Is CEO pay the major cause of income inequality in the District? Increasingly the corporate ladder you’re on matters more than where you are on the corporate ladder.

Much of the attention on the causes of growing income inequality has been focused on the difference in pay among the very top earners and the pay of other employees.  CEO and executive pay is an important factor in explaining growing income inequality both nationally and locally.  However it is the widening gap in median pay between different occupations that explains why income inequality in the District is higher compared to other parts of the nation.  In 1975 a salesperson working in the District, in a middle to upper middle position in her/his career, would likely have been a middle class resident.  Today she/he is considerably less well off than an entry-level attorney. We will discuss some of the implications of this growing disparity but we begin by looking at the data to illustrate this  point.

Ratio of Wages for Top Ten Percent of Earners vs. Bottom Ten Percent: 1

 

Source: BLS OES Data, DISTRICTMEASURED.COM

As shown above, the top 10 percent of earners in the District across all occupations made more than six times the lowest ten percent. The disparity in earnings in the District was higher than any of the 10 largest states, and in fact was higher than all 50 states.

When we looked at this same ratio of wages of top earners compared to low earners within individual occupations, the results were significantly different.  Interestingly for high paid occupations (like legal, and business  and financial occupations), the ratio of wages  for the top 10 percent of earners  compared to the bottom ten percent was lower in DC than the ten largest States.

Ratio of Wages for Top Ten Percent of Earners vs. Bottom Ten Percent:

2

Source: BLS OES data, DISTRICTMEASURED.COM

For example, the top ten percent of earners in business and finance occupations in the District made 2.8 times the lowest 10 percent.  In New York, this ratio was 3.6 percent.  The same result, the lower disparity among pay, was also true for legal occupations.  This may be due to the larger presence in DC of legal occupations within the government sector, where salary ranges even for the highest level are narrower compared to the private sector.

This does not imply the top ten percent of earners in the District made less than their counterparts in other states. What this says is that the relative difference between top earners and low earners for these high paying occupations is less pronounced in the District compared to other States.

Ratio of Wages for Top Ten Percent of Earners vs. Bottom Ten Percent:

3

Source: BLS OES data, DISTRICTMEASURED.COM

For low paying occupations such as food services, the earnings ratio of high paid earners to low paid earners was somewhat higher in the District compared to other states, but not significantly different for other  low paying occupations like sales.

Overall, for most low paying occupations, the data does not indicate that the difference between the top earners and the lowest paid earners in the District is higher than in other parts of the nation.

So why is income inequality in the District greater than in other parts of the nation?  The cause is not the greater difference in pay within any particular occupation (along the corporate ladder).  Rather it is due to a greater disparity in pay across industries (which corporate ladder you’re on). The data below compares median pay in high-paying occupations such as legal, to low-paying occupations such as sales. In DC the average person employed in legal occupations earns almost 5 times the pay of an average employee in sales. In California and New York the ratio is about 4 times and in North Carolina and Texas the ratio is 3 times.

4

Source: BLS OES data, DISTRICTMEASURED.COM

The larger disparity in median pay between high paying occupations and low paying occupations explains in large part the District’s higher income inequality relative to other parts of the nation.  This has many implications. The likelihood that someone in a low paying occupation can attain middle class status by moving up their career ladder is lower in DC than other parts of the nation.  The skills and experience that in the past led to middle class status are more limited today to certain occupations. Without these skill sets it is unlikely that a person can attain middle class status even by rising up the corporate ladder through work experience.

What exactly is the data:

Data in this report is from the BLS Occupational Employment Series.  Probability sample panels of about 200,000 establishments are selected semiannually. Total 6-panel un-weighted employment covers approximately 78 million of the total employment of 136 million.

One limitation of this data set is that it does not cover non-production bonus pay such as such stock options. These types of compensation could account for an increasing proportion of pay at the high-end of the income distribution, particularly for the top 1 percent which would include CEOs. The occupations that pay bonuses tend to be clustered in high paying occupations such as legal services, finance and information services, so that the general results here- that the corporate ladder you’re on increasingly matters more than where you are on the corporate ladder still hold.

Bob Zuraski contributed to this post

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