Economic imbalances and social inequality pose a serious global risk according to the organizers of the World Economic Forum in Davos. President Obama, in his State of the Union Address, called economic fairness “the defining issue of our time.”
Hollywood has been a big supporter of President Obama, and Democratic causes in general, although the recent disagreement over SOPA may create some tension in their relationship. Hollywood’s support for a President and political party that wants to reduce income inequality is odd because the movie and television industries are home to some of the most unequal economic outcomes in the U.S.
Earnings Inequality is High in Hollywood
The earnings ratio between the 90th and 10th percentile is a common measure of inequality used by labor economists. Actors at the 90th percentile of the earnings distributions earn about 7.5 times as much as actors in the 10th percentile (according to the Bureau of Labor Statistics). To put these numbers into perspective the 90-10 earnings ratio is 3.2 for economists and 2.4 for high school teachers.
There is also considerable income inequality within Hollywood’s top 10%. Ashton Kutcher reportedly earns $700,000 per episode for Two and a Half Men, or 150 times the Screen Actors Guild minimum for a “Major Role Performer” in a television series.
Movie Box Office Inequality has Sky-Rocketed since 2000
Blockbuster movies in Hollywood earn substantially more than the typical film, and that gap has grown over time. The following graph shows the ratio of box office earnings for movies in the top 1% and top 10% to the earnings of the median film each year. The median film is one that earned less than ½ the films and more than the other ½ of films.
In 2000 the average top 1% film earned 100 times as much and the average top 10% film earned 50 times as much as the median film. Today these box office ratios are about 1400:1 and 550:1 for movies in the top 1% and 10% respectively. In the past decade there has been an explosion of inequality in box office receipts in Hollywood.
Why Is Hollywood so Unequal?
Some movies are far more successful than others because the best actors are usually teamed with the best directors and scripts written by the best screenwriters. When Leonardo DiCaprio works with James Cameron or Martin Scorcese, the movie is released at the most favorable time (e.g. during a holiday weekend) and has a larger promotional and marketing campaign, it has a huge advantage over the typical film. When inputs are complementary and the production process is multiplicative it is efficient to team the best with the best. This type of process, which Michael Kremer called the “O-Ring Theory” of production, also substantially increases economic inequality.
In his path-breaking article, Economics of Superstars, the late Sherwin Rosen explained how superstars are aided by technology. Actors’ earnings have become more skewed because the best actors can now entertain millions of people simultaneously in movie theaters, on DVDs, television and the streaming of online videos. Superstars’ earnings were more limited when actors had to be present at each live performance and audience size was limited by seating capacities.
The US Economy is Similar to Hollywood
Inequality is higher in markets, like Hollywood, where quantity is a poor substitute for quality. Two inexperienced laborers can produce as much as an experienced one, but two bad movies are not as enjoyable as one good movie. The same lack of substitutability applies to the markets for lawyers, engineers, architects, physicians and economists. The quality of human capital is increasingly important in markets for skilled labor. Policies to reduce economic inequality will be counterproductive if they distort incentives to invest in the human capital and technologies that set us apart and give us a comparative advantage in the global economy.