The State of Working America

Lawrence Mishel, Josh Bivens, Elise Gould, Heidi Shierholz

• Publisher: ILR Press
• Year: 2012
• Print ISBN: 9780801451706
• eBook ISBN: 9780801466229
• Edition: 12
• Topic: Economics
• Subtopic: Political Economy
• Index: Economics

From reviews of previous editions—

"The State of Working America remains unrivaled as the most-trusted source for a comprehensive understanding of how working Americans and their families are faring in today's economy."—Robert B. Reich

"It is the inequality of wealth, argue the authors, rather than new technology (as some would have it), that is responsible for the failure of America's workplace to keep pace with the country's economic growth. The State of Working America is a well-written, soundly argued, and important reference book."—Library Journal

"An indispensable work on family income, wages, taxes, employment, and the distribution of wealth."—New York Review of Books

Since 1988, The State of Working America has provided a comprehensive answer to a question newly in vogue in this age of Occupy Wall Street: To what extent has overall economic growth translated into rising living standards for the vast majority of American workers and their families? In the 12th edition, Lawrence Mishel, Josh Bivens, Elise Gould, and Heidi Shierholz analyze a trove of data on income, jobs, mobility, poverty, wages, and wealth to demonstrate that rising economic inequality over the past three decades has decoupled overall economic growth from growth in the living standards of the vast majority.

The new edition of The State of Working America also expands on this analysis of American living standards, most notably by placing the Great Recession in historical context. The severe economic downturn that began in December 2007 came on the heels of a historically weak recovery following the 2001 recession, a recovery that saw many measures of living standards stagnate. The authors view the past decade as "lost" in terms of living standards growth, and warn that millions of American households face another decade of lost opportunity.

Especially troubling, the authors stress, is that while overall economic performance in the decades before the Great Recession was more than sufficient to broadly raise living standards, broad-based growth was blocked by rising inequality driven largely by policy choices. A determinedly data-driven narrative, The State of Working America remains the most comprehensive resource about the economic experience of working Americans.

CHAPTER 1

Overview

Policy-driven inequality blocks living-standards growth for low- and middle-income Americans

Like its predecessors, this edition of The State of Working America digs deeply into a broad range of data to answer a basic question that headline numbers on gross domestic product, inflation, stock indices, productivity, and other metrics can’t wholly answer: “How well has the American economy worked to provide acceptable growth in living standards for most households?”

According to the data, the short answer is, “not well at all.” The past 10 years have been a “lost decade” of wage and income growth for most American families. A quarter century of wage stagnation and slow income growth preceded this lost decade, largely because rising wage, income, and wealth inequality funneled the rewards of economic growth to the top. The sweep of the research in this book shows that these trends are the result of inadequate, wrong, or absent policy responses. Ample economic growth in the past three-and-a-half decades provided the potential to substantially raise living standards across the board, but economic policies frequently served the interests of those with the most wealth, income, and political power and prevented broad-based prosperity.

America’s vast middle class has suffered a ‘lost decade’ and faces the threat of another

Wages and incomes of typical Americans are lower today than in over a decade. This lost decade of no wage and income growth began well before the Great Recession battered wages and incomes. In the historically weak expansion following the 2001 recession, hourly wages and compensation failed to grow for either high school–or college-educated workers and, consequently, the median income of working-age families had not regained pre-2001 levels by the time the Great Recession hit in December 2007. Incomes failed to grow over the 2000–2007 business cycle despite substantial productivity growth during that period.

Although economic indicators as of mid-2012 are stronger than they were two or three years ago, protracted high unemployment in the wake of the Great Recession has left millions of Americans with lower incomes and in economic distress. This problem is actually quite solvable: Tackle the source of the problem—insufficient demand—with known levers of macroeconomic policy to generate demand. Unfortunately, the problem is not being solved.

Consensus forecasts predict that unemployment will remain high for many more years, suggesting that typical Americans are in for another lost decade of living standards growth as measured by key benchmarks such as median wages and incomes. For example, as a result of persistent high unemployment, we expect that the incomes of families in the middle fifth of the income distribution in 2018 will still be below their 2007 and 2000 levels.

Income and wage inequality have risen sharply over the last three-and-a-half decades

Income inequality in the United States has grown sharply over the last few decades. This is evident in nearly every data measure and is universally recognized by researchers. For example, if we look at cash “market-based incomes,” which exclude the effects of taxes and transfers (benefits received through government programs such as Social Security) and employer-provided in-kind benefits such as health insurance, the top 1 percent of tax units claimed more than six times as much of the total income growth between 1979 and 2007 as the bottom 90 percent—59.8 percent to 8.6 percent. Similarly, there has been a tremendous disparity in the growth of wages earned by individual workers. Wages for the top 1 percent grew about 156 percent between 1979 and 2007, whereas wages for the bottom 90 percent rose by less than 17 percent.

Rising inequality is the major cause of wage stagnation for workers and of the failure of low- and middle-income families to appropriately benefit from growth

There has been sufficient economic growth since 1979 to provide a substantial across-the-board increase in living standards. However, because wage earners and households at the top reaped most of the benefits of this growth, wages were relatively stagnant for low- and middle-wage workers from 1979 to 2007 (except in the late 1990s), and incomes of lower- and middle-class households grew slowly. This pattern of income growth contrasts sharply with that of the postwar period up through the 1970s, when income growth was broadly shared.

The economy’s failure to ensure that typical workers benefit from growth is evident in the widening gap between productivity and median wages. In the first few decades after World War II, productivity and median wages grew in tandem. But between 1979 and 2011, productivity—the ability to produce more goods and services per hour worked—grew 69.2 percent, while median hourly compensation (wages and benefits) grew just 7.0 percent.

Economic policies caused increased inequality of wages and incomes

Since the late 1970s, economic policy has increasingly served the interests of those with the most wealth, income, and political power and effectively shifted economic returns from typical American families to the already well-off. A range of economic policy choices—both actions and failures to act—in the last three decades have had the completely predictable effect of increasing income inequality. These choices include letting inflation consistently erode the purchasing power of the minimum wage, and allowing employer practices hostile to unionization efforts to tilt the playing field against workers. U.S. policies have also hastened integration of the U.S. economy and the much poorer global economy on terms harmful to U.S. workers, refused to manage clearly destructive international trade imbalances, and targeted rates of unemployment too high to provide reliably tight labor markets for low- and middle-wage workers.

Industry deregulation (of trucking, communications, airlines, and so on) and privatization have also put downward pressure on wages of middle-class workers. Meanwhile, deregulation of the financial sector—without a withdrawal of the government guarantees that allow private interests to take excessive risks—has provided the opportunity for well-placed economic actors to claim an ever-larger share of economic growth. An increasingly well-paid financial sector and policies regarding executive compensation fueled wage growth at the top and the rise of the top 1 percent’s incomes. Large reductions in tax rates provided a motive for well-placed actors to take these risks and also fueled the after-tax income growth at the top.

Although these post-1979 economic policies predictably redistributed wages, income, and wealth upward, there was no corresponding benefit in the form of faster overall economic growth. In fact, economic growth from the 1970s onward was slower than the economic growth in the prior 30 years. Besides resulting in slower growth, economic policy decisions also contributed to the fragility of the U.S. economy in the run-up to the Great Recession. For example, otherwise-anemic economic growth in the mid-2000s was driven by a housing bubble made possible largely through a deregulated financial sector that was hiding, not managing, the growing risk that home prices would fall. This economic fragility proved catastrophic when confronted with the shock of plummeting demand after the housing bubble burst and destroyed families’ housing wealth. More equitable and stable economic growth can only occur if there is a marked change in the direction of U.S. economic policy.

Claims that growing inequality has not hurt middle-income families are flawed

Despite the near-universal acknowledgement of growing income inequality as a fact of recent American economic history, a number of studies have claimed that it has not prevented middle-income families from achieving acceptable income growth since 1979. These studies argue that under a comprehensive measure of income that includes benefits from employers and government transfers, incomes of the middle fifth of households in the income distribution grew by 19.1 percent between 1979 and 2007. But this 19.1 percent cumulative (0.6 percent annual) growth rate does not mean that the private sector of the American economy is performing well for middle-income families. First, had the middle fifth’s incomes grown at the same 51.4 percent cumulative rate as overall average incomes (i.e., had there been no growth in income disparities), their annual income in 2007 would have been far greater—$18,897 higher. Second, this 0.6 percent annual growth rate does not come close to the income growth between 1947 and 1979, when middle-fifth family income grew 2.4 percent annually.

Third, the large share of this 1979–2007 income growth coming from government transfers (53.6 percent) reflects the strength of American social insurance programs (Social Security, Medicare, and Medicaid) and is not evidence that the private U.S. economy is being managed effectively or fairly. Given the unnecessary push to cut these programs going forward, it is unlikely that this source of middle-class income growth can be relied on in future decades. Fourth, higher household labor earnings contributed a modest 6.1 percent to this middle-fifth income growth, and the impressive ability of American households to steadily increase their work hours over this period, in part by increasing the number of household members employed, will not be replicable in the years ahead.

Last, the data on comprehensive incomes are technically flawed because they count, as income, rapidly rising health expenditures made on behalf of households by employers and the government without accounting for the excessive health care inflation that has absorbed large portions of the increase in this particular source of income. If rising health care costs are properly accounted for, the 19.1 percent growth in comprehensive middle-fifth incomes is lowered by a third. If we strip out health care inflation, government transfers, and additional hours worked—elements that add to measured income growth but cannot be attributed to a well-performing private economy—middle-class incomes grew just 4.9 percent across the 28 years from 1979 to 2007, with most of that growth occurring just in the late 1990s.

Growing income inequality has not been offset by increased mobility

Growing income inequality in the United States is a trend made more disturbing by static, and perhaps declining, economic mobility. Despite the image of the nation as a place where people with initiative and skills can vault class barriers, America today is not a highly mobile society, compared with our international peers. In one study of 17 Organisation for Economic Co-Operation and Development (OECD) countries, the United States ranked 13th on a measure of mobility, ahead only of Slovenia, Chile, Italy, and the United Kingdom, and far behind Denmark, Norway, Finland, and Canada.

Americans largely end up where they started out on the economic ladder, and the same is true for their children. For example, one study showed that two-thirds (66.7 percent) of sons of low-earning fathers (in the bottom fifth of the earnings distribution) end up in the bottom two-fifths as adults, while only 18.1 percent make it to the top two-fifths. There is no evidence that mobility has increased to offset rising inequality, and in fact some research shows a decline.

Inequalities persist by race and gender

As this book, and our research in general, shows, there is actually no single economic “state of America” but rather an America that is experienced differently, and often unequally—not only by class, as discussed, but by race and gender. For example, a review of employment rates from 1979 to 2011 shows that black and Hispanic unemployment always far exceeded white unemployment. As this book was nearing completion in July 2012, the overall unemployment rate was 8.3 percent—roughly the same as the African American unemployment rate during all of 2007, the last year of economic expansion before the Great Recession.

Further, even in 1992, the peak of black/white equality in wealth holdings, median black household wealth was just 16.8 percent of median white household wealth. By 2010—after the housing bubble had burst and destroyed $7 trillion in equity in residential real estate (the most widely held type of wealth)—median African American wealth was just 5.0 percent of median white wealth.

And while gaps between labor market outcomes of men and women have closed in recent decades, progress has occurred not just because women gained ground, but also because men lost ground. Gaps in employer-provided pension coverage rates between men and women, for example, have rapidly closed in recent decades, but only because men’s coverage rates have fallen while women’s have stagnated.

Economic history and policy as seen from below the top rungs of the wage and income ladder

This chapter assesses U.S. economic performance over the last 30 years through the lens of this failure of the economy to deliver appropriate gains to the broad middle class and fuel greater social mobility. One could label this policy regime a “failure,” but one could also say this was a “failure by design”—the policies worked as intended to boost the economic standing of those who already had the most income and wealth. Our discussion in this chapter begins with the Great Recession and its aftermath, moves to the lost decade period commencing with the 2001 recession, and concludes with the years between 1979 and the beginning of the Great Recession.

The Great Recession: The shock to demand and the need for continued stimulus. The key lesson to be learned from our current crisis is that full and meaningful recovery from the Great Recession that officially ended in June 2009 has not yet happened and is assuredly not guaranteed. As this book is being written in mid-2012, things are indeed better than they were two and three years ago, but the American economy remains far from healthy, and there is danger in prematurely declaring “mission accomplished.” There is a clear continued need for fiscal stimulus such as aid to the states, infrastructure investments, and safety net supports such as unemployment insurance and food stamps, as well as expansionary monetary policy. But, just as patients prescribed antibiotics should not stop taking them as soon as their immediate symptoms fade, we must not remove economic supports before full economic health has been genuinely restored; doing so could come back to hurt us.

Economic lost decades: The threat of continued disappointing wage and income growth. Our examination of a broad range of living standards benchmarks argues strongly that recovery to the economic conditions that prevailed in 2007, immediately prior to the Great Recession, is too modest a goal. The 2000s expansion was the weakest on record and provided very little in terms of lasting gains for American families. As a result, we have had a lost decade where wages and benefits failed to grow for the vast majority of the workforce, including college-educated workers as well as the two-thirds of the workforce who lack a college degree. The typical working-age family had lower income in 2007 than before the early 2000s recession, and incomes fell further in the Great Recession. Using current projections of unemployment in coming years, we estimate that the average income of households in the middle fifth of the income distribution will remain below its 2000 level until at least 2018. This would lead to another lost decade for far too many American workers and the households and families they support.

Stagnating living standards before the lost decade: Rising inequality from 1979 to 2007 halts income and wage growth for most Americans. The stagnation of wages and incomes for low- and middle-income households during the 2000s was merely a continuation of longer-term trends. For most of the years between 1979 and 2007, living standards growth for most American households lagged far behind overall average growth because the vast majority of growth was claimed by a select sliver at the top of the income ladder. Without a brief period of strong across-the-board wage and income growth in the late 1990s, virtually the entire 28-year period before the Great Recession may well have been an era of lost growth for l...

Table of contents

• Documentation and methodology
• Chapter 1 Overview
• Chapter 2 Income
• Chapter 3 Mobility
• Chapter 4 Wages
• Chapter 5 Jobs
• Chapter 6 Wealth
• Chapter 7 Poverty
• Appendix A
• Appendix B
• Bibliography
• About EPI
• About the authors
• Figures and Tables