payroll tax: "carried interest" (frequently used by hedge funds, investment funds, and private equity firms) and compensation defined as a benefit.

In addition, there's a trend toward compensation forms not subject to the payroll tax, which funds Social Security. Despite the increase in pay for executive and top company employees, the percentage of wages subject to the payroll tax declined to 83 percent in 2007 from 90 percent in 1982, The Journal reported. Supporters say the trend simply represents private compensation granters taking advantage of existing rules. Critics say it's a loop hole that circumvents the Social Security funding mechanism, resulting in less funds flowing to Social Security than would otherwise be the case.

The Social Security income data mirrors studies by private organizations, such as the Economic Policy Institute (EPI), a liberal think tank based in Washington, D.C. The EPI found that from 2001 to 2007, for the first time on record, the real income of middle class families declined, despite relatively strong increases in U.S. GDP. For example, following the recession of 2001, the U.S. economy continued to shed jobs for almost two years, despite a growing economy, and it took almost four years for the United States to reach the workforce employment peak attained before the recession, the EPI said. For the above reason, and others, workers did not see any improvement in their real income during the period -- and all this despite continued increases in worker productivity.

Economic Analysis: Over the past decade, several factors including globalization, automation, and lack of unionization have led to a widening of the gap between executive and employee compensation, but for now let's concentrate on what it means for investors:

In general, the constrained wage gains/wage declines benefit commerce, businesses, and consumers by lowering costs and/or by leading to a higher-quality product for the same price. That's intrinsic to a market system that continually strives for the most efficient, lowest-cost processes. In the globalization era, this means the transfer of jobs to lower-cost production centers overseas. However, in the country(ies) that lost higher-wage jobs, a problem occurs if a domestic economy requires those very same citizens who lost jobs -- and now who likely have lower wage positions -- to buy goods and services, and to serve as an engine of GDP growth. If the latter is the case, a consumer-driven economy could run the risk of not having enough citizens with incomes high enough to sustain adequate GDP growth.

Where does the United States economy fit in the analysis? Historically, the U.S. economy has been very dependent on consumer spending, but it's too soon to tell in the current economic cycle if it has fallen below the 'critical mass' of good jobs needed to sustain adequate GDP growth. The approaching recovery stage of the expansion will reveal more about the type of jobs created in the U.S., assuming, of course, job growth resumes.

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