Are You In The One Percent?

How much do you need to earn per year to be in the top 1%?  The answer to this question varies depending on if you are asking about the 1% in a given country or globally?

In today's podcast we discuss how much you have to earn and how wealthy you have to be to be considered in the top one percent.  We discuss the careers and lifestyles of the one percent.  We look at inequality research to understand if inequality is actually growing as much as researchers like Thomas Piketty say it is.

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Transcript

Are you in the One Percent?

This Monday the world’s most influential leaders in politics and business will convene in Davos Switzerland for the annual meeting of the World Economic Forum.  This year’s theme is “Rebuilding Trust” Over 100 governments, major international organizations, business leaders, youth activists, social entrepreneurs, and the media are expected to attend.

Every year to coincide with the start of the World Economic Forum in Davos, the British charity Oxfam releases a report on inequality which always goes viral.  Last year the big headline was that the top 1% own almost half of the world's wealth, while the poorest half of the world own just 0.75% of it.

The report is designed to grab your attention, and does that very well, but the statistics that they use are deeply flawed as has been pointed out for years by journalists like Felix Salmon, Ezra Klein, Chris Giles and many more.

If you look closely at the charts that Oxfam provide – which are based on Credit Suisse data, you’ll notice that the bottom 10 percent of the global wealth distribution contains a surprising number of North Americans and Europeans, and that the next 10 percent contains hardly any. On top of that, China appears to have no people whatsoever in the bottom 10% and the vast majority of Chinese people are in the top half of global wealth.  So, what exactly is going on?

How can so many of the poorest of the poor come from The United States – a rich country?  Well, the net worth calculation used in this data is assets minus debts, and Americans and Europeans are the most likely people to be in debt, with mortgages, student debt and credit card debt, but just because someone has debt doesn’t mean that they are suffering from the same economic hardship as someone with no debt in one of the least developed countries in the world.  An American medical student might graduate university with a large negative net worth, but they will soon start earning a high income and will not be living in poverty for long.

I did a google search for the most indebted person in the world and found that it is Jerome Kerviel – the French Rogue Trader who still owes 6.3 billion dollars to his former employer.  According to Wikipedia – Kerviel - the world’s poorest man - works as a computer security consultant today. Apparently in 2014 he made a pilgrimage on foot to Italy to meet with the pope to discuss the problems of modern capitalism.  The financial criminal Jordan Belfort owes $100 million dollars in restitution to his former clients – but he seems to be doing just fine too. [Clip] 

2024 is the biggest election year in world history, with elections being held in more than fifty countries around the world. Eight of the 10 most populous countries are holding elections this year so about half of the adult population of the globe will have the opportunity to vote.  The issue of economic inequality and how to tackle it is likely to be a central issue in many of these elections, so it might be worthwhile digging into the data to try to understand it better.

So, let’s start with global numbers.  If you as an individual earn more than sixty thousand dollars a year after taxes, you are in the 1% of highest incomes globally.  If you have a household after tax income of $130,000 per year or greater you are also in the top 1%.  According to my channel analytics, seventy percent of my viewers are in the top 1% - so well done!

According to Statista, the majority of people in the top 1% globally are Americans, and there are around as many one percenters in the United States as there are in the next nine countries combined.

Top 1% income varies significantly by country.  According to the US Census bureau “Real Median Household Income” in the United States was just under 75 thousand dollars.  To be in the top 1% of earners in the United States you had top earn just under half a million dollars. Now obviously the top 1% includes a very wide range of people, everything from someone who earns $500,000 per year to Jeff Bezos who makes more than that per hour.  According to Bloomberg data, to be in the top 1% in India you had to earn over $77 thousand dollars, In Australia and the UK you had to earn over $250 thousand dollars and in the United Arab Emirates, the top 1% earn over 922 thousand dollars per year.

There is of course a difference between income and wealth, so we need to cover that, and there is a lot of data on how people earn top 1% incomes, where they live and how they live.  There are lots of controversies around how data on wealth and inequality are calculated too, which we will get to shortly.

So, now that we have covered income, what about wealth – or net worth?  Well, to be in the top 1% in terms of net worth globally, you need to have a net worth of a million dollars or more approximately.  Of course – once again, that data varies significantly from country to country.   According to Knight Frank, the top 1% of Americans have a net worth of $5 million dollars or more.  In Singapore, France, Hong Kong and the UK the top 1% have a net worth of 3.5 million dollars or more.  In China, to be in the top 1% you need a net worth of close to a million dollars, in India you need 175 thousand dollars or more.  At the top there is Monaco where you need to have an income of over 12 million dollars to be in the top 1% and at the bottom is Kenya where you need a net worth of over twenty thousand dollars to be in the top 1%.

I have been thinking for quite some time of moving to Zimbabwe, as I have this hundred trillion dollar note that I bought on Ebay a few years ago. I imagine it would allow me to live like a king.   Oh hold on, it seems it is only worth about $3…  I think I only paid 40 cents for it though, so I’m up nicely on my foreign exchange speculation…  but, maybe I’ll stay here for now...

A lot of the big discussions around the differences between the 1% and the 99% came from the Occupy Wall Street movement which occurred in the wake of Global Financial Crisis.  There has been a lot of discussion on how the 1% make their money, their political opinions and their lifestyles. A 2021 paper from the CSEF makes the point that for the purposes of analysis, the top 5% might be a more useful cut off than the top 1% as a lot of the data on narrowly defined groups like the top 1% or even the top 0.1 percent tends to have problems and may not be very accurate.  I have looked at data from the Federal Reserve, The Tax Policy Center, Census data and the Congressional Budget office in making this video and often the numbers reported don’t align very well. 

A lot of the academic research on this topic uses tax data and survey data, both of which have flaws, but the CSEF paper highlights that when you zoom out to 5% from 1% the different sources start to align a lot better.  Some of the discrepancies between the various data sources relate to changes in tax laws, movement of retirement accounts and things like that which mean that data on the top one percent is more flawed than data on the top five percent.  We will get into some of those controversies near the end of the video.

Hopefully you can see that inequality research is a complicated field – which is often extremely politicized, and you should take any research on the topic (including the information in this video) with a pinch of salt - as the data can be – and often is twisted by people who are agitating for a political agenda – both on the right and on the left.

A New York Times article from 2012 described the 1% as being a far more varied group than the Wall Street bosses that many people imagined at the peak of the Occupy movement.  

According to the authors research, the top 1% were nearly twice as likely to be married as the general population and have more children than middle and upper-middle-class families do. A vast majority of 1 percenters graduated from college, and in 27 percent of couples, both partners have advanced degrees. Doctors – according to the article are more likely than any other profession in America to be in the 1 percent.

In top 1% married households, men were found to be earning 75% of the money, which stands in contrast to the population in general as today in almost half of U.S. households, women are now out earning or earning very similar incomes to their husbands.  In marriages where women earn more than their husbands, Pew research found that women earn a median of $88,000 to their husbands’ $35,000 – out earning them by $53,000 dollars a year.

Richard Reeves – on the big think YouTube channel pointed out how different male performance is at the different ends of the income spectrum [Clip]

The 1% were found by the New York Times to be three times more likely than the 99 percent to work more than 50 hours a week and were also more likely than average to be self-employed. Twice as many one percenters as 99 percenters were reported to have inherited some money.  

The affluent families in Nassau County New York interviewed in the article were reported to describe themselves as being practically middle class, saying that property values and taxes in Nassau County are so high that their incomes don’t go very far.  Overall, the 1% are more likely than average to live in parts of the country with a higher cost of living – as that is often where highly paid jobs exist – and thus their high incomes are often offset by high expenses.

So, what about politics? Well, according to a Gallup poll, One-third of the nation's "1%" identify themselves as Republicans, 41% as independents, and 26% as Democrats. The poll found very little difference between the political views of the one percent and the population in general, other than being slightly more likely to be Republican.

A paper by Oliver Denk on the on the socio-demographic and job characteristics of the top 1 percent earners in Europe found that high earners in Europe tend to be predominantly male, aged between 40 and 59 years old and have a university education. Much like in the United States, health professionals make up a large group of top earners in several European countries.  Health professionals were found to exceed the number of business and finance professionals among the top 1 percent in Finland, France, Italy, Portugal, Sweden, and the United Kingdom.

The top 1% of earners were found to work in industries like Finance, IT and in senior management positions – like Chief Executives. They were found to have on average stayed three years longer with their current firm than lower paid workers had.

Denk found that in Eastern European countries the 1% turned out to be younger than in the rest of Europe – being mostly made up of people who came of age after the fall of communism.

Bonuses were found to make up one-fifth of the labor income of top earners on average and are a particularly common method of pay in places like the UK and Luxembourg.

Denk found that the 1 percent of highest paid employees nearly all work full-time and have a permanent contract in each of the 18 countries analyzed.  They were more likely than average to work at large firms that employ more than 250 people.

OK, so what about the spending habits of the 1%? Well according to research from Charles Schwab, the top 1% spend a higher percentage of their income on education than the middle class do.  This includes university fees, private schools for their children and tutoring.  The 1% are more likely to be married and have children than the rest of the population, they are also more likely to be homeowners.  To many people the idea of being a high earner brings to mind visions of designer goods and exotic cars, but analysis of the most commonly owned cars in the wealthiest zip codes in the United States shows that the top 1% often own Jeeps, Mercedes E- Classes and Toyota Prius’s.  I was surprised when researching last weeks video to learn that the average price of a new car sold in the United States last year was $48 thousand dollars.  Many of the cars bought by the top 1% were at or below that price point.

So how do the top 1% invest?  Well, according to Knight Frank 32 percent of the wealth of high net worth individuals is tied up in their homes (that can be both main residence and holiday homes), after that, they invest in Equities, commercial property, bonds and then things like private equity and Venture Capital.

It is worth pointing out that the top 1% - at least in the United States – is a constantly changing group.  It is easy to think that once a person is a high earner, they will always be a high earner, but according to a study by Rank and Hirshl 11 percent of Americans will at some point in their lifetime spend at least one year in the top one percent of income earners in the nation, and just under 6% will be in it for two years or more. The study shows that very few get to stay in these high-income brackets for their whole careers.  Only 0.6 percent get to earn top 1% incomes for ten years or more.

The fact that people move in and out of the 1% quite a lot, most likely relates to the fact that many of the roles that are really highly paid can be quite volatile.  If you are doing well, you are paid well, but if you fail to perform you could lose your job.  Some of this ties back to Oliver Denks research showing that bonuses can feature heavily in the income of the top 1%.  There might be a lesson in here that if things are going really well for you, it might make sense to set aside a good chunk of your income in savings as you don’t know when the good times might end.

According to Rank and Hirshl, 70% of the working population in the United States will experience at least one year in the top 20% of income earners and just over half will have at least one year among the top 10%. 

The study found that those who were already upper middle class and educated were most likely to make it into the higher income categories than those who were at the very bottom.

Rank and Hirshl also point out that it's quite common for Americans to spend some time at the bottom of the income distribution too. According to their research, over half of Americans will be in or near poverty for at least one year of their life by their 60th birthday.

So, next up, is inequality getting worse over time? Well, once again, that is a complicated question. I was reading an Economist article earlier this week about Cardi B and the price of Lettuce – as I like to keep up to date on the goings on in the world of Rap Music. 

I was saddened when they drifted into a discussion on hourly wages and inflation – but that is also what always seems to happen on this channel when I try to make a video about rap music.  Anyhow, in the Economist piece on Cardi B - they highlight the fact that hourly wages are today - on average, about 15% higher than they were pre- pandemic—the biggest increase over any three-year period since the early 1980s.

If you adjust for inflation, using CPI, most of the gains in hourly wages since 1970 are wiped out by inflation, but if you adjust for inflation using PCE – which assumes that if the price of a good goes up too much – like the price of lettuce that Cardi B highlighted – consumers will switch to buying a more affordable vegetable.  Adjusting for inflation using substitute goods shows that hourly wage earners are making about 25% more today than they were in 1970 – after inflation.

It is not just hourly wages that have been rising over the last few years.  Jo Ellison in the FT wrote a piece yesterday about how tipped workers have been doing a lot better since the emergence of the new payment terminals that you see at coffee shops and take-out food restaurants today that suggest a tip.  Apparently tips in bakeries and cafés have risen 41 per cent, while theatre box office staff have seen an increase of 160 per cent.   

The Economist piece points out that incomes for the highest earners have grown much faster than for the lowest paid, but that taxation and means-tested transfers have balanced out some of that difference. The lowest quintile of income earners in the United States have apparently seen their tax bills shrink over the 40-year period studied while also receiving more benefits, especially health insurance. Medicaid- in America - which covers some medical costs, is America’s largest and fastest-growing transfer program. Because of tax changes and transfers, income growth for the lowest quintile in the United States since 1979 amounts to 94 percent.

The article points out that the post pandemic pay growth was mostly brought about by an extremely tight labor market and that this may reverse in the event of a recession.  It additionally points out that while the richest and poorest Americans are seeing their incomes grow, this is not happening for middle income Americans.

The Economist piece highlights a reasonable amount of income mobility in the United States too, saying that that the children of low-income earners – often from immigrant families often grow up to be high income earners. They point out that this happens twice as much in Canada, and I’m not sure what might be causing such a large difference between the two countries.

There is a really good paper by Branko Milanovic – who is one of the biggest names in inequality research. It’s called the three eras of global inequality and analyzes 200 years of history on income and wealth inequality.  The paper is really interesting, and I’ll link to it in the video description as due to time constraints I’ll only be able to touch on a few points from it.  

Milanovic points out that global inequality was more modest at the time of the industrial revolution and started growing steadily from that point forward.  The countries that industrialized fastest benefitted the most.  This growth in inequality peaked on the eve of World War One. In the inter-war period, inequality fell slightly, only to rise again due to the effects of World War II that benefited rich countries like the United States. After that, global inequality began to fall sharply mostly driven by rising incomes in Asia.

According to Milanovic’s research, up until the 1990’s the global income distribution had two peaks the first peak being the large number of very poor people in the third world and the second was a much lower peak at relatively high incomes in developed Western economies. The middle of the global income distribution was rather empty.

The distribution has since changed, shifting to the right implying a general increase in global incomes, and this was accompanied by a thickening in the middle of the income distribution, the twin peaks being replaced by a single peak reflecting what Milanovic describes as the rise of the “the global median class.” This group is much poorer than what is conventionally considered the middle class in advanced Western economies.  The growth of this group reflects the rise out of poverty of a number of Asian economies over the period in question and the fall of the Berlin Wall.

Interestingly, the most recent ten-year period that runs from the end of the Global Financial Crisis to the outbreak of the pandemic in 2020 has seen a slightly different trend. The most recent growth incidence curve according to the research shows a marked deceleration in real income growth for the global top one percent along with no significant improvement for the people around the 80-90th global percentile either, instead there has been strong growth in the middle.

As I mentioned earlier Income and Income inequality research can be controversial, there are lots of different data sources and different conclusions that can be drawn from the same data depending on how you approach it.  

One of the stars of the inequality research space is Thomas Pikkety, whose book Capital in the 21st century became a surprise bestseller in the wake of the Global Financial Crisis. His research popularized the idea that the 1 percent were pulling away from the 99 percent and benefiting disproportionately in the United States.  Pikketys research it can be argued formed a foundation for the occupy movement and their slogan “we are the 99 percent.”

A new analysis by Gerald Auten and David Splinter argues that flaws in the treatment of data by Pikkety, Saez and Zucman mean that while both groups agree that inequality has grown in the United States, Pikketys research exaggerated the extent to which the top 1% have been growing their wealth at the expense of the 99 percent.  Auten and Splinter argue that the poorest half of US society had about the same share of total income in 2020 as they had in 1960, and the growth of the 1% has been much more modest than claimed by Pikkety.

Some of the flaws that Auten & Splinter point out are quite interesting, they point out that the earlier research included more than 1% of the US population in the top 1% because they didn’t adjust for the fact that marriage rates are much higher among the wealthy than the poor – so dual income households were being compared to single income households. They point out that changes in US tax rules in 1986, which incentivized paying dividends out from companies, did not represent an increase in the resources held by the rich, just a change in how those resources showed up in the data.

Auten & Splinter highlight that Pikkety had counted people rolling savings from one pension pot to another as income when the vast majority of untaxed retirement account distributions are just money being moved from one retirement account to another – which happens very frequently in the United States when people change jobs. They argue that that corporate tax evasion among the self-employed is not concentrated among the super-rich, that it is as likely at every income level. They back this up by looking at data from IRS audits rather than assuming that under-reported income matches that of reported income as Pikkety did.

This is not to say that Pikkety and his team did bad research or were deliberately exaggerating the growth of inequality as some people have accused them of.  It just highlights the difficulty of working with the data they built their research on, and how small assumptions can have a big impact.

Auten and Splinter don’t point out a single flaw in Pikkety Saez and Zucmans data, but instead a long list of smaller issues that sum up to a rather large difference in research findings.

Pikkety has accused Auten and Splinter of being inequality deniers – which I think is unfair - the dispute is really about data analysis and which assumptions and adjustments make sense and which don’t.  It is likely that this debate will continue between the two teams and over time research methods will improve and more accurate conclusions will be drawn.

Thanks for tuning in to today's podcast.  If you enjoyed it, I’d love if you could recommend it to a friend or write a review on Apple Podcasts or Spotify to help it grow.  Have a great day and talk to you again next week.  Bye!