Copyright ©2010 |The Unique Green Boutique
by David Lawson
on February 28th, 2012at 4:50 pm
Posted In: Debtwatch
By Salvatore Babones
Salvatore Babones (@sbabones) is a senior lecturer in sociology & social policy at the
The American economy has done well over the past forty years.
That’s a lot of money for a lot of people. Unfortunately, all of that money doesn’t go directly into ordinary Americans’ paychecks. Some of it goes into corporate profits, payroll taxes, and other expenses. The remaining personal income actually paid out to Americans through their paychecks and profits came to $40,094 per person in 2010. That’s still over $40,000 for every man, woman, and child living in
Of course, that doesn’t mean that a family of two adults with eight children will make $400,000 a year. Most children don’t work, and when they do work they don’t earn very much. Spreading total US personal income out among just the adult population would give an average of income of $52,952 for every American adult.
In other words, if
If the typical single person in
How can it be that the typical American adult makes just $26,134 when
Put a slightly different way, the same data show that the richest 20% of households take home more income than the other 80% combined. There really are two
It wasn’t always like this, and it doesn’t have to be like this.
FORTY YEARS OF STAGNATION FOR AMERICAN WORKERS
The figure below shows the median male income for American men since the end of the Civil War in 1865. The median income is the income of the average or typical person. Men’s incomes are used because the proportion of women working outside the home has changed dramatically over the years. Where data are available for women, they tell a similar story.
It’s obvious from this figure that typical male incomes rose continuously from the 1860s through the 1960s. Between 1865 to 1973 typical male incomes rose by a factor of 10, from $3425 a year to $34,762 a year. Male incomes rose in every single decade for more than a century.
It’s also obvious that this growth ended in the 1970s. Since the 1970s there has been no increase in male median incomes — at all. None. In fact, since 1973 typical male incomes have fallen by 7.4%, from $34,762 a year to $32,184 a year. Typical male incomes fell slightly in the 1970s, rose slightly in the 1980s and 1990s, then fell again in the 2000s.
That’s remarkable, considering that American national income per person has doubled over the same period. But it gets worse. For American men of any given age, incomes have fallen dramatically since 1973. For American men aged 45-54 years old incomes have fallen by 11.1%; for men 35-44 years old incomes have fallen by 18.7% since 1973, and for men aged 25-34 years old incomes have dropped by an astounding 26.7%.
Yes, the average American young man in 2009 makes one-quarter less than the average American young man did in 1973. American men today are — literally — worse off than their fathers were. The typical young male Americans made $43,530 in 1973, compared with just $31,914 today. No wonder young adults can’t afford to move out on their own these days.
How it is possible that the
The third part, however, is the biggest. It’s rising inequality. Pretty much all of the economic gains of the past forty years have gone to the top half of American workers. Most of those gains have gone to the top 1%. It has been estimated that 58% of all the income growth in the
I think that the reasons for this have largely to do with the manner in which wealth has come to be distributed in the
It was financial profits that made a roaring comeback, not profitability more generally. If we look at the more recent data it correlates. Below is a graph charting the percentage of total domestic profits that is accounted for by financial sector profits.
For the 99% of Americans whose household incomes are well under $400,000 a year, there has been very little improvement since the 1970s. For individual Americans in the middle of the income distribution, there has been no improvement at all. For Americans at the bottom, things have actually gotten worse since the 1970s.
It sounds like the same old story: the rich get richer and the poor get poorer. But as shown in the figure above, that’s not really true. For at least a century from 1870 to 1970 it was the people in the middle — or at least the working men in the middle — who got richer.
THE MIDDLE SIXTY AT HOME
According to a recent survey, 91% of American adults identify themselves as “middle class.” Of these, 53% identify themselves as falling in the middle of the middle class, 18% in the upper middle, and 18% in the lower middle class. Taking the middle of the middle as a benchmark, over half of all Americans seem to feel like they live pretty typical lives. They’re probably right.
On surveys and in actual incomes there’s a bulge of Americans who fall somewhere in the middle of the distribution. They’re more than half the population, but far short of the whole population. They’re the Middle Sixty. Above them are the Top Twenty — lawyers, doctors, investment bankers, and business executives. Below them are the Bottom Twenty — the poor. The Middle Sixty, Top Twenty, and Bottom Twenty roughly correspond to normative ideas of well-off, middle-class, and poor.
The “Middle Sixty” are the roughly 60% of Americans who live lives of plenty, but not lives of luxury. They never go hungry, but they can’t afford to hire kitchen help. They’re not homeless, but they have one home, not two or three. Their kids don’t go to private prep schools, but their kids can go to college if they work hard and get the grades. The Middle Sixty live ordinary, typical American lives.
A good way to think about what it means to be a member of the Middle Sixty is to think about owning a car. Most Americans own a car. It might be a Hyundai or it might be a Hummer, but either way it’s one car for each adult driver. Only poor Americans can’t afford their own cars. Only rich Americans can afford to have collections of cars. For the vast majority of Americans in the middle, one car per driver is enough.
People at the high end of the Middle Sixty might drive expensive new cars while people at the low end of the Middle Sixty drive cheap used cars, but life is pretty similar either way. They all drive their cars on the same roads and park in the same spaces at the same supermarkets. They all have kids in carseats and pump their own gas. When the car needs service, they have to get up early and drop it off before work. Some of the Middle Sixty have nicer lifestyles than others, but they all have pretty much the same lifestyle.
A good indicator of the strength of the middle class in a country is the proportion of all the income in that country that goes to the Middle Sixty. For example, one problem in
The amazing thing is, by this measure even
It might be even worse than this. The data used to calculate the official US Census Bureau income statistics don’t accurately measure incomes over about $100,000. As a result, they don’t adequately capture the recent rise in the incomes of the super-wealthy. To address this gap, the Federal Reserve conducts a survey every three years that is specifically designed to measure the incomes of people earning over $100,000 a year.
The latest data available from that Federal Reserve study are for 2007. The results suggest that the income share of the Middle Sixty is actually just 35.8%. To put that number in context, a 35.8% income share is literally “off the chart” of the figure above. Using that same Federal Reserve data, the Middle Sixty income share was 44.6% in 1982, the first year that the survey was conducted.
For those who don’t remember 1982, it was a tough year for the middle class. Since then, though, the income share of the Middle Sixty has dropped to nearly 11 points below Mexican levels. And that was in 2007, which was a good year for most Americans. The latest Federal Reserve survey was conducted in 2010, but the data have not yet been released. Considering the state of the economy in 2010, it’s likely to be a bloodbath for the Middle Sixty.
THE REASONS BEHIND THE TRENDS
The answer is that all of the growth in the American economy over the past forty years has gone to the top half of Americans. Most of it has gone to the Top Twenty. If the
The fact that the average American household today has an income of $50,000 instead of $100,000 can be attributed entirely to rising instead of declining inequality over the past four decades.
Sociologists and economists have been conducting detailed quantitative analyses of rising inequality for more than a quarter century now. It’s no mystery why inequality has been rising in
By far the most important of these is union density: the percentage of workers who are covered by a union contract or collective bargaining agreement. Around the world, wherever workers have unions, they get better pay. The most recent estimates suggest that unionization increases an individual worker’s pay by about 17%, but some argue that the effect on total pay (including benefits) could be as high as 43%. Though researchers argue over the exact figure, research consistently shows that unions increase workers’ wages.
In the end the key issue is bargaining power. Obviously, workers who bargain as part of a union are in a better bargaining position than workers who don’t have a union. But it’s not just a matter of unions. Where unemployment benefits are generous, workers can bargain harder, since it’s not catastrophic if they lose their jobs. And having a good minimum wage means that when unemployed workers run out of insurance payments they can be sure of earning at least a living wage when they do go back to work.
So how does
At the union peak in 1953 well over 40% of American workers were covered by collective bargaining agreements. Considering that union workers were never very poor and never very rich, that 40% accounts for the majority of the Middle Sixty. In other words, it used to be normal for Americans to be in a union. Ralph Kramden, Archie Bunker, and Fred Flintstone were all union members. Ronald Reagan was a six-term union president before he became a politician. In 1960 he even called his union out on strike!
Of course, the decline of unions isn’t the only reason why inequality is rising in
To some degree the decline in union membership is also just a symptom of a much broader trend: the decline of society and the rise of individualism. This trend is associated with increased consumerism and free market economics. People place their own interests above the common good. In particular, American businesspeople increasingly ask not what’s good for their employees, their customers, or their coworkers, but what’s good for themselves. Nowhere is this better illustrated than when looking at executive pay.
The chief Executive Officer (CEO) is the top employee, the commander-in-chief, of any public company. In the
It’s been widely reported that CEOs now receive enormous salaries, hundreds of times as much as their own workers. The average annual pay of a Fortune 500 CEO was over $8,000,000 in 2009. That’s about 200 times the earnings of the average American adult who works full-time.
Much less widely reported has been the growing gap between how much companies pay their CEOs and how much they pay the small number of top executives who work directly under the CEO. Between 1993 and 2006 CEOs at
In other words, inequality is rising even within the boardroom. It is rising everywhere we look. The rising pay gap between corporate fourths- and fifths-in-command has nothing to do with union coverage, unemployment insurance, technological change, or the premiumization of life in
Ronald Reagan, the conquering hero of American conservative mythology, was born in 1911. He came of age during the Great Depression. People of his generation had it tough. They worked hard to make ends meet, but their hard work was rewarded with ever-increasing standards of living. For Americans of their generation, things started out hard but got better and better as time went on. They were perpetual optimists, because living in
That’s simply not true anymore.
Today, American confidence in the future has reached an all-time low. Americans are optimists by nature, and optimists still outnumber pessimists by 54% to 42%, but the gap is narrower than ever before. By a small margin of 38% to 37%, more Americans actually think life was better in the 1960s than it is today. Among those who are old enough to actually remember adult life in the 1960s, the ratio is 49% to 30% in favor of the sixties.
That’s not just nostalgia. Life really was better in the late 1960s for many Americans, and certainly for most white Americans. Perhaps more importantly, the
What’s incredible is not that so many people are no better off than their parents were forty years ago. What’s incredible is that so many people are no better off than their parents were forty years ago despite the fact that American economic output per person has doubled in that period. The problem isn’t that the economy is stagnant. It’s not stagnant. It’s growing. The problem is that the rewards of that growth are all going to a very small number of people — ironically, to the people who need them least.
There’s both good news and bad news to be read in this benchmarking of the great American middle. The good news is that there are plenty of resources in
The bad news is that there’s no sign that Americans are prepared to take it into their own hands to reduce inequality. Fewer than half of Americans have a favorable view of unions; even after a major recession, slightly more Americans have a positive view of businesses than of unions. Americans are not going to the polls to demand that their political leaders implement policies that are known to reduce inequality. Perhaps most importantly, Americans are not moving away form the divisive beggar-thy-neighbor individualism that caused inequality to rise in the first place. Instead, they seem to be embracing it.
 Based on figures from the 2010 National Income and Product Accounts from the US Bureau of Economic Analysis, Table 7-1.
 Based on real national income per capita estimates from Angus Maddison (2010), Statistics on World Population,
 Based on 2010 US
 Based on 2011 and 2012 US growth projections from the International Monetary Fund’s World Economic Outlook Update, January 2011.
 Based on 2010 US personal income estimates from US Bureau of Economic Analysis release BEA 11-02, Table 10, divided by 2010 US population estimates from US Census Bureau release
 Based on the age structure of the
 Based on 2009 figures from US Census Bureau release PINC-01, Part 1.
 Based on an analysis of 2009 figures from US Census Bureau Income Inequality Historical Table H-2.
 Data for 1865-1946 based on E.H. Phelps Brown and Margaret H. Phelps Brown (1968), A Century of Pay: The Course of Pay and Production in France, Germany, Sweden, the United Kingdom, and the United States of America, 1860-1960, Appendix 3. Data for 1947-2009 are based on figures from US Census Bureau Historical Income Statistics Table P-8. The three separate inflation-adjusted Phelps Brown and Phelps Brown indices have been spliced together at their overlap points, then spliced to the Census Bureau 2009 dollar series using the average conversion rate between the two sources for the years 1947-1960 ($72.87 in 2009 dollars per Phelps Brown and Phelps Brown index point). Linear interpolations have been used to fill the gaps in the series due to World War I (1914-1919) and World War II (1942-1944).
 Based on figures from US Census Bureau Historical Income Statistics Table P-8.
 Based on figures from US Census Bureau Historical Income Statistics Table P-8.
 Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez. 2009. “Top Incomes in the Long Run of History,” NBER Working Paper 15408; the authors include single-person households as “families,” making their definition of a family near-identical to the US Census Bureau definition of a household.
 Based on Atkinson et al’s figures for the top 1% extrapolated using top 5% income growth rates since 2007 from US Census Bureau Historical Income Statistics Table H-1.
 Based on figures from US Census Bureau Historical Income Statistics Table P-8.
 Based on the application of income ratios from US Census Bureau Historical Income Statistics Table IE-2 to data from US Census Bureau Historical Income Statistics Table P-8.
 Based on 2002 figures (the most recent available) from Matthew Hammill (2005), Income Inequality in
 Based on 2009 figures from US Census Bureau Historical Income Statistics Table H-2.
 All figures are the most recent available. Canadian figures are for 2008 and come from Statistics
 The Survey of Consumer Finances, which contains a supplemental sample targeting high-income individuals.
 Based on figures from Edward N. Wolff (2010), Levy Economics Institute Working Paper 589: Recent Trends in Household Wealth in the
 Again based on Wolff’s figures with an imputation for the second-to-bottom quintile.
 Based on 1968 figures from US Census Bureau Historical Income Statistics Table H-2.
 Based figures from the 2010 National Income and Product Accounts from the US Bureau of Economic Analysis, Table 7-1.
 Arrived at by applying US
 Winfried Koeniger, Marco Leonardi, and Luca Nunziata (2007), “Labor Market Institutions and Wage Inequality, Industrial and Labor Relations Review, Vol. 60, pp. 340-356 (quote from p. 340).
 Koeniger et al (2007), Table 2.
 Alex Bryson (2007), “The Effect of Trade Unions on Wages,” Reflets et Perspectives de la Vie Économique, Vol. 46, pp. 33-45.
 David G. Blanchflower and Alex Bryson (2004), “What Effect Do Unions Have on Wages Now and Would Freeman and Medoff Be Surprised?” Journal of Labor Research, Vol. 25, pp. 383-414, Table 2.
 Based on figures from Barry Hirsch and David Macpherson, U.S. Historical Tables, accessed through the unionstats.com website. The 1953 US figure is imputed from the 1953 private sector workers’ membership figure from Barry Hirsch (2008), “Sluggish Institutions in a Dynamic World: Can Unions and Industrial Competition Coexist?” Journal of Economic Perspectives, Vol. 22, pp. 153-176, adjusted upward by the historical average of 25% to account for government workers and workers who were covered by union contracts but who were not union members. Figures for European countries are drawn from L. Fulton (2009), Worker Representation in Europe, Labour Research Department (London) and European Trade Union Institute, accessed through the worker-participation.eu website.
 Robert J. Gordon and Ian Dew-Becker (2008), Controversies about the Rise of American Inequality: A Survey, NBER Working Paper 13982.
 Robert H. Frank and Philip J. Cook (1995), The Winner-Take-All Society.
 Scott DeCarlo (2010), “What the Boss Makes,” Fortune Magazine online April 28, 2010.
 Based on data from US Census Bureau Historical Income Statistics Table P-38.
 Based on data from Changmin Lee and Woonam Seok (2009), “The Structure and Pay Distribution in the Executive Team,” working paper, Samsung Research Institute of Finance, Table 6.
 Again based on Lee and Seok (2009), Table 6.
 Based on data from the
 Again based on Pew (2011), p.13.
 Again based on Pew (2011), p.14.
 Based on figures from G. William Domhoff (2011), “Power in
 Based on data from the