By Sal­va­tore Babones

Sal­va­tore Babones (@sbabones) is a senior lec­tur­er in soci­ol­o­gy & social pol­i­cy at the Uni­ver­si­ty of Syd­ney and an asso­ciate fel­low at the Insti­tute for Pol­i­cy Stud­ies (IPS). You can find more of his com­men­tary on the US econ­o­my at http://salvatorebabones.com.

The Amer­i­can econ­o­my has done well over the past forty years. Amer­i­ca’s nation­al income per per­son has almost exact­ly dou­bled since 1970.[1] The Unit­ed States has been the rich­est major coun­try in the world for over 100 years now, and it remains the rich­est major coun­try in the world today.[2] The Amer­i­can econ­o­my in 2010 gen­er­at­ed $47,436 for every man, woman, and child liv­ing in the coun­try.[3] On cur­rent pro­jec­tions, this fig­ure will rise by a fur­ther $1000 per year for the next sev­er­al years.[4]

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.[5] That’s still over $40,000 for every man, woman, and child liv­ing in Amer­i­ca.

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[6] would give an aver­age of income of $52,952 for every Amer­i­can adult.

In oth­er words, if Amer­i­ca’s total per­son­al income were even­ly dis­trib­uted, the typ­i­cal mar­ried cou­ple would be mak­ing over $100,000 a year.

If the typ­i­cal sin­gle per­son in Amer­i­ca were mak­ing $52,952 a year and the typ­i­cal mar­ried cou­ple were mak­ing $105,904 a year, the Unit­ed States real­ly would be a very rich coun­try. The prob­lem is that most peo­ple actu­al­ly make much less than this. The typ­i­cal Amer­i­can adult makes just $26,134.[7] Half of all Amer­i­cans make less than this.

How can it be that the typ­i­cal Amer­i­can adult makes just $26,134 when Amer­i­ca is the rich­est nation on Earth? The answer is that a few high-income Amer­i­cans gain the lion’s share of Amer­i­ca’s nation­al income. As illus­trat­ed in the fig­ure below, the top 5% of Amer­i­can house­holds made as much mon­ey in 2009 as the entire bot­tom 50% com­bined.[8] That’s amaz­ing. Out of about 120 mil­lion house­holds in Amer­i­ca today, the rich­est 6 mil­lion make as much mon­ey as the poor­est 60 mil­lion.

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 Amer­i­c­as: the top 20%, and every­body else. By def­i­n­i­tion, most Amer­i­cans fall into the cat­e­go­ry of “every­body else.”

It was­n’t always like this, and it does­n’t have to be like this. Amer­i­ca used to be one of the most equal coun­tries in the free world, a place where any­body could make a decent liv­ing, sup­port a fam­i­ly, and retire well. Such sim­ple dreams are increas­ing­ly out of reach for ordi­nary Amer­i­cans who fall in the mid­dle of the coun­try’s income dis­tri­b­u­tion.

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.[9] 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%.[10]

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.[11] No won­der young adults can’t afford to move out on their own these days.

How it is pos­si­ble that the US econ­o­my has dou­bled in size with­out help­ing the aver­age work­ing man at all? The answer can be divid­ed into three parts. First, more and more women work out­side the home. This boosts the over­all size of the econ­o­my with­out boost­ing the wages paid by any par­tic­u­lar job. Sec­ond, the pop­u­la­tion is get­ting old­er as baby boomers mature. Old­er peo­ple are more expe­ri­enced and thus earn more (on aver­age), even though incomes for peo­ple of any par­tic­u­lar age haven’t changed.

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 US econ­o­my between 1976 and 2007 went to the top 1% of house­holds in Amer­i­ca.[12] To get into that top 1% a house­hold has to be bring­ing in over $405,000 a year.[13]

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.[14] For Amer­i­cans at the bot­tom, things have actu­al­ly got­ten worse since the 1970s.[15]

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 AND ABROAD

Accord­ing to a recent sur­vey, 91% of Amer­i­can adults iden­ti­fy them­selves as “mid­dle class.”[16] 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 Mex­i­co is the lack of a strong mid­dle class. In Mex­i­co, the Mid­dle Six­ty take home just 46.6% of Mex­i­co’s income, even though they make up 60% of Mex­i­co’s house­holds.[17] In Mex­i­co, so much of the nation’s income goes to the Top Twen­ty that there’s very lit­tle left for the Mid­dle Six­ty, or for the poor.

The amaz­ing thing is, by this mea­sure even Mex­i­co has a stronger mid­dle class than the Unit­ed States. The Mid­dle Six­ty in Amer­i­ca take home just 46.3% of Amer­i­ca’s income.[18] This is by far the low­est fig­ure of any major devel­oped coun­try. The fig­ure below shows Mid­dle Six­ty income lev­els for the Unit­ed States, Mex­i­co, and four oth­er coun­tries.[19] The Unit­ed States scores at the rock bot­tom of the league for the eco­nom­ic strength of its mid­dle class.

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.[20]

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%.[21] 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.[22]

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 Unit­ed States did­n’t always have the world’s weak­est mid­dle class. Back in 1968 the US Mid­dle Six­ty took home 52.3% of all the nation’s income (based on the offi­cial sta­tis­tics).[23] That implies that in 1968 the US mid­dle class was stronger than any mid­dle class in the world is today. The US Mid­dle Six­ty might have been even stronger in the 1950s, but unfor­tu­nate­ly data are not avail­able to tell. The data start in 1968, and it’s been all down­hill from there.

THE REASONS BEHIND THE TRENDS

Total US nation­al income per per­son rose by 99.3% over the 30 years from 1969 to 2009.[24] Why then have incomes for most Amer­i­cans been stag­nant or falling? Why do Amer­i­can fam­i­lies now need two incomes to have the stan­dard of liv­ing they used to have with just one? Why aren’t today’s young adults mak­ing twice as much as their par­ents did were when they first entered the labor mar­ket thir­ty years before?

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 US income dis­tri­b­u­tion today had remained unchanged from 1969, by 2009 the aver­age Amer­i­can house­hold would have had an income of $86,479 instead of $49,777.[25] If the US income dis­tri­b­u­tion had become more equal in the four decades after 1969 — as it did in the four decades before 1969 — the aver­age Amer­i­can house­hold would be doing even bet­ter.

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. Amer­i­ca has far greater income than ever before in its his­to­ry, but that income is con­cen­trat­ed in few­er and few­er hands. Ris­ing inequal­i­ty is killing mid­dle Amer­i­ca.

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 Amer­i­ca. As a recent 11-coun­try com­par­a­tive study con­clud­ed, the main fac­tors that deter­mine whether a coun­try is equal or unequal in its income dis­tri­b­u­tion are “union den­si­ty, the strict­ness of employ­ment pro­tec­tion law, unem­ploy­ment ben­e­fit dura­tion, unem­ploy­ment ben­e­fit gen­eros­i­ty, and the size of the min­i­mum wage.”[26]

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.[27] Around the world, wher­ev­er work­ers have unions, they get bet­ter pay.[28] The most recent esti­mates sug­gest that union­iza­tion increas­es an indi­vid­ual work­er’s pay by about 17%,[29] but some argue that the effect on total pay (includ­ing ben­e­fits) could be as high as 43%.[30] 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 Amer­i­ca com­pare on union cov­er­age? As the fig­ure below makes clear, the Unit­ed States has just about the low­est lev­el of union cov­er­age in the world.[31] This fig­ure com­pares the pro­por­tion of work­ers who are cov­ered by union-type col­lec­tive bar­gain­ing con­tracts across the Unit­ed States and 11 west­ern Euro­pean coun­tries. Union cov­er­age in the Unit­ed States is now low­er (by far) than any­where in west­ern Europe. Even at its height in 1953, US union cov­er­age was low by Euro­pean stan­dards. Today it is absolute­ly in the base­ment.

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 Amer­i­ca. There is some evi­dence that Amer­i­ca is pulling apart along region­al lines, with New York and Los Ange­les pulling away from the rest of the coun­try.[32] There’s also some evi­dence that tech­no­log­i­cal change is cre­at­ing sit­u­a­tions in which the top-ranked peo­ple in any indus­try (like sports and movie stars) end up tak­ing home more and more of the avail­able pay.[33] After-tax inequal­i­ty is also affect­ed by changes in the tax sys­tem.

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 Unit­ed States, CEOs run their com­pa­nies with very few con­straints. Tech­ni­cal­ly they are super­vised by boards of direc­tors, but most Amer­i­can CEOs serve as chair­men of their own boards of direc­tors — and even select their own board mem­bers. Share­hold­ers are the legal own­ers of a pub­lic com­pa­ny, but if share­hold­ers are unhap­py it’s much eas­i­er for them to sell their shares than to fire their CEOs.

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.[34] That’s about 200 times the earn­ings of the aver­age Amer­i­can adult who works full-time.[35]

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 Amer­i­ca’s top 1500 pub­lic com­pa­nies received aver­age annu­al rais­es of 8.8% per year.[36] Cor­po­rate sec­onds-in-com­mand received annu­al rais­es aver­ag­ing 5.4%, thirds-in-com­mand 5.2%, fourths-in-com­mand 5.0%, and fifths-in-com­mand 4.6%.[37]

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 New York and Los Ange­les. It can only be traced to chang­ing norms of what’s con­sid­ered accept­able behav­ior in set­ting pay. Forty years ago, exec­u­tives might have felt some pres­sure to take care of their employ­ees before tak­ing care of them­selves. They cer­tain­ly don’t any­more.

CLOSING THOUGHTS

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 Amer­i­ca they could always be sure of one thing: life would be bet­ter for their chil­dren than it was for them.

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.[38] By a small mar­gin of 38% to 37%, more Amer­i­cans actu­al­ly think life was bet­ter in the 1960s than it is today.[39] 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.[40]

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 Unit­ed States of forty years ago had much more of an eth­ic that they were all in it togeth­er. In the 1960s and 1970s, Amer­i­can CEOs paid them­selves rough­ly 40 times as much as an ordi­nary work­er.[41] That’s not exact­ly slum­ming it, but it seems pos­i­tive­ly fru­gal by today’s stan­dards.

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 Amer­i­ca for every­one to live a very good life. There’s so much income gen­er­at­ed every year in Amer­i­ca that if we dis­trib­uted it even­ly the aver­age house­hold could be liv­ing on $100,000 a year. Even allow­ing for the kinds of inequal­i­ty found in Amer­i­ca in the 1960s and 1970s — CEOs mak­ing 40 times their work­ers’ salaries instead of 200 times — the aver­age house­hold could be bring­ing in $80,000 a year. That’s not too bad.

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.[42] 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.

NOTES