In modern times in the United States, it increasingly seems to be the case that in many different fields, a small number of people are receiving the lion’s share of the economic rewards and the rest are left to fight for crumbs.
To see this clearly, let us consider two examples from sports and entertainment.
The Brazilian Pele, arguably the greatest soccer player of all time, was paid about $150,000 by his club Santos in 1960. This would amount to a little over $1 million in today’s money, and this is not a large amount by today’s standards. Players such as the Portuguese Cristiano Ronaldo or the Argentine Lionel Messi now make $80 million and $93 million annually. The point is that while the two superstars make vast sums of money, most soccer players make nothing remotely resembling those astronomical amounts.
Next, consider the market for pop music. Eduardo Porter of the New York Times points out that in 1982, in terms of pay, the top 1 percent of pop stars raked in 26 percent of concert ticket revenue. However, in 2003, top pop stars—names such as Christina Aguilera and Justin Timberlake—were bringing in 56 percent of the concert dollars.
As noted by the now deceased economist Sherwin Rosen, a key factor responsible for these vast income disparities is technological change. In the music industry, MTV first put music on television. Then, Napster took music to the Internet. Finally, Apple allowed fans to buy single songs and carry these songs with them anywhere. Each one of these technological breakthroughs permitted the very top performers to reach an ever increasing fan base. Hence, these performers were able to command a larger audience and ultimately a bigger share of concert receipts.
Rosen’s theoretical framework also does a pretty good job of explaining the growth of executive compensation. In 1977, an elite CEO in one of America’s top 100 companies earned about 50 times the wage of the average worker. In 2007, top CEOs earned about 1,100 times the salary of the average worker. Clearly, top CEOs are not pop stars, but the reasons for the growth in their salaries is similar to that of pop stars.
As corporations have become more complex, managing these complex organizations to generate high profits has become more difficult. This has resulted in extreme competition for top talent, with the result that the salaries of top managers are way higher than the salaries of the next best rank of managers. The superstar phenomenon is, once again, at work and this phenomenon has now separated the mega-rich in America from the merely very rich.
The superstar phenomenon appears to be salient even in areas where one would not think of it as an obvious causal factor. Consider the case of aggregate economic activity. Researchers have known for a while that the share of gross domestic product going to labor has been declining over time. Why? There is no generally accepted answer to this question and economists have suggested causal factors such as the decline in the cost of capital relative to labor and increased import competition from nations such as China.
However, in interesting new research, the economist David Autor of Massachusetts Institute of Technology and his colleagues contend that as consumers have become more sensitive to the attributes of price and quality because of increased goods market competition (brought about in part by globalization) or because of the presence of new technologies (easier to make price comparisons on the internet), industries are increasingly characterized by a “winner take most” feature in which a small number of firms acquire a very large share of the market.
These are the superstar firms and, in this regard, companies such as Amazon, Apple, Google and Walmart readily come to mind. The point to note is that the existence of superstar firms provides a plausible rationale for the decline in the labor share of GDP.
The existence of the superstar phenomenon in America today means that our society has become what the economist Robert Frank calls a “winner-take-all” society. Two features of this society can be readily observed. First, small differences in performance give rise to enormous differences in economic reward. Second, there is an inexorable focus on coming out on top: in writing the best-selling book, in producing the blockbuster movie, and even in standing first in spelling bee competitions.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at the Rochester Institute of Technology but these views are his own.