The interactive chart featured here is making the rounds on the web, because it tells a story about how the rich are getting richer and the poor are getting poorer, or it at least it seems to.
The problem with that interpretation is that it is about income, not wealth. Each year, the people in the top 10% of earners can change. For instance, in the 1970’s Cher was in the top 1% Today, Lady Gaga is instead. So instead of the rich getting richer, we are actually seeing the highest paid each year gettting paid increasingly more than the average.
The right message to take away is that over time, our economy has changed to be more winner take all, which makes sense. In a knowledge economy, the best at something can get rididculous pay and the rest get near average, because the work of the best can easily be reproduced and extended to most everyone, reducing the need for anything but the best and concentrating a large markets worth of payments in fewer hands.
In the 1920’s, bands and entertainers of all kinds still performed throughout the nation, touring around to provide entertainment. Today, we record the best performers and replay them constantly over TV and club sound systems. Think how many comedy acts Seinfeld reruns alone has crushed demand for.
At the height of the financial crisis, I posted about how finance salaries would stay the same, because modern tools allow a small group of people to manage huge amounts of money. It also allows a small group of people to entertain huge amounts of people, give legal advice to huge amounts or people, and write news articles read by huge amounts of people. In other words, because best in class work can reach or impact more people, best in class workers (the top 1%) can earn more. The decline in wages for everyone else is a corresponding symptom of that — we need less bad, average, and good entertainers, journalists, and lawyers when the great ones can do more of the work.
Welcome to the brave new world, where greatness is lavishly rewarded with outsized earnings and everyone else is clustered close around the median. Only a small number of people will be able to earn an outsize salary, and an even smaller number will be able to do it year after year. The flip side of that is you only need to do something great once to have an incredible year and change your life. So think like a reality star and cash in big if and when you can, because the days of making big money over and over again are over.