Introduction and executive summary

Our country has suffered from rising income inequality and chronically slow growth in the living standards of low- and moderate-income Americans. This disappointing living-standards growth–which was in fact caused by rising income inequality–even preceded the Great Recession. Fortunately, income inequality and middle-class living standards are now squarely on the political agenda. But despite their increasing salience, these issues are too often discussed in abstract terms. This paper–and the Raising America’s Pay project that it launches–exposes the easy-to-understand root of rising income inequality, slow living-standards growth, and a host of other key economic challenges: the near stagnation of hourly wage growth for the vast majority of American workers over the past generation.

It should not be surprising that trends in hourly wage growth have profound consequences for American living standards. After all, the vast majority of Americans rely on their paychecks to make ends meet. For these families, wages and employer-provided benefits comprise the bulk of income, followed by other income sources linked to labor market performance, such as wage-based tax credits, pensions, and social insurance. Even for the bottom fifth of households, wage-related income accounts for the majority of total income. Indeed, wage-related income has been a growing share of total bottom-fifth income over time, as the safety net shifts toward wage-related income supports (such as the earned income tax credit) while non-wage-related supports (such as Temporary Assistance for Needy Families) decline.

SUPPLEMENTARY DATA: Download the appendix tables accompanying this report here.

The clear connections between wages, income, and living standards mean that progress in reversing inequality, boosting living standards, and alleviating poverty will be extraordinarily difficult without addressing wage growth. Indeed, converting the slow and unequal wage growth of the last three-and-a-half decades into broad-based wage growth is the core economic challenge of our time.

Slow and unequal wage growth in recent decades stems from a growing wedge between overall productivity and pay. In the three decades following World War II, hourly compensation of the vast majority of workers rose in line with productivity. But for most of the past generation (except for a brief period in the late 1990s), pay for the vast majority has lagged further and further behind overall productivity. This breakdown of pay growth has been especially evident in the last decade, affecting both college- and non-college-educated workers as well as blue- and white-collar workers.

This paper argues that broad-based wage growth is necessary to address a constellation of economic challenges the United States faces: boosting income growth for low- and moderate-income Americans, checking or reversing the rise of income inequality, enhancing social mobility, reducing poverty, and aiding asset-building and retirement security. The paper also points out that strong wage growth for the vast majority can boost macroeconomic growth and stability in the medium run by closing the chronic shortfall in aggregate demand (a problem sometimes referred to as “secular stagnation”). Finally, the paper argues that any analyses of the causes of rising inequality and wage stagnation must consider the role of changes in labor market policies and business practices, which are given far too little attention by researchers and policymakers.

The paper’s key data findings include:

Despite increasing economy-wide productivity, wages for the vast majority of American workers have either stagnated or declined since 1979, and this weak wage growth extends even to those with a college degree.

Since 1979, hourly pay for the vast majority of American workers has diverged from economy-wide productivity, and this divergence is at the root of numerous American economic challenges. Between 1979 and 2013, productivity grew 64.9 percent, while hourly compensation of production and nonsupervisory workers, who comprise 80 percent of the private-sector workforce, grew just 8.2 percent. Productivity thus grew eight times faster than typical worker compensation. Much of this productivity growth accrued to those with the very highest wages. The top 1 percent of earners saw cumulative gains in annual wages of 153.6 percent between 1979 and 2012–far in excess of economy-wide productivity.

Hourly wages of the vast majority of American workers have either stagnated or declined since 1979, with the exception of a period of strong across-the-board wage growth in the late 1990s. Median hourly wages rose just 0.2 percent annually between 1979 and 2013, compared with an annual decline of 0.2 percent for the 10th percentile worker (i.e., the worker who earns more than only 10 percent of workers) and an annual gain of 1 percent for the 95th percentile worker. Between 2000 and 2013, hourly wages of the vast majority of workers either fell (bottom 30 percent) or were essentially flat (next 40 percent), and only the 95th percentile saw wage growth closely approaching 1 percent annually. The late 1990s was the only period between 1979 and 2013 when wage growth was robust and broadly shared; in fact, wage growth was actually strongest for the bottom 40 percent.

While wage disparities by gender have gradually narrowed over the last three-and-a-half decades, wage disparities by race and ethnicity have not narrowed. Gaps between women’s and men’s hourly wages have been slowly narrowing since 1979. However, the higher up the wage distribution one looks, the slower the progress has been. Among women workers, the hourly wage at the 10th percentile was 91.8 percent of men’s 10th percentile wage in 2013, while women’s median wage was 83.4 percent of men’s median wage, and women’s 95th percentile wage was 76.1 percent of men’s 95th percentile wage. Gaps between hourly wages of black and Hispanic workers relative to white workers have not closed over time. These gaps have remained essentially unchanged at the low end of the wage distribution, and have actually been widening at higher levels.

Weak wage growth extends even to those with a four-year college degree, while those with a high school degree and no further education have fared even worse. The vast majority of college graduates have seen only small wage gains since 2000. Even at the 90th percentile, college graduates’ hourly wages only increased 4.4 percent cumulatively from 2000 to 2013. Entry-level hourly wages fell on average for both female and male college graduates from 2000 to 2013 (8.1 percent among women and 6.7 percent among men). Workers without a four-year degree have fared even worse over the entire 1979 to 2013 period, as the ratio of wages for college-educated workers relative to this group expanded rapidly in the 1980s and early 1990s, and has grown (albeit much more slowly) since.



Inequality fueled by broad wage stagnation is by far the most important determinant of the slowdown in living standards growth over the past generation, and it has been enormously costly for the broad middle class (households between the 20th and 80th income percentiles).

Between 1979 and 2007, more than 90 percent of American households saw their incomes grow more slowly than average income growth (which was pulled up by extraordinarily fast growth at the top).

By 2007, the growing wedge between economy-wide average income growth and income growth of the broad middle class–a wedge we sometimes refer to as the “inequality tax”–reduced middle-class incomes by nearly $18,000 annually.

Slow income growth for most American households is mainly due to weak hourly wage growth. In 1979, labor income accounted for 85.1 percent of total income for non-elderly households in the broad middle class, yet hourly compensation growth accounted for only about 17 percent of the increase of household incomes between 1979 and 2007–meaning it punched far below its weight. All of hourly compensation growth for the broad middle class occurred between 1995 and 2000. Rising hours of work (as opposed to higher hourly compensation) accounted for roughly two-thirds of the rise in labor income between 1979 and 2007 for this group of non-elderly households in the broad middle class.



The failure of wages to grow for the vast majority is the leading reason why progress in reducing poverty has stalled over the last three-and-a-half decades.

Wage-driven inequality has severed the link between poverty reduction and overall economic growth. If poverty reduction and growth were correlated as tightly as they were between 1959 and 1973, growth would have driven the poverty rate, which grew from 11.7 percent in 1979 to 15.0 percent in 2012, to essentially zero by now. This general finding remains true even when using alternative measures of poverty, such as the supplemental poverty measure (SPM).

From 1979 to 2012, the impact of rising inequality was nearly five times more important in explaining poverty trends than changes in family structure, while rising educational attainment of low-wage workers actually put downward pressure on the poverty rate over that time.

Wage growth is key to poverty reduction: The bottom fifth of non-elderly American households relied on work-related income (wages, benefits, and wage-based tax credits) for more than two-thirds (69.7 percent) of their total incomes in 2010.

Key economic evidence implicates policy decisions–and particularly changes in labor market policies and business practices–as more important in explaining the slowdown in hourly wages for the vast majority than many commonly accepted explanations (such as the interaction between technological change and the skills and credentials of American workers).

Various wage gaps reflect the relative strength of policy changes in affecting Americans’ wages, as compared with other influences (such as the interaction of technology and education). The timing of changes in the gap between wages at the middle and bottom of the wage distribution (or, the “50/10 wage ratio”) suggests that changes in the minimum wage and the unemployment rate explain most of its evolution. The gap between wages near the top of the wage distribution and the middle (or, the “95/50 wage ratio”) has grown much faster since 1995 than have the returns to a four-year college degree. This suggests that rising demands for this credential cannot explain the bulk of changes in the 95/50 ratio since then. The wage gap between those in the top 1 percent and other very high-wage workers (those between the 90th and 95th percentiles) rose faster and more consistently than any of the other wage gaps examined in this paper. As the top 1 percent is dominated by corporate managers and finance-sector professionals, this suggests these wage trends are driven in large part by developments in corporate governance and financial regulation that have given those at the very top the bargaining power that allows them to claim economic rents.

Direct evidence highlights the key roles of the two most-visible and well-documented changes in labor market policy and practice over the past generation in driving wage trends: the erosion of the inflation-adjusted value of the federal minimum wage and the sharp decline in the share of the American workforce represented by a union. Between the 1970s and the late 2000s, the eroded minimum wage explains roughly two-thirds of the growing wage gap between low- and middle-wage workers, and weakened unions explain a fifth to a third of the entire rise of wage inequality.



EPI’s Raising America’s Pay initiative highlights labor market policies and business practices behind poor wage growth

Aside from reviewing trends in hourly labor compensation and linking these trends to front-burner issues in American economic life, this paper also serves as background for a larger project centered at the Economic Policy Institute–the Raising America’s Pay project. Raising America’s Pay is a multiyear research and public education initiative to make wage growth an urgent national policy priority. Raising America’s Pay aims not just to highlight the central role of hourly wage performance in American economic life, but also to suggest concrete remedies for the disappointing wage growth experienced by the vast majority since 1979.

We have noted in past work (see Mishel et al. 2012 and Bivens 2011) a number of influences that can help explain why the wages of the vast majority have grown so much more slowly than economy-wide productivity. These influences include integration of the U.S. and the much-poorer global economy on terms deeply damaging to the vast majority of American workers, the failure of macroeconomic policymakers to aggressively pursue genuinely full employment, steep cuts to top marginal tax rates that have greatly increased the motive for well-placed economic actors to fully wield their economic power to tilt the distribution of rewards their way, deregulation of the financial sector that has led to greater risk and reward for financial managers without leading to better economic outcomes, and the continuing failure of corporate governance to rein in executive compensation.

While we touch on some of these influences in this paper, Raising America’s Pay seeks to give overdue recognition to the labor market policies and business practices that have suppressed wage growth by robbing American workers of key protections and diluting their bargaining power. As just noted, the most obvious examples of corrosive policies and practices are the continued erosion of both union coverage and the real (i.e., inflation-adjusted) value of the federal minimum wage. But a range of other, less visible factors have also undercut pay, from the inappropriate classification of employees as independent contractors to increasing incidence of “wage theft” that occurs when workers–particularly low-wage and immigrant workers–are not paid for the work they have performed. Indeed, those looking to boost the bargaining power of employers have fought efforts to allow certain low-wage workers to qualify for overtime pay and have tried to impede institutions that help thwart wage theft.

Besides erosion of union coverage and the real value of the minimum wage, many of these changes to labor market policies and practices likely would not by themselves move the dial on overall wage trends. However, as a group they could have measurable effects. Representatives of employers’ interests surely conceive of them as important, as they spend great effort and money to weaken standards and institutions that provide labor market protections at the federal and state levels (Lafer 2013). Future research conducted as part of the Raising America’s Pay initiative will identify and assess changes in labor market policies and business practices that will generate substantial broad-based wage growth.

Structure of the paper

The rest of the paper is structured as follows: Section one details trends in wages (mostly hourly wages) across the American wage distribution in recent decades. Section two shows how these wage trends are the driving force behind rising inequality of household incomes and the sluggish growth of living standards for the vast majority in recent decades. Section three highlights the crucial link between stagnant wage growth in the bottom fifth of the wage distribution and faltering progress in reducing poverty in recent decades. Section four discusses how hourly wage growth is crucial in making progress on a range of other economic challenges–including wealth accumulation and retirement security, social mobility, and macroeconomic stability. Section five draws policy conclusions from the assembled evidence, and the paper concludes by identifying promising future research opportunities.

Section One: Trends in American wages

This first section provides a detailed overview of trends in wages and compensation (including employer-provided benefits such as contributions to pensions and health insurance premiums) for the vast majority of American workers in recent decades. It pays particular attention to growth in hourly compensation when possible, simply because rising annual earnings obtained by working more hours cannot be fairly classified as an increase in Americans’ living standards. Further, the key driver of unequal annual labor income growth has been inequalities of hourly wages rather than increased inequalities of work hours.

The section begins with an examination of the disconnect between pay and productivity; turns to an analysis of wage trends by decile; presents wage gaps by gender and race and ethnicity; demonstrates that sluggish wage growth has not been driven by nonwage benefits such as employer-provided health insurance and pensions; and concludes by showing that the fruits of productivity growth have mainly accrued to those at the top.

Disconnect between pay and productivity

Figure A sets the scene for the rest of the section, showing the growing gap between economy-wide productivity (a measure of how much economic output is produced on average in each hour of work) versus real hourly compensation (wages and benefits, adjusted for inflation) for production and nonsupervisory workers (a group that constitutes roughly 80 percent of the private-sector workforce).

Figure A Disconnect between productivity and typical worker compensation,* 1948–2013 Year Hourly compensation Productivity 1948 0.0% 0.0% 1949 6.3% 1.5% 1950 10.5% 9.3% 1951 11.8% 12.4% 1952 15.0% 15.6% 1953 20.8% 19.5% 1954 23.5% 21.6% 1955 28.7% 26.5% 1956 33.9% 26.7% 1957 37.1% 30.1% 1958 38.2% 32.8% 1959 42.6% 37.6% 1960 45.5% 40.0% 1961 48.0% 44.4% 1962 52.5% 49.8% 1963 55.0% 55.0% 1964 58.5% 60.0% 1965 62.5% 64.9% 1966 64.9% 70.0% 1967 66.9% 72.1% 1968 70.7% 77.2% 1969 74.7% 77.9% 1970 76.6% 80.4% 1971 82.0% 87.1% 1972 91.3% 92.0% 1973 91.3% 96.7% 1974 87.0% 93.6% 1975 86.9% 97.9% 1976 89.7% 103.4% 1977 93.2% 105.8% 1978 96.0% 107.8% 1979 93.4% 108.1% 1980 88.6% 106.5% 1981 87.6% 111.0% 1982 87.8% 107.9% 1983 88.3% 114.1% 1984 87.0% 119.7% 1985 86.4% 123.4% 1986 87.3% 128.0% 1987 84.6% 129.1% 1988 83.9% 131.8% 1989 83.7% 133.7% 1990 82.2% 137.0% 1991 82.1% 138.9% 1992 83.1% 147.6% 1993 83.4% 148.4% 1994 83.8% 150.8% 1995 82.7% 150.9% 1996 82.8% 157.0% 1997 84.8% 160.6% 1998 89.2% 165.9% 1999 92.0% 172.8% 2000 93.0% 179.2% 2001 95.7% 183.5% 2002 99.6% 191.4% 2003 101.8% 200.9% 2004 101.1% 209.1% 2005 100.3% 214.5% 2006 100.4% 216.5% 2007 101.9% 218.8% 2008 102.1% 219.4% 2009 110.1% 226.0% 2010 112.1% 235.4% 2011 109.6% 236.7% 2012 107.7% 240.9% 2013 109.2% 243.1% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: From 1948 to 1979, productivity rose 108.1 percent, and hourly compensation increased 93.4 percent. From 1979 to 2013, productivity rose 64.9 percent, and hourly compensation rose 8.2 percent. * Data are for compensation of production/nonsupervisory workers in the private sector and net productivity (growth of output of goods and services less depreciation per hour worked) of the total economy. Hourly compensation is derived from inflating the average wages of production/nonsupervisory workers from the BLS Current Employment Statistics (CES) by a compensation-to-wage ratio. The compensation-to-wage ratio is calculated by dividing the average total compensation (wages and salaries plus benefits) by the average wage and salary accruals of all full- and part-time employees from the Bureau of Economic Analysis (BEA) National Income and Product Accounts (NIPA) interactive tables. The 2013 compensation-to-wage ratio used in the calculation of hourly compensation was estimated using the growth rate of the compensation-to-wage ratio from 2012 to 2013 from the Bureau of Labor Statistics (BLS) Employer Costs for Employee Compensation (ECEC). Source: Authors' analysis of data from BLS Labor Productivity and Costs program, Bureau of Labor Statistics Current Employment Statistics public data series and Employer Costs for Employee Compensation, and Bureau of Economic Analysis National Income and Product Accounts (Tables 2.3.4, 6.2, 6.3, 6.9, 6.10, and 6.11) UPDATED FROM: Figure 4U in The State of Working America, 12th Edition, an Economic Policy Institute book published by Cornell University Press in 2012 Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Productivity and these workers’ hourly compensation grew in tandem roughly from 1948 until the mid-1970s. After 1979, however, productivity growth continued to rise consistently (if at a slower rate than in the previous period). But the typical worker’s compensation began lagging further and further behind. In fact, between 1979 and 2013, productivity grew 64.9 percent, while hourly compensation grew only 8.2 percent. Productivity thus grew nearly eight times faster than hourly compensation.

Wage trends by decile

Table 1 presents trends in wage growth at different points of the wage distribution and sheds light on some of the patterns of hourly wage inequality that have characterized recent decades.

Table 1 Hourly wages of all workers, by wage percentile, 1979–2013 (2013 dollars) Wage by percentile* Year 10 20 30 40 50 60 70 80 90 95 Real hourly wage 1979 $8.84 $10.08 $11.83 $13.92 $15.75 $18.26 $21.58 $25.15 $30.76 $37.56 1989 7.55 9.40 11.27 13.47 15.65 18.28 21.75 26.00 32.85 40.37 1995 7.68 9.39 11.22 13.20 15.37 18.19 21.68 26.25 33.92 42.54 2000 8.53 10.51 12.27 14.19 16.56 19.59 23.23 28.22 36.88 47.04 2007 8.75 10.62 12.39 14.54 16.98 20.15 23.92 29.51 39.58 51.14 2013 8.37 9.99 11.94 14.19 16.70 19.75 23.88 29.81 40.44 52.80 Annualized percent change 1979–1995 -0.9% -0.4% -0.3% -0.3% -0.2% 0.0% 0.0% 0.3% 0.6% 0.8% 1995–2000 2.1 2.3 1.8 1.5 1.5 1.5 1.4 1.5 1.7 2.0 2000–2013 -0.1 -0.4 -0.2 0.0 0.1 0.1 0.2 0.4 0.7 0.9 1979–2013 -0.2 0.0 0.0 0.1 0.2 0.2 0.3 0.5 0.8 1.0 * The xth-percentile wage is the wage at which x% of wage earners earn less and (100-x)% earn more. Source: Authors' analysis of Current Population Survey Outgoing Rotation Group microdata UPDATED FROM: Table 4.6 in The State of Working America, 12th Edition, an Economic Policy Institute book published by Cornell University Press in 2012 Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Probably the most illustrative measure contained in Table 1 is the hourly wage of the median worker. This is simply the worker at the 50th percentile of the wage distribution, who makes higher hourly wages than half of the American workforce and lower hourly wages than the other half. The overall real median wage has risen just 6.1 percent cumulatively over the past 34 years, compared with economy-wide productivity growth of just under 65 percent. In essence, more than 90 percent of the economy’s productivity growth in the past generation has leaked away from the wages of median workers.

Table 1 also provides data on wage trends for workers at each decile (every tenth percentile) in the wage distribution, thus allowing an examination of wage growth (or decline) of low-, middle-, and high-wage earners. Data are also presented for the 95th percentile, the highest wage percentile that can be reliably measured with the Current Population Survey (CPS), the data source for this table. These data are “top coded” for purposes of privacy, meaning that wage values above a certain threshold are not reported at the actual value provided to the Census Bureau, but at a specified top wage (roughly 3 percent of workers in the CPS are assigned a top-coded wage). As we will see later, because so much of overall growth has accrued to the very top (even the top 1 percent) of the distribution, this top coding, along with small sample sizes and wide variation in wages at the top, impedes a full understanding of what is happening in the American economy. Even so, the data in Table 1 provide a strong inkling of what is occurring.

The data are presented for the business cycle peak years of 1979, 1989, 2000, and 2007, as well as for 1995 (the point during the 1990s business cycle after which wages grew dramatically) and for 2013 (the last year for which data are available).

The bottom panel displays the annualized percent change in wages over select time periods. In broad terms, it shows either flat or falling wages for the vast majority of workers between 1979 and 1995, fast wage growth between 1995 and 2000, and a return to essentially flat or falling wages since 2000. The bottom row presents the annualized percent change in wages over the entire 1979-2013 period.

From 1979 to 1995, for the vast majority of workers, wages either outright fell (for the bottom 50 percent) or were essentially flat (up to the 70th percentile). Even higher-wage earners saw extraordinarily modest hourly wage growth over that same time, rising just 0.3 percent annually at the 80th percentile. Wage growth at the 90th and 95th percentiles, however, was more than double that at the 80th percentile from 1979 to 1995.

Over the entire period between 1979 and 1995, wage growth was faster at higher wages than at lower wages–the higher the percentile in the wage distribution, the faster the wage growth. However, starting in the late 1980s, low-wage workers began experiencing wage growth either comparable to or even exceeding that of middle-wage workers. Consequently, the wage gap between the middle and bottom lessened and then stabilized (data on this are presented later in Table 9 and discussed in some detail in section five). Increases in the minimum wage in the early and late 1990s, along with low unemployment, can explain most of the closing of this gap between the bottom and the middle.

The period between 1995 and 2000 saw a significant and welcome reversal of the poor wage trends over the previous 16 years. Wages grew by at least 1.4 percent annually for every wage decile, and wage growth was actually fastest for the bottom 40 percent (buoyed, again, by a minimum-wage increase in the late 1990s). As we note later, this period of rapid, across-the-board wage growth in the late 1990s should be much more influential in policymaking debates than it has been. Besides the welcome increases in the federal minimum wage, the rapid wage growth was also driven by the very tight labor markets of the late 1990s. This gave American workers up and down the wage distribution some bargaining power vis-à-vis their employers for the first time in a generation.

After the momentum of the late 1990s/early 2000s full-employment labor market was broken by the recession and jobless recovery of the early 2000s, the poor and unequal pre-1995 wage trends reasserted themselves. Wages of the bottom 30 percent of wage earners fell between 2000 and 2013, while wages of workers between the 40th and 70th percentiles were essentially stagnant (growing 0.2 percent annually or less). Only the 95th percentile saw wage growth that even closely approached 1 percent annually. If we look just at wage trends since 2002, after the momentum from the wage growth of the late 1990s had faded, wages have been falling for the bottom 70 percent–by as much as 0.6 percent annually for the bottom 30 percent (see appendix tables and Mishel and Shierholz 2013).

Driven by the long periods of wage troubles (1979-1995 and 2000-2013) for the vast majority, during the entire 1979-2013 span, average annual wage growth steadily increases as one moves up the wage distribution. The changes range from a 0.2 percent decline for the 10th percentile wage, to growth of 0.2 percent for the median wage, and up to a 0.8 percent rise for the 90th percentile wage and a 1 percent gain at the 95th percentile wage. While these data clearly show the top pulling apart from the rest, the largest wage gains are actually concentrated within the top 5 percent of wage earners, which as explained previously are not captured by the CPS data (though we do manage to obtain some data that can track trends among the very highest wage earners, which we display in Figure F to come).

Wage gaps by gender, race, and ethnicity

Just as average wage trends mask variations at different parts within the wage distribution, overall wage trends also obscure different outcomes for men and women as well as for workers of different racial and ethnic backgrounds. The data appendix displays a full complement of data at each decile and the 95th percentile for male and female workers, as well as for white, black, and Hispanic workers. These data show, for instance, that while the median wage of men in 2013 was higher than that of women ($18.11 versus $15.10), the median wage grew between 1979 and 2013 at an average annual rate of 0.6 percent among women and fell by an average of 0.3 percent annually for men.

Figure B displays the ratio of male to female wages at the 10th, 50th, and 95th percentiles of each distribution between 1979 and 2013. For example, the 10th percentile hourly wage in 2013 for women was $8.09 and for men was $8.82. The ratio of these wages was 91.8 percent, meaning that women at the 10th percentile of the women’s wage distribution earned 91.8 percent as much as men at the 10th percentile of the men’s distribution. These are raw wage comparisons that do not account for differences in factors such as age, education, experience, and occupation. These wage ratios could, of course, also be examined as wage gaps. For example, a wage ratio of 76.1 percent at the 95th percentile corresponds to a 23.9 percent wage gap between male and female wages, meaning that women at the 95th percentile of the female wage distribution make 23.9 percent less than men at the 95th percentile of the male wage distribution.

Figure B Hourly wages of women as a percent of men’s hourly wages, at the 10th, 50th, and 95th wage percentiles, 1979–2013 Year 10th percentile 50th percentile 95th percentile 1979 86.7% 62.7% 62.9% 1980 83.2% 63.4% 64.8% 1981 88.7% 64.2% 63.6% 1982 88.9% 64.8% 64.8% 1983 89.3% 66.5% 62.9% 1984 87.2% 67.4% 64.1% 1985 85.8% 67.1% 63.2% 1986 84.7% 66.9% 66.2% 1987 83.5% 69.1% 65.8% 1988 81.5% 71.1% 68.0% 1989 81.3% 73.1% 71.9% 1990 83.4% 74.4% 72.7% 1991 86.8% 74.9% 72.8% 1992 89.7% 76.2% 73.9% 1993 90.9% 77.6% 74.4% 1994 90.8% 78.4% 76.3% 1995 88.2% 76.7% 76.6% 1996 87.2% 77.6% 77.0% 1997 87.0% 79.0% 75.2% 1998 89.4% 78.2% 76.7% 1999 87.6% 76.9% 77.0% 2000 87.3% 78.0% 75.6% 2001 87.3% 78.5% 75.7% 2002 89.6% 80.1% 76.2% 2003 89.4% 81.0% 76.8% 2004 89.3% 81.8% 75.3% 2005 88.3% 82.0% 77.2% 2006 88.8% 82.2% 77.9% 2007 89.9% 81.5% 77.2% 2008 90.3% 82.6% 77.0% 2009 92.3% 81.7% 74.6% 2010 92.9% 83.3% 76.8% 2011 93.4% 84.0% 77.9% 2012 91.7% 82.8% 74.5% 2013 91.8% 83.4% 76.1% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: The xth-percentile wage is the wage at which x% of wage earners earn less and (100-x)% earn more. Source: Authors' analysis of Current Population Survey Outgoing Rotation Group microdata Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

As is clear from Figure B, women’s wages at the 10th, 50th, and 95th percentiles are always lower than men’s wages at these points in their distribution. The greatest progress in terms of gender wage parity by 2013 has been achieved among lower-wage earners. And again, a key driver of progress was likely increases in the federal minimum wage; because low-wage earners are disproportionately female, a rising wage floor helped lift women’s wages closer to men’s at the bottom of the wage distribution.

Figure B also indicates that the hourly wage gap between men and women increases as one ascends the wage scale: The median wage gap is larger than the 10th percentile gap, and the 95th percentile gap is larger than the median wage gap. In fact, as the median wage gap continued to narrow throughout the 2000s, the 95th percentile wage gap has remained relatively flat for nearly the last 20 years, with a ratio of women’s to men’s hourly wages of about 76 percent. In 2013, the ratios at the 10th percentile and at the median were far higher, at 91.8 percent and 83.4 percent, respectively.

Figures C1 and C2 turn to wage ratios by race and ethnicity. They display the hourly wages of black and Hispanic workers as a percent of white hourly wages at the 10th, 50th, and 95th percentiles of each wage distribution. More comprehensive hourly wage data by race and ethnicity can be found in the appendix tables. As with comparing women to men, the wages of black and Hispanic workers at each point in the distribution are lower than those of white workers. The gap again increases as one moves up the wage scale.

Figure C-1 Hourly wages of black workers as a percent of white hourly wages, at the 10th, 50th, and 95th wage percentiles, 1979–2013 YEAR 10th percentile 50th percentile 95th percentile 1979/01/01 94.7% 82.8% 78.9% 1980/01/01 93.2% 81.9% 78.1% 1981/01/01 95.9% 82.4% 79.5% 1982/01/01 95.4% 79.6% 75.3% 1983/01/01 95.3% 80.6% 76.2% 1984/01/01 94.3% 79.6% 77.4% 1985/01/01 93.7% 78.4% 75.1% 1986/01/01 92.6% 80.2% 75.2% 1987/01/01 91.0% 80.1% 77.5% 1988/01/01 89.5% 81.2% 77.3% 1989/01/01 88.7% 79.5% 76.0% 1990/01/01 87.8% 78.5% 72.9% 1991/01/01 88.7% 78.8% 76.0% 1992/01/01 91.2% 79.2% 77.4% 1993/01/01 92.4% 79.8% 78.1% 1994/01/01 92.8% 78.3% 76.1% 1995/01/01 92.4% 78.1% 75.8% 1996/01/01 89.7% 77.8% 73.5% 1997/01/01 88.3% 76.7% 73.9% 1998/01/01 92.2% 80.1% 73.9% 1999/01/01 92.2% 78.6% 72.8% 2000/01/01 90.5% 79.2% 72.1% 2001/01/01 89.6% 77.1% 72.4% 2002/01/01 91.9% 77.6% 72.6% 2003/01/01 92.9% 79.7% 73.1% 2004/01/01 92.1% 79.8% 72.6% 2005/01/01 90.2% 76.8% 72.5% 2006/01/01 90.1% 78.1% 74.5% 2007/01/01 92.1% 76.3% 72.9% 2008/01/01 92.6% 76.2% 72.5% 2009/01/01 94.0% 77.6% 70.5% 2010/01/01 93.8% 77.6% 70.4% 2011/01/01 93.5% 76.9% 73.1% 2012/01/01 91.6% 75.4% 70.5% 2013/01/01 90.8% 76.7% 70.0% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: The xth-percentile wage is the wage at which x% of wage earners earn less and (100-x)% earn more. Shaded areas denote recessions. Race/ethnicity categories are mutually exclusive (i.e., white non-Hispanic, black non-Hispanic, and Hispanic any race). Source: Authors' analysis of Current Population Survey Outgoing Rotation Group microdata Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Figure C-2 Hourly wages of Hispanic workers as a percent of white hourly wages, at the 10th, 50th, and 95th wage percentiles, 1979–2013 Year 10th percentile 50th percentile 95th percentile 1979/01/01 95.5% 81.2% 78.6% 1980/01/01 94.6% 81.4% 77.7% 1981/01/01 96.0% 79.6% 79.1% 1982/01/01 95.9% 79.0% 75.1% 1983/01/01 95.5% 79.4% 75.3% 1984/01/01 94.8% 78.7% 78.0% 1985/01/01 94.1% 77.3% 76.2% 1986/01/01 92.0% 76.1% 78.4% 1987/01/01 91.1% 76.2% 74.0% 1988/01/01 91.2% 76.1% 75.2% 1989/01/01 90.0% 73.9% 74.0% 1990/01/01 87.4% 71.8% 72.9% 1991/01/01 86.5% 72.0% 74.2% 1992/01/01 88.2% 73.3% 77.3% 1993/01/01 86.9% 72.9% 74.7% 1994/01/01 86.1% 70.8% 73.0% 1995/01/01 86.4% 69.8% 71.5% 1996/01/01 86.2% 70.3% 70.1% 1997/01/01 85.5% 68.6% 71.3% 1998/01/01 86.8% 70.0% 70.1% 1999/01/01 86.8% 69.3% 69.6% 2000/01/01 85.6% 68.8% 68.3% 2001/01/01 85.3% 69.8% 65.7% 2002/01/01 86.8% 69.0% 66.4% 2003/01/01 87.8% 68.5% 67.7% 2004/01/01 88.2% 67.7% 67.5% 2005/01/01 86.7% 68.5% 67.9% 2006/01/01 87.1% 69.8% 67.5% 2007/01/01 89.2% 70.7% 69.4% 2008/01/01 91.4% 70.8% 68.1% 2009/01/01 91.5% 69.8% 69.1% 2010/01/01 92.5% 68.6% 69.0% 2011/01/01 92.5% 68.7% 67.6% 2012/01/01 91.4% 68.3% 66.1% 2013/01/01 90.0% 68.5% 66.5% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: The xth-percentile wage is the wage at which x% of wage earners earn less and (100-x)% earn more. Shaded areas denote recessions. Race/ethnicity categories are mutually exclusive (i.e., white non-Hispanic, black non-Hispanic, and Hispanic any race). Source: Authors' analysis of Current Population Survey Outgoing Rotation Group microdata Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

A simple look at the flat or downwardly sloping lines suggests that there has been little to no long-term progress (and even some regress) in closing these wage gaps over the last three-and-a-half decades. Arguably, the gaps at the 10th percentile have been relatively flat, while the gaps at the 95th percentile have been unambiguously rising (i.e., the ratio of black and Hispanic wages relative to white wages has been falling). At the median the black-white wage gap is steadier over time, while the Hispanic-white wage gap rose more sharply. It is clear from looking at these raw, unadjusted hourly wages that the wages of black and Hispanic workers have not closed the gap vis-à-vis white workers’ wages as rapidly as women’s wages have converged with men’s wages since 1979.

Finally, the data underlying these figures can shed light on one claim often made to excuse poor overall wage trends: that these trends simply are driven by an increasing share of nonwhite workers (particularly Hispanic immigrants) in the workforce, which mechanically reduces overall wages (sometimes called a compositional effect). What these data show is that wage growth was slow for all race and ethnic groups; even wages of middle-wage white workers increased just 0.3 percent annually between 1979 and 2013, less than one-third the annual increase of the 95th percentile overall hourly wage.

Sluggish wage growth has not been driven by nonwage benefits

The hourly wage data obtained from the CPS microdata do not measure employer-provided benefits. Some have suggested that overall compensation (including both health and pension benefits along with wages) may have risen significantly faster than wages alone in recent decades, particularly due to the rapidly increasing cost of health care, which is often reflected in premiums paid by employers for their workers’ health insurance. This section examines whether or not rising benefits make up for (or can explain) the failure of wages to rise for the vast majority.

First, we should note that Figure A illustrated the clear disconnect between productivity and compensation, not simply wages, of the typical worker. Furthermore, it is important to note that the share of the workforce covered by employer-provided fringe benefits, such as pensions and health insurance, has actually been falling for over a decade and for much of the last three decades. Therefore, an examination of benefit trends indicates an additional set of concerns regarding job quality and the erosion of pay for many workers. Figures D and E examine changes in employer-provided pension and health insurance coverage, respectively, between 1979 and 2012. As Figure D shows, pension coverage eroded among private-sector workers from 1979 until 1993, increased through the late 1990s, and began falling again in 2000. Over the entire period, employer-provided pension coverage fell 8.3 percentage points, from 50.6 percent to 42.3 percent. As with wages, the benefits of workers differ by educational attainment. In 2012, college graduates had pensions at one-and-a-half times the rate of high school graduates, 55.0 percent versus 35.2 percent. It is also clear that college graduates were driving the increases in overall pension coverage in the 1990s.

Figure D Share of private-sector workers with employer-provided pension coverage, by educational attainment, 1979–2012 All High school graduate College graduate 1979 50.6% 51.2% 61.0% 1980 50.0% 50.8% 58.3% 1981 49.0% 48.8% 58.0% 1982 48.0% 47.9% 55.9% 1983 47.5% 47.7% 57.3% 1984 46.0% 45.7% 56.4% 1985 46.2% 45.3% 56.8% 1986 45.4% 44.5% 56.4% 1987 42.5% 42.0% 52.8% 1988 42.8% 42.8% 52.6% 1989 43.7% 42.9% 55.4% 1990 43.9% 43.3% 55.8% 1991 44.5% 42.7% 56.3% 1992 44.5% 43.0% 56.6% 1993 43.7% 41.4% 56.9% 1994 45.7% 43.2% 59.1% 1995 45.8% 43.2% 58.8% 1996 47.1% 44.2% 61.7% 1997 47.1% 43.8% 61.9% 1998 48.5% 46.0% 63.3% 1999 48.6% 44.9% 63.1% 2000 48.3% 43.8% 63.7% 2001 47.1% 42.8% 62.1% 2002 45.5% 41.4% 59.9% 2003 45.9% 40.9% 60.2% 2004 45.5% 40.2% 60.6% 2005 44.1% 39.0% 58.7% 2006 42.8% 37.1% 57.0% 2007 44.6% 38.8% 58.2% 2008 43.4% 38.1% 56.3% 2009 42.6% 36.3% 54.9% 2010 42.8% 36.3% 56.1% 2011 42.4% 35.7% 54.0% 2012 42.3% 35.2% 55.0% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: Sample is of private-sector wage-and-salary earners age 18–64 who worked at least 20 hours per week and 26 weeks per year. Source: Authors' analysis of Current Population Survey Annual Social and Economic Supplement microdata Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Figure E Share of private-sector workers with employer-provided health insurance, by race and ethnicity, 1979–2012 All White Black Hispanic 1979 69.0% 70.3% 63.1% 60.4% 1980 70.2% 71.4% 64.7% 62.2% 1981 70.5% 71.8% 65.1% 61.5% 1982 69.6% 70.6% 65.5% 61.9% 1983 68.6% 69.7% 64.1% 61.3% 1984 67.1% 68.6% 63.0% 56.0% 1985 67.0% 68.6% 62.1% 55.6% 1986 66.2% 68.1% 61.3% 52.9% 1987 62.4% 64.9% 55.1% 46.1% 1988 61.7% 64.1% 54.1% 47.2% 1989 61.5% 64.0% 56.3% 46.0% 1990 59.9% 62.4% 53.3% 45.1% 1991 59.7% 62.4% 52.2% 44.9% 1992 58.3% 61.2% 50.4% 41.6% 1993 58.9% 62.0% 52.2% 43.0% 1994 58.7% 61.8% 54.4% 40.1% 1995 58.5% 61.7% 53.0% 42.1% 1996 59.1% 62.1% 55.7% 42.4% 1997 58.0% 61.2% 54.4% 41.2% 1998 58.7% 62.1% 53.9% 41.7% 1999 58.9% 62.4% 55.7% 41.3% 2000 58.9% 62.7% 55.4% 41.8% 2001 58.2% 62.1% 55.7% 40.5% 2002 57.3% 61.2% 54.4% 41.0% 2003 56.4% 60.3% 54.3% 39.3% 2004 55.9% 59.7% 54.1% 39.7% 2005 54.9% 58.9% 52.5% 38.6% 2006 55.0% 59.6% 52.4% 37.3% 2007 55.0% 59.6% 52.4% 37.3% 2008 55.4% 59.7% 53.4% 38.6% 2009 53.6% 58.2% 50.2% 35.9% 2010 53.1% 57.8% 49.5% 36.3% 2011 52.3% 56.9% 50.0% 35.7% 2012 51.6% 56.3% 48.5% 35.3% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: Race/ethnicity categories are mutually exclusive (i.e., white non-Hispanic, black non-Hispanic, and Hispanic any race). Sample is of private-sector wage-and-salary earners age 18–64 who worked at least 20 hours per week and 26 weeks per year. Coverage is defined as being included in an employer-provided plan for which the employer paid for at least some of the coverage. Source: Authors' analysis of Current Population Survey Annual Social and Economic Supplement microdata UPDATED FROM: Figure 4I in The State of Working America, 12th Edition, an Economic Policy Institute book published by Cornell University Press in 2012 Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Figure E illustrates the nearly uninterrupted decline in employer-provided health insurance among private-sector workers from 1979 to 2012. Overall coverage rates fell a total of 17.4 percentage points, from 69.0 percent to 51.6 percent. The figure also highlights disparities in benefits by race and ethnicity. In 2013, non-Hispanic whites had coverage rates 7.8 percentage points higher than blacks and 21.1 percentage points higher than Hispanics.

This decline in the incidence of key employer-provided benefits gives important clues as to why the growth in nonwage compensation cannot come near to accounting for the overall divergence between pay for the vast majority and economy-wide productivity. Table 2 presents a breakdown of the growth in nonwage compensation, or benefits, using the Bureau of Labor Statistics Employer Costs for Employee Compensation data. These data (based on a survey of employers) show that the value of total nonwage compensation, including payroll taxes and both health and pension benefits, grew just $0.27 between 1987 and 2013 (from $5.61 to $5.88). This growth in benefits amounts to roughly a penny a year and certainly does not compensate for or explain the wage losses among American workers.

Table 2 Growth of specific fringe benefits, 1987–2013 (2013 dollars) Voluntary benefits Payroll taxes Total benefits and

nonwage compensation Year* Pension Health** Subtotal Hourly benefits 1987 $0.96 $2.41 $3.36 $2.25 $5.61 1989 0.78 2.50 3.27 2.34 5.61 1995 0.80 2.25 3.05 2.44 5.48 2000 0.81 1.97 2.78 2.29 5.07 2007 0.99 2.43 3.42 2.51 5.93 2013 1.06 2.42 3.48 2.40 5.88 Annual dollar change 1989–2000 $0.00 -$0.05 -$0.04 -$0.01 -$0.05 1989–1995 0.00 -0.04 -0.04 0.02 -0.02 1995–2000 0.00 -0.06 -0.05 -0.03 -0.08 2000–2007 0.03 0.07 0.09 0.03 0.12 2007–2013 0.01 0.00 0.01 -0.02 -0.01 Annual percent change 1989–2000 0.4% -2.1% -1.5% -0.2% -0.9% 1989–1995 0.5 -1.7 -1.2 0.6 -0.4 1995–2000 0.3 -2.6 -1.8 -1.3 -1.6 2000–2007 3.0 3.0 3.0 1.3 2.3 2007–2013 1.2 -0.1 0.3 -0.7 -0.1 * Data are for March.

** Deflated by medical care price index Source: Authors' analysis of Bureau of Labor Statistics Employer Costs for Employee Compensation public data series UPDATED FROM: Table 4.9 in The State of Working America, 12th Edition, an Economic Policy Institute book published by Cornell University Press in 2012 Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Simply put, spending on benefits and overall benefit provision are not mitigating the lack of significant wage gains in the middle and bottom of the wage distribution.

Where did the productivity growth go? To the top

We will end here by beginning to answer a question that is more fully addressed in the next section: Since it did not show up in the paychecks of the vast majority of American workers, just where did all of the productivity growth generated in the last generation go? We know from Figure A that the vast majority of workers’ pay lagged far behind economy-wide productivity growth. We also know that while workers at the 90th and 95th percentiles saw significantly faster growth than those below them in the wage distribution, even they did not see hourly wage growth exceed 1 percent per year for most of the post-1979 period. This begs the question: Where did the rest of that productivity growth go?

One simple answer (and one that will become a common theme throughout this report) is that lots of it accrued to those with the very highest wages–i.e., above the 95th percentile. These workers’ wages are so high that they are not captured in the top-coded CPS data.

Figure F turns to another data source, one that is not top-coded. It shows the growth in real annual wages using Social Security Administration (SSA) data, which allow us to tease out changes within the top 5 percent of the wage distribution. In Figure F, these data show that real annual wages of the bottom 90 percent cumulatively grew 16.7 percent from 1979 to 2007. Including the recent recessionary years, the bottom 90 percent’s annual wages grew just 17.1 percent from 1979 to 2012.

Figure F Cumulative change in real annual wages, by wage group, 1979–2012 Top 1% 95–99% 90–95% Bottom 90% Average 1979 0.0% 0.0% 0.0% 0.0% 0.0% 1980 3.4% -0.2% -1.3% -2.2% -1.4% 1981 3.1% -0.1% -1.1% -2.6% -1.7% 1982 9.5% 2.2% -0.9% -3.9% -1.9% 1983 13.6% 3.6% 0.7% -3.7% -1.1% 1984 20.7% 6.0% 2.5% -1.8% 1.2% 1985 23.0% 8.1% 4.0% -1.0% 2.4% 1986 32.6% 12.5% 6.4% 1.1% 5.3% 1987 53.5% 15.0% 7.4% 2.1% 8.0% 1988 68.7% 18.4% 8.2% 2.2% 9.7% 1989 63.3% 18.2% 8.1% 1.8% 9.0% 1990 64.8% 16.5% 7.1% 1.1% 8.3% 1991 53.6% 15.5% 6.9% 0.0% 6.5% 1992 74.3% 19.2% 9.0% 1.5% 9.8% 1993 67.9% 20.6% 9.2% 0.9% 9.1% 1994 63.4% 21.0% 11.2% 2.0% 9.8% 1995 70.2% 24.1% 12.2% 2.8% 11.3% 1996 79.0% 27.0% 13.6% 4.1% 13.3% 1997 100.6% 32.3% 16.9% 7.0% 18.0% 1998 113.1% 38.2% 21.3% 11.0% 22.9% 1999 129.7% 42.9% 25.0% 13.2% 26.6% 2000 144.8% 48.0% 26.8% 15.3% 29.9% 2001 130.4% 46.4% 29.0% 15.7% 29.3% 2002 109.3% 43.2% 29.0% 15.6% 27.2% 2003 113.9% 44.9% 30.3% 15.7% 28.0% 2004 127.2% 47.1% 30.8% 15.6% 29.2% 2005 135.4% 48.7% 30.8% 15.0% 29.6% 2006 143.4% 52.1% 32.5% 15.7% 31.2% 2007 156.2% 55.4% 34.1% 16.7% 33.4% 2008 137.5% 53.8% 34.2% 16.0% 31.4% 2009 116.2% 53.6% 35.4% 16.0% 29.9% 2010 130.9% 55.7% 35.7% 15.2% 30.8% 2011 134.0% 56.9% 36.2% 14.5% 30.7% 2012 153.6% 61.6% 39.2% 17.1% 34.8% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Source: Authors' analysis of Kopczuk, Saez, and Song (2010) and Social Security Administration wage statistics Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

In contrast, wages grew 156.2 percent for the top 1 percent of earners between 1979 and 2007, or nearly 10 times as fast as wage growth among the bottom 90 percent over the same period. And even after the fall in top wages during the Great Recession, the top 1 percent saw wage growth of 153.6 percent from 1979 to 2012. The top 0.1 percent of earners (not depicted in the figure) saw growth of 337 percent from 1979 to 2012. In contrast, the group of earners from the 95th to the 99th percentiles saw wages rise roughly in line with economy-wide productivity: 61.6 percent from 1979 to 2012, less than half that of the top 1 percent, but still 3.6 times that of the bottom 90 percent.

Only those in the top 10 percent of the wage distribution experienced wage growth that matched or exceeded the average. This extreme skew of wage gains makes clear once again that productivity gains were not broadly shared. The next section draws out the implications of this unequal wage growth for economy-wide inequality and the living standards of low- and moderate-income households in recent decades.

Section Two: Slumping of hourly wage growth for vast majority explains overall trends in income inequality

The previous section primarily reviewed trends in hourly wages for the vast majority of American workers over the past generation. This section undertakes an examination of the interplay between wages and income. Income is at the core of living standards for American families and households; it includes wages as well as returns on investments and/or government transfer payments.

This section begins by providing context for the rise in inequality and the slowdown in middle-class living standards growth that have become such salient issues in American politics. It then documents the degree to which income inequality has risen in recent decades and illustrates how the disappointing wage trends presented previously can explain the large majority of this rise in inequality. It then shows that these hourly wage trends also fully explain the dramatic slowdown in living standards growth for the vast majority of American households over the last generation–a phenomenon sometimes referred to as the “middle-class squeeze.” Next, the section explains how the rapid increase in inequality is the dominant explanation for why income growth for the vast majority since 1979 lags so far behind income growth in the preceding generation. It concludes by illustrating that hourly wage growth has made a modest contribution to middle-class income growth in recent decades.

Background: Inequality and the great slowdown of middle-class living standards growth

To put this slowdown in living standards growth into some perspective, you may recall that a 2012 paper by economist Robert J. Gordon ignited a firestorm of debate that spilled out of academia and onto the pages of the New York Times and Washington Post. This Gordon paper–titled Is U.S. Economic Growth Over?–envisioned a future dystopia where technological advance will have slowed so much that living-standards growth for the vast majority of Americans would be ratcheted down to a terrifyingly low 0.5 percent per year. But between 1979 and 2010, income growth for families between the 20th and 80th percentiles actually averaged 0.6 percent per year. If Gordon’s future seemed scary, what was worse was that the broad U.S. middle class had already lived it for decades, thanks to slow hourly wage growth.

Of course, even annual income growth of 0.6 percent leads, over decades, to incomes rising enough to no longer be considered completely stagnant, and, crucially, this income growth for the broad middle class has been noticeably better than the hourly wage growth highlighted in the previous section. Because of this, a revisionist literature has argued that the U.S. economy is actually performing much better for low- and moderate-income Americans than is generally recognized. However, declaring economic performance satisfactory for the broad American middle class rests largely on assuming that any income growth exceeding zero is acceptable.

This is far too low a threshold to be a benchmark of success; even centrally planned economies have managed to post decades of above-zero income growth for their citizens. In this section, we define two more-reasonable benchmarks against which middle-class income growth looks much less impressive. One benchmark is income growth for the broad middle class relative to overall average growth–or the growth that the economy could have delivered to all households had they all shared proportionately in these gains (which, it is important to remember, was the case for the first three-plus decades following World War II). Another benchmark is income growth relative to earlier historical epochs. What this benchmark shows is that the rise of inequality–driven by stagnant hourly wage growth–explains the vast majority of the deceleration in middle-class growth relative to earlier periods.

It is undeniably true that income growth for most Americans has managed to outpace hourly wage growth, yet it is hard to argue that this signifies an economy working well for these Americans. Further, the sources of income growth that allowed it to outpace hourly wage growth will probably operate far less strongly in coming decades. Therefore, ensuring decent income growth in the future will require raising the pace of hourly wage growth for the vast majority. These likely unsustainable sources include (1) households’ significant increase in their total hours of work in recent decades, which has helped annual labor income grow even in the face of near-flat hourly wage growth; and (2) government transfers (safety net and social insurance payments) that, combined with an aging population, have boosted incomes significantly for older Americans, which in turn has had a very significant (and positive) effect on overall income trends.

Overall trends in, and sources of, rising income inequality

Figure G shows the increase in American income inequality that has become a matter of intense political concern. It charts the cumulative percentage increase in average incomes for all households (i.e., the overall average); the bottom and middle income fifths; households between the 81st and 90th percentiles, 91st and 95th percentiles, and 96th and 99th percentiles; and the top 1 percent. Breaking the top 1 percent down even further would show nearly as dramatic an increase in inequality just within this top group, but it would also stretch the vertical axis so much as to make it nearly unreadable, so for now we will just examine the top 1 percent.

Figure G Change in average real annual household income, by income group, 1979–2010 Year All households Bottom fifth Middle fifth 81–90% 91–95% 96–99% Top 1 percent 1979/01/01 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1980/01/01 -3.3% -3.2% -3.6% -2.6% -2.2% -3.8% -4.7% 1981/01/01 -3.5% -5.5% -4.8% -3.4% -2.6% -5.4% -5.3% 1982/01/01 -3.8% -7.1% -7.0% -3.9% -3.9% -5.4% -0.8% 1983/01/01 -3.1% -9.9% -8.6% -2.8% -1.3% -2.4% 8.9% 1984/01/01 2.1% -6.2% -3.5% 3.2% 6.2% 5.5% 20.2% 1985/01/01 3.8% -5.5% -3.2% 2.6% 5.7% 6.8% 28.5% 1986/01/01 11.3% -4.6% -0.6% 8.1% 11.3% 17.2% 68.5% 1987/01/01 7.7% -4.9% -1.5% 9.0% 13.2% 15.7% 36.0% 1988/01/01 12.5% -2.4% 0.2% 10.6% 15.1% 20.2% 70.7% 1989/01/01 13.3% 1.0% 1.4% 12.3% 17.5% 22.3% 59.2% 1990/01/01 12.4% 5.0% 1.5% 10.2% 14.3% 18.4% 52.9% 1991/01/01 9.7% 6.4% -0.5% 8.3% 13.1% 15.7% 36.7% 1992/01/01 12.7% 7.6% 0.2% 9.9% 15.3% 20.3% 55.1% 1993/01/01 13.3% 9.3% 1.1% 11.3% 16.4% 20.8% 49.1% 1994/01/01 14.7% 10.4% 1.4% 13.4% 18.3% 23.5% 53.5% 1995/01/01 19.1% 14.6% 4.6% 16.4% 21.4% 29.7% 70.7% 1996/01/01 23.1% 13.4% 5.8% 18.1% 25.4% 34.4% 87.7% 1997/01/01 27.8% 15.2% 7.3% 20.5% 29.5% 42.9% 115.5% 1998/01/01 33.7% 19.0% 9.6% 24.8% 34.0% 50.1% 143.1% 1999/01/01 39.5% 21.0% 12.4% 28.8% 39.0% 56.2% 163.5% 2000/01/01 41.6% 16.7% 11.6% 30.5% 42.2% 59.5% 187.0% 2001/01/01 34.1% 19.5% 13.0% 28.2% 37.2% 49.4% 126.9% 2002/01/01 28.8% 16.5% 10.6% 26.3% 34.4% 43.4% 100.6% 2003/01/01 30.6% 15.7% 10.5% 27.4% 36.7% 47.7% 112.8% 2004/01/01 38.4% 18.6% 14.4% 32.3% 41.6% 56.6% 153.5% 2005/01/01 45.1% 21.8% 15.7% 34.4% 46.5% 68.2% 205.6% 2006/01/01 49.5% 25.4% 16.2% 37.2% 49.5% 72.6% 229.2% 2007/01/01 53.4% 29.2% 19.7% 39.1% 53.0% 78.1% 244.7% 2008/01/01 41.4% 26.1% 15.3% 35.3% 46.6% 63.0% 178.7% 2009/01/01 34.0% 26.5% 13.7% 32.9% 43.4% 53.5% 118.9% 2010/01/01 37.8% 27.6% 14.1% 33.5% 45.9% 58.9% 153.9% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: Data are for comprehensive income. Shaded areas denote recessions. To be consistent with other income and earnings measures in this paper, we use the CPI-U-RS to deflate this series, instead of the personal consumption expenditures deflator used by CBO. Source: Authors' analysis of Congressional Budget Office (2013) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Although the figure depicts trends over 1979-2010, most of this section focuses on the 1979-2007 period, as this span best shows the underlying trends toward greater inequality. This is because income trends between 2007 and 2010 were driven by the Great Recession and the extremely slow recovery. In particular, the stock market decline led to very large reductions in top 1 percent incomes in 2007-2010, as large shares of these incomes are related to asset prices.

Over 1979-2007, the results are striking. Average incomes grew by 53.4 percent. Incomes of the bottom fifth of households grew by 29.2 percent, and incomes of the middle fifth grew just 19.7 percent. Even more strikingly, income growth of households between the 81st and 90th percentiles (39.1 percent) did not come particularly close to matching overall average income growth rates, and even average income growth of households between the 91st and 95th percentiles (53.0 percent) fell short of average growth. In short, over 90 percent of American households saw below-average income growth over 1979-2007.

Income growth of households between the 96th and 99th percentiles (78.1 percent) significantly exceeded average growth. And income growth of the top 1 percent (244.7 percent) was nearly five times as rapid as overall average growth.

The data in Figure G chart comprehensive income–including cash, market-based incomes (wages and salaries, dividends, rent, capital gains, and business income); non-cash income, such as employer contributions to health insurance premiums; and cash and non-cash government transfers like Social Security, food stamps, Medicare, and Medicaid. A substantial revisionist literature in recent years has tried to make the case that these comprehensive income measures rebut the notion that the U.S. economy is performing poorly for the vast majority of American households. We address this debate a bit in a later section, but for now we simply note that the rise in American inequality is extreme even when using these comprehensive income measures. For example, the top 1 percent of households account for a higher share (34.6 percent) of the $38,178 increase in average comprehensive income that occurred between 1979 and 2007 than the bottom 80 percent of households (32.3 percent).

What is clearly true, however, is that the rise in inequality is even more extreme when focusing strictly on cash, market-based incomes. Take the now-famous data series compiled by Emmanuel Saez and Thomas Piketty that tracks cash, market-based incomes of tax units. In the Piketty and Saez data, the top 1 percent of tax units account for 84.5 percent of the rise in average income between 1979 and 2012.

Figure H demonstrates the equalizing effects of transfer payments by simply showing the top 1 percent’s share of market-based income (with and without capital gains) versus the top 1 percent’s share of transfer income in recent decades. The top 1 percent’s share of transfer income is actually slightly less than their share of the population (and obviously well under their share of total income) and is steady over the time period. Their share of market-based income starts out many multiples above their share of the population and then roughly doubles in the period before the Great Recession (rising from 9.1 percent to 20.0 percent), before taking a significant fall in 2008 and 2009 and then heading back up in 2010.

Figure H Top 1 percent share of transfer and market-based income, with and without capital gains, 1979–2010 Year Transfer income Market-based income, capital gains included Market-based income, capital gains excluded 1979 0.8% 9.1% 7.2% 1980 0.9% 10.0% 8.1% 1981 0.9% 9.8% 7.8% 1982 0.9% 10.4% 8.1% 1983 0.9% 11.0% 8.2% 1984 1.2% 11.3% 8.4% 1985 1.1% 11.7% 8.4% 1986 1.1% 14.1% 8.1% 1987 1.0% 11.6% 9.6% 1988 0.9% 13.6% 11.3% 1989 1.0% 14.0% 11.8% 1990 0.9% 13.5% 11.9% 1991 0.9% 12.2% 11.0% 1992 0.8% 13.6% 12.2% 1993 0.8% 12.8% 11.3% 1994 0.8% 12.8% 11.3% 1995 0.8% 13.6% 11.9% 1996 0.8% 14.2% 11.8% 1997 0.8% 15.4% 12.4% 1998 0.9% 16.3% 12.6% 1999 0.9% 18.4% 14.1% 2000 0.9% 19.2% 14.4% 2001 0.8% 16.1% 13.3% 2002 0.8% 14.7% 12.6% 2003 0.8% 15.2% 12.8% 2004 0.8% 17.0% 13.5% 2005 0.8% 19.3% 14.9% 2006 0.9% 19.8% 15.2% 2007 0.8% 20.0% 15.0% 2008 0.8% 17.7% 14.6% 2009 0.7% 15.1% 13.4% 2010 0.7% 16.7% 14.2% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Source: Authors' analysis of Congressional Budget Office (2013) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Slow wage growth for vast majority drives inequality

Table 3 provides some more detail on the composition of top 1 percent incomes, how the composition of their income differs from that of overall income, and how changes within and between income categories have contributed to the rise in the top 1 percent’s share of overall income. This table helps us to zero in on how stagnant wages for the vast majority are the root of the extraordinary rise in inequality in recent years.

Table 3 Decomposition of, and changes in, top 1 percent incomes, 1979-2010 Capital and business incomes Total Labor compensation Rents, interest, dividends Business income Capital gains Total Pensions Transfers Top 1% share of each income type 1979 8.4% 3.9% 25.1% 20.1% 54.6% 33.5% 4.7% 0.8% 2007 18.0% 8.6% 42.1% 48.7% 71.3% 58.7% 6.6% 0.8% 2010 14.5% 8.3% 43.0% 51.9% 79.8% 54.0% 7.5% 0.7% Share of overall income accounted for by each category 1979 100.0% 69.8% 10.1% 4.5% 3.6% 18.2% 3.2% 8.8% 2007 100.0% 60.3% 8.7% 6.2% 8.0% 22.8% 6.3% 10.7% 2010 100.0% 62.9% 6.5% 6.1% 3.4% 16.0% 7.1% 14.0% Within contributions* 1979-2007 7.2 3.0 1.6 1.5 1.0 5.2 0.1 0.0 2007-2010 0.6 -0.2 0.1 0.2 0.5 -0.9 0.1 0.0 Between contributions** 1979-2007 2.4 -0.6 -0.5 0.6 2.7 2.1 0.2 0.0 2007-2010 -4.1 0.2 -0.9 0.0 -3.5 -3.8 0.1 0.0 Total change 1979-2007 16.9% 2.5% 1.1% 2.1% 3.7% 7.3% 0.3% 0.0% 2007-2010 -8.2% 0.0% -0.8% 0.2% -3.0% -4.7% 0.1% 0.0% * Percentage-point contribution of growing concentration within each income category to increasing top 1% income share ** Percentage-point contribution of shift from less- to more-concentrated income categories to increasing top 1% income share Source: Authors' analysis of Congressional Budget Office (2013) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

The table’s overarching finding is that the rise in the top 1 percent share of overall income is explained both by their claiming an ever-larger share of each of the major types of income (their shares of labor and capital income both grew) and by the share of all income going to capital and business incomes growing significantly. This shift from labor compensation toward capital and business incomes boosts the top 1 percent income share because capital and business incomes accrue disproportionately to the top 1 percent.

The first panel simply shows the top 1 percent income share in various years, both for overall income as well as for the various sources of income identified in CBO (2013). A clear finding is that the top 1 percent share of every source of income except government transfers rose significantly between 1979 and 2007. Particularly salient is that the top 1 percent’s share of labor income more than doubled, from 3.9 percent to 8.6 percent; indeed, this is the single largest explanatory factor in this table behind the rise in the top 1 percent’s overall income share, explaining nearly a third of the increase by itself.

The next panel shows the share of overall income accounted for by each income source. The most striking finding here is the large decline in labor compensation’s share of overall income, falling from 69.8 percent in 1979 to 60.3 percent in 2007. Correspondingly, capital income’s overall share (driven mostly by capital gains and business income) rose substantially, from 18.2 percent to 22.8 percent. We have noted elsewhere (Mishel et al. 2012) that the rise in capital income’s share is driven overwhelmingly by a higher profit rate, not a rise in capital-output ratios. This means that the higher capital income share is not simply rewarding capital owners for the greater importance of capital in production (as it is not playing a larger role in overall income generation), but is instead driven entirely by an increase in the payment capital owners receive per unit of capital owned. This becomes important in how we assess the causes of the rise in the top 1 percent share.

The next two panels document two sources of the rise in top 1 percent income shares: a rising top 1 percent share (or, concentration) within each income source, and a shift in overall income shares between sources. Growing concentration within income sources could boost top 1 percent shares of overall income if, say, the top 1 percent claims an increasing share of both labor and capital incomes. Shifts in income shares between income sources can boost top 1 percent shares of overall income if, for example, there is a shift over time from less-concentrated income sources (such as labor income) to more-concentrated sources (such as capital income).

The third panel calculates how much growing concentration within each income category contributed to the increasing top 1 percent share between 1979 and 2007. The concentration within income types contributed 7.2 percentage points of the 9.6 percentage-point total increase in the top 1 percent’s income share, and 3.0 percentage points of this was concentration within labor income.

The fourth panel calculates how much the shift between income categories (from less- to more-concentrated income categories, mostly from labor to capital-like incomes) contributed to the increasing top 1 percent share of overall income over the same period. While the individual components are a bit hard to interpret, the total effect of shifts between income categories accounts for 2.4 percentage points of the total 9.6 percentage-point increase in the top 1 percent share between 1979 and 2007.

One way to summarize what these data tell us is that the vast majority of households are losing out in claiming their proportionate share of total income growth in two significant ways. First, workers as a group are losing out to capital owners, with the shift from labor to capital income explaining a significant portion of the rise of the top 1 percent. Second, middle-class households (defined in this instance as the bottom 99 percent) are able to claim only an ever-shrinking portion of the overall wage bill, with the highest-paid workers doubling their share of labor income.

In our view, these are simply two sides of the same coin: a pronounced reduction in the collective and individual bargaining power of ordinary American workers. If wages of the bottom 99 percent had kept pace with productivity growth for most of the past generation (the way they did in the preceding generation), then most of the increase in income inequality we have seen simply would not have had space to develop, as concentration within labor incomes would not have grown and the share of total output available to be claimed by capital owners would have been significantly smaller.

The toll of rising inequality on living standards for the vast majority

Inequality fueled by broad wage stagnation is by far the most important determinant of the slowdown in living standards growth over the past generation, and it has been enormously costly for the broad middle class. Figure I shows actual income growth of the broad middle class (defined as households between the 20th and 80th percentiles of the income distribution) over the generation before 2007, and growth they could have had if their incomes had simply kept pace with overall average growth (i.e., had inequality not widened over this time). The wedge between these incomes is essentially a tax on middle-class incomes imposed by rising inequality. By 2007, this implicit tax was enormous; middle-class incomes today would be roughly 23.4 percent ($17,890) higher had inequality–driven by stagnant hourly wages–not widened. This comparison makes clear why the revisionist literature on the economic health of the middle class that defines any income growth greater than zero as satisfactory is so far off base. The U.S. economy has generated enormous amounts of income–even in the post-1979 period when overall growth slowed. It can certainly provide far faster growth for the broad middle class than it has over the past generation, and its failure to do so is an economic catastrophe.

Figure I Household income of the broad middle class, actual and projected assuming it grew at overall average rate, 1979–2010 Actual Projected 1979 $61,500.85 $61,500.85 1980 $59,410.80 $59,496.24 1981 $59,165.77 $59,378.47 1982 $58,045.20 $59,190.13 1983 $57,113.42 $59,607.40 1984 $60,436.44 $62,791.97 1985 $60,455.80 $63,846.45 1986 $62,311.33 $68,438.53 1987 $61,350.34 $66,237.78 1988 $62,294.69 $69,160.78 1989 $63,135.03 $69,649.78 1990 $63,346.74 $69,117.33 1991 $62,385.30 $67,438.64 1992 $62,719.35 $69,281.92 1993 $63,536.81 $69,690.99 1994 $63,950.92 $70,539.98 1995 $65,918.30 $73,252.34 1996 $66,667.39 $75,701.52 1997 $67,763.61 $78,584.99 1998 $69,986.27 $82,248.14 1999 $71,838.84 $85,781.89 2000 $71,671.22 $87,064.80 2001 $71,700.18 $82,452.42 2002 $70,110.64 $79,223.47 2003 $70,173.65 $80,341.96 2004 $72,564.81 $85,091.74 2005 $73,697.74 $89,243.02 2006 $74,371.55 $91,962.80 2007 $76,450.81 $94,341.19 2008 $73,564.59 $86,936.24 2009 $72,740.58 $82,433.72 2010 $72,843.79 $84,733.87 Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: Data show average income of 20th–80th percentile. Source: Authors' analysis of Congressional Budget Office (2013) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Income growth for the vast majority in historical perspective

The rapid increase in inequality that began (roughly) in 1979 has not just kept incomes for the vast majority from growing as fast as the overall average, it also is the dominant explanation for why income growth for the vast majority since 1979 lags so far behind income growth in the preceding generation.

While average income growth has indeed slowed in the most recent generation compared with the period between 1947 and 1979, this overall slowdown does not explain the majority of the deceleration of income growth for the vast majority. Instead, the rise in inequality is a more important factor.

Figure J provides the evidence. In each block of bars, the left bar shows growth in various income measures from 1947 to 1979, while the center bar shows growth from 1979 to 2007 and the right bar shows growth from 2007 to 2010.

Figure J Average annual growth of various income measures, by time period 1947–1979 1979–2007 2007–2010 Per capita personal income (NIPA) 2.6% 1.7% -1.3% Per capita cash market-based income (NIPA) 2.4% 1.3% -2.6% Per capita transfer income (NIPA) 4.9% 2.6% 7.0% Cash, market-based income for bottom 90% (Piketty and Saez) 2.1% 0.2% -4.0% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Source: Authors' analysis of data from Piketty and Saez (2013, updated) and Bureau of Economic Analysis National Income and Product Accounts (Table 2.1) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

The left-most block of bars shows growth in average, per capita personal income. This grew at an annual rate of 2.6 percent in the earlier period and then slowed to 1.7 percent in the second period. This means that even without the upward redistribution over the past generation, income growth for the vast majority would have slowed simply because average income growth weakened. However, if this were the only reason for slowing middle-class income growth, the American middle class would have had a much more prosperous generation. Instead, the fruits of even this slower average growth largely bypassed the broad middle class.

The next cluster of bars shows the growth of cash, market-based income overall. This component of personal income grew by 2.4 percent annually in the first period and 1.3 percent annually in the second.

Moving right, the next cluster of bars shows the contribution of transfers and non-cash market income to the overall growth rate. This component of income grew by 4.9 percent annually in the first period and 2.6 percent annually in the second period. What this shows is the slowdown in market income growth for the vast majority post-1979 was hugely unlikely to have been compensated for by any increase in transfer incomes (while transfers continued to grow in the second period, they grew at a slower pace).

Finally, the last block of bars shows the growth of cash, market-based income for the bottom 90 percent in each period, using the Piketty-Saez data series. The upshot is clear: The collapse of growth in cash, market-based incomes for the vast majority of American households has led to a pronounced slowdown in their living standards growth, and it is implausible that this slowdown in cash, market-based income growth was somehow fully made up for by increased growth in transfers and non-cash market incomes. Again, the rising inequality of market-based incomes (fueled by broad wage stagnation) is the single most important reason why living standards growth for the vast majority has decelerated so markedly over the last generation.

Reliable sources of income growth for the vast majority? Everything but hourly wages

Finally, we review the sources of income growth for the broad middle class since 1979 and show that hourly wage growth made only a meager contribution to income growth over this time. Table 4 shows the sources of income growth for the broad middle class by income type.

Table 4 Change in average comprehensive income for households in the 20th–80th percentile, by income source, 1979–2010 (2013 dollars) Labor compensation Social insurance/safety net Total Wages and salaries Employer-sponsored insurance Total Capital and business income Pensions Cash Non-cash* Total 1979 $61,432 $45,349 $2,135 $47,484 $5,826 $2,329 $4,506 $1,287 $5,793 1989 63,133 42,304 2,364 44,667 6,454 4,220 5,388 2,404 7,792 1995 65,900 42,259 3,056 45,316 5,204 5,290 6,138 3,952 10,091 2000 71,715 46,438 2,736 49,174 5,698 6,765 6,063 4,015 10,078 2007 76,474 46,946 3,624 50,569 5,343 7,358 7,003 6,202 13,204 2010 72,820 42,296 3,344 45,640 3,744 7,470 8,875 7,091 15,966 Change 1979–2007 ($) $15,042 $1,597 $1,489 $3,085 -$483 $5,028 $2,496 $4,915 $7,411 1979–2007 (% of total change) 100.0% 10.6% 9.9% 20.5% -3.2% 33.4% 16.6% 32.7% 49.3% * Includes value of Medicare, Medicaid, food stamps, and other non-cash government transfer payments Source: Authors' analysis of Congressional Budget Office (2013) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

What immediately stands out is the modesty of the contribution made by labor income (which is the sum of wages and salaries plus employer-provided health insurance). Between 1979 and 2007, the growth of labor income ($1,597 in wages and salaries, $1,489 in health benefits) can account for only 20.5 percent of the entire increase ($15,042) in comprehensive income for the broad middle class. It is crucial to remember that in 1979, labor income accounted for 77.3 percent of total household income for the broad middle class, so the fact that it contributed just 20.5 percent of the growth between 1979 and 2007 means that it punched far below its weight. Transfers, on the other hand, can account for essentially half of the income growth over that time period (and non-cash transfers, which are dominated by health programs like Medicare and Medicaid, account for nearly a third of all income growth over that period).

Of course, part of the explanation for this outsized importance of transfers–the bulk of which are directed toward older households–is demographic shifts over this time. Table 5 carries out the same exercise but excludes households classified as both elderly and childless (in what follows, we will refer to this group as “non-elderly households” for the sake of brevity). This group should skew much more heavily toward those most reliant on their job for income.

Table 5 Change in average comprehensive income for households in the 20th–80th percentile, by income source, excluding elderly/childless households, 1979–2010 (2013 dollars) Labor compensation Social insurance/safety net Total Wages and salaries Employer-sponsored insurance Total Capital and business income Pensions Cash Non-cash* Total 1979 $64,738 $52,624 $2,468 $55,092 $4,794 $1,655 $2,456 $740 $3,196 1989 67,481 52,777 2,955 55,732 5,162 3,183 2,393 1,011 3,404 1995 70,586 53,014 3,875 56,889 4,510 4,108 2,920 2,160 5,080 2000 76,029 57,606 3,406 61,012 4,917 5,226 2,791 2,083 4,874 2007 80,335 58,410 4,503 62,912 5,002 5,539 3,341 3,542 6,882 2010 76,640 53,749 4,285 58,035 3,755 5,531 4,945 4,374 9,319 Change 1979–2007 ($) $15,598 $5,785 $2,035 $7,820 $208 $3,884 $885 $2,801 $3,686 1979–2007 (% of total change) 100.0% 37.1% 13.0% 50.1% 1.3% 24.9% 5.7% 18.0% 23.6% * Includes value of Medicare, Medicaid, food stamps, and other non-cash government transfer payments Note: Data are derived from weighted average of non-elderly childless households and households with children. Source: Authors' analysis of Congressional Budget Office (2013) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

For this group of households, labor income makes a much larger contribution to total income growth over the past generation. Labor income rose for this group by $7,820 ($5,785 from wages and salaries and $2,035 from employer-provided health insurance), accounting for 50.1 percent of the $15,598 in total income growth between 1979 and 2007. Of course, this still means that labor income growth seriously underperformed, as labor income accounted for 85.1 percent of total household income for non-elderly households in 1979.

Most importantly, the $7,820 growth in annual labor income seen by non-elderly households in the broad middle class between 1979 and 2007 was driven overwhelmingly by increased hours of work per year instead of growth in hourly pay.

Table 6 shows the growth in hours by working-age households over time, a measure that takes into account changes in the number of workers per household (including a rise in two-earner households) and the increased average annual work time for each earner in the household. By 2007, households in the broad middle class worked an average of 9.2 percent more (or 290 extra hours) per year than in 1979.

Table 6 Contribution of hours versus hourly wages to annual wage growth for working-age households, by income group, selected years, 1979–2012 (2012 dollars) Period changes 1979 1989 1995 2000 2007 2012 1979–2007 2007–2012 1995–2000 Real average annual wages Second fifth $33,471 $34,472 $33,377 $37,580 $36,725 $32,693 9.3% -11.0% 12.6% Middle fifth $50,279 $52,800 $51,608 $57,501 $56,710 $52,477 12.0% -7.5% 11.4% Fourth fifth $67,785 $73,463 $74,156 $82,464 $82,902 $78,831 20.1% -4.9% 11.2% Average of above $50,512 $53,578 $53,047 $59,182 $58,779 $54,667 13.8% -7.8% 11.7% Annual hours worked Second fifth 2,543 2,797 2,811 2,908 2,787 2,663 9.2% -4.5% 3.5% Middle fifth 3,007 3,273 3,323 3,395 3,335 3,228 10.3% -3.2% 2.2% Fourth fifth 3,424 3,604 3,688 3,774 3,719 3,602 8.3% -3.1% 2.3% Average of above 2,991 3,225 3,274 3,359 3,280 3,165 9.2% -3.5% 2.6% Implicit household wages per hour worked Second fifth $13.16 $12.32 $11.87 $12.92 $13.18 $12.28 0.1% -6.8% 8.8% Middle fifth $16.72 $16.13 $15.53 $16.94 $17.01 $16.26 1.7% -4.4% 9.0% Fourth fifth $19.80 $20.38 $20.11 $21.85 $22.29 $21.88 11.8% -1.8% 8.7% Average of above $16.56 $16.28 $15.84 $17.24 $17.49 $16.81 5.5% -3.9% 8.8% Contributions to annual wage growth Hours worked Second fifth – – – – – – 99.0% 40.6% 27.4% Middle fifth – – – – – – 85.9% 42.7% 19.1% Fourth fifth – – – – – – 41.1% 63.9% 20.8% Average of above 75.3% 49.1% 22.4% Hourly wages Second fifth – – – – – – 1.0% 62.2% 70.1% Middle fifth – – – – – – 14.1% 59.2% 79.2% Fourth fifth – – – – – – 58.9% 37.2% 77.4% Average of above 24.7% 52.9% 75.6% Note: Working-age households are those headed by someone under age 65. Percentage changes are approximated by taking the difference of natural logs of wages and hours. Source: Authors' analysis of Current Population Survey Annual Social and Economic Supplement microdata Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

As just noted in the discussion of Table 5, annual labor earnings (including employer-provided benefits, which are not tracked in the wage data shown in Table 6) rose by $7,820 between 1979 and 2007 for non-elderly households in the broad middle class. This constituted a 14.2 percent increase in annual earnings, which implies that the 9.2 percent increase in hours can explain about two-thirds of the rise in annual labor income over that period (as 9.2 percent is roughly two-thirds of 14.2 percent). Increased hourly compensation thus only accounts for the remaining third. The upshot of this analysis is that rising hourly labor earnings can account for just over 17 percent (one-third of the 50.1 percent contribution of annual earnings) of the rise in total broad middle class family incomes–even for largely working-age households–between 1979 and 2007.

Finally, it is staggering how much of the $7,820 in labor income growth between 1979 and 2007 was driven by the five years between 1995 and 2000: 52.7 percent. This late 1990s period was, of course, a time when unemployment rates reached their lowest levels in generations. This full-employment boom provided some real bargaining power to workers across the wage distribution that resulted in the only period of broad-based wage growth over the last four decades. Further, the annual wage increases in this period were predominantly driven by increased hourly compensation, not simply longer hours. In fact, in the 23 years between 1979 and 2007 that do not include the tight labor markets of the late 1990s, annual labor income growth averaged just 0.3 percent for the broad middle class, and hourly compensation actually declined slightly.

There are several important lessons to draw from this examination. First, a return to full employment should be much more of a pressing policy priority than it currently is. Second, and most relevant to this project, we simply must find ways to give American workers some genuine bargaining power even in those periods when full employment does not prevail. Think of a worker who began her career in 1979: By 2013 she would have spent only five years out of her 34-year working life in an economy with near full employment. Relying solely on achieving and sustaining full employment as a strategy for boosting wages does not seem like a promising avenue on its own.

As shown in Table 5, the remaining major contributions to total income growth between 1979 and 2007 for non-elderly households in the broad middle class are made by pensions (24.9 percent) and transfers (23.6 percent). It is important to note, however, that pension income growth among this group has slowed rapidly post-2000. Between 2000 and 2010, for example, average pension income for this group grew only $305, compared with growth of more than $1,500 between 1979 and 1989, and growth of over $2,000 between 1989 and 2000. In short, whatever is driving the ability of market-based pensions to contribute to income growth for the vast majority seems to be losing steam.

The rise in transfers could reflect either a growing (though still quite small) share of households with children headed by somebody over age 65, or an increase in multigenerational households with some member(s) receiving transfers targeted to older recipients (Social Security and/or Medicare). Whatever the cause, the implication remains that transfer income has been a rare and disproportionate source of good news for incomes of the vast majority, and preservation at least (if not outright expansion and deepening) of these incomes should hence be a key policy priority moving forward.

Clearly, the root cause of both rising inequality and the middle-class squeeze is slow hourly wage growth for the vast majority. Following sections will detail how slow hourly wage growth also plays a starring role in eroding progress on many other fronts of economic life, including poverty, asset-building and retirement security, social mobility, and macroeconomic stability.

Section Three: Wage stagnation stalls progress in reducing poverty

Besides leading to a pronounced slowdown in living standards of the broad middle class, the failure of wages to grow for the vast majority is also the leading reason why progress in reducing poverty has stalled over the last three decades. In fact, the more one looks at trends for the bottom fifth of households, the more they look like those for the broad middle class. Workers at the bottom have worked longer hours and become increasingly educated, but their hourly wages have not been buoyed by rising productivity. For those concerned about poverty, the foremost policy priority should be raising wages.

This section begins by explaining how wage-driven inequality has led to a decoupling of economic growth and poverty reduction. It then demonstrates that poverty reduction over the last few decades is due not to wage growth, but to an improved social safety net. The section then illustrates the importance of wages to the living standards of the bottom fifth before examining demographic characteristics of workers earning poverty-level wages. It concludes by showing that inequality dwarfs family structure and demographics as a driver of poverty trends.

Rising inequality has decoupled economic growth and poverty reduction

Figure K illustrates the stakes by showing how rising inequality (driven by stagnant wages) has delinked economic growth and poverty reduction. Economic growth used to be associated with significant poverty reductions, but since the 1970s the benefits of aggregate growth for lowering poverty have largely stalled. The figure compares the actual poverty rate with a simulated poverty rate based on a model of the statistical relationship between growth in per capita gross domestic product (GDP) and poverty that prevailed between 1959 and 1973. The model forecasts poverty quite accurately through the mid-1970s. Since then, the actual poverty rate stopped falling and has instead fluctuated cyclically within 4 percentage points above its trough in 1973.

Figure K Poverty rate, actual and simulated,* 1959–2012 Simulated poverty rate* Actual poverty rate 1959 22.0% 22.4% 1960 21.9% 22.2% 1961 21.8% 21.9% 1962 20.6% 21.0% 1963 19.8% 19.5% 1964 18.6% 19.0% 1965 17.1% 17.3% 1966 15.4% 14.7% 1967 14.9% 14.2% 1968 13.7% 12.8% 1969 13.0% 12.1% 1970 13.3% 12.6% 1971 12.6% 12.5% 1972 11.1% 11.9% 1973 9.4% 11.1% 1974 9.9% 11.2% 1975 10.4% 12.3% 1976 8.7% 11.8% 1977 7.3% 11.6% 1978 5.5% 11.4% 1979 4.7% 11.7% 1980 5.3% 13.0% 1981 4.6% 14.0% 1982 5.9% 15.0% 1983 4.3% 15.2% 1984 1.6% 14.4% 1985 0.1% 14.0% 1986 -1.1% 13.6% 1987 13.4% 1988 13.0% 1989 12.8% 1990 13.5% 1991 14.2% 1992 14.8% 1993 15.1% 1994 14.5% 1995 13.8% 1996 13.7% 1997 13.3% 1998 12.7% 1999 11.9% 2000 11.3% 2001 11.7% 2002 12.1% 2003 12.5% 2004 12.7% 2005 12.6% 2006 12.3% 2007 12.5% 2008 13.2% 2009 14.3% 2010 15.1% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. * Simulated poverty rate is based on a model of the statistical relationship between growth in per capita GDP and poverty that prevailed between 1959 and 1973. Source: Authors' analysis of Current Population Survey Annual Social and Economic Supplement Historical Poverty Tables (Tables 2 and 4), Bureau of Economic Analysis National Income Product Accounts (Table 7.1), and Danziger and Gottschalk (1995) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

However, the simulated poverty rate shows that if the relationship between per capita GDP growth and poverty that prevailed from 1959 to 1973 (wherein poverty dropped as the country, on average, got richer) had held, the poverty rate would have fallen to zero in the mid-1980s. Therefore, broadly shared prosperity could have led to a near eradication of poverty in the United States, but it did not.

Poverty reductions in recent decades are due to taxes and transfers, not wages

Any progress achieved in reducing poverty since 1967 has been wholly due to an improved social safety net and in spite of the deterioration of wages earned by low-income households. This can best be seen using a comprehensive measure of income that incorporates not only market-based incomes (such as wage income) but also government in-kind support (such as Supplemental Nutrition Assistance Program [SNAP] benefits, health care benefits, and housing subsidies), cash transfers (through Temporary Assistance for Needy Families [TANF], Social Security, unemployment benefits, etc.), and tax benefits (e.g., the earned income tax credit [EITC]). A less comprehensive measure, such as the official Census measure, would not show any reduction in poverty as SNAP or earned income tax credits expand, since it does not include those income sources.

Figure L displays both market-based poverty rates (poverty rates if wages were the only source of income and government provided no support) and post-tax, post-transfer poverty rates (poverty rates once government supports have been included) for the non-elderly population (those under age 65). In 1967, market outcomes yielded a non-elderly poverty rate of 18.4 percent, but actual poverty, when counting tax-and-transfer programs, was lower, 17.2 percent, indicating the social safety net reduced poverty by 1.2 percentage points. Forty years later, in 2007, the market produced greater poverty (18.9 percent) among the non-elderly population despite the 85.4 percent increase in productivity since 1967. But in 2007 the safety net lowered the non-elderly poverty rate by a full 5 percentage points, to 13.9 percent. These data indicate, therefore, that the entire improvement (or, more than the entire improvement) in reducing observed non-elderly poverty from 17.2 percent in 1967 to 13.9 percent in 2007 was due to the safety net.

As a result of less work and lower wages in the Great Recession, the market-based non-elderly poverty rate rose to 24.4 percent in 2012, substantially higher than in 1967. Fortunately our safety net programs became stronger in the recession and prevented actual poverty from rising beyond 16.1 percent. Nevertheless, it is remarkable that economic outcomes generated a situation in 2012 where nearly one in four non-elderly households would have been poor if there were no government support, up from 18.4 percent in 1967.

Overall, this figure demonstrates that although the safety net has made some progress toward reducing poverty, the tax-and-transfer system alone is inadequate; wage gains are also necessary. Without hourly wage increases, the tax-and-transfer system needs to work harder and harder simply to keep poverty rates from increasing.

One way the bottom fifth looks middle class: Wages are crucially important

Over the last three-and-a-half decades, wages and wage-related safety-net income (from such sources as the EITC) have grown in importance to low-income households. This is the case because their work hours have increased and government support through cash assistance has diminished as programs such as TANF have become far less generous.

Figure M displays the major sources of income for non-elderly households in the bottom fifth of the income distribution from 1979 to 2010. It shows that incomes of the bottom fifth are increasingly dependent on ties to the workforce. Wages, employer-provided benefits, and tax credits that are dependent on work (such as the EITC) made up 69.7 percent of non-elderly bottom-fifth incomes in 2010, compared with only 57.5 percent in 1979. While government in-kind benefits from sources such as SNAP and Medicaid have increased from 13.2 percent of these bottom-fifth incomes in 1979 to 18.3 percent in 2010, cash transfers such as welfare payments have declined 8.2 percentage points (from 18.7 percent to 10.5 percent). For better or worse, the safety-net system has clearly become increasingly tied to work through programs such as the EITC and the child tax credit, which overwhelmingly benefit households with labor earnings. Consequently, efforts to improve the incomes of low-income households must feature efforts to boost labor earnings.

Figure M Share of income of the non-elderly* bottom fifth accounted for by wage-related income, in-kind income, and cash transfers, 1979–2010 Cash transfers (e.g., Social Security, UI, TANF) In-kind benefits (e.g., SNAP, Medicaid) Wage-related income (wages, benefits, and tax credits [e.g., EITC]) 1979 18.7% 13.2% 57.5% 1980 19.4% 13.5% 56.6% 1981 19.2% 13.5% 56.9% 1982 20.3% 14.3% 56.0% 1983 20.0% 15.4% 55.1% 1984 17.1% 13.3% 57.6% 1985 17.9% 14.5% 56.8% 1986 17.1% 14.8% 56.5% 1987 17.6% 16.9% 54.5% 1988 17.1% 16.5% 55.1% 1989 15.2% 16.1% 57.5% 1990 14.5% 17.5% 57.8% 1991 14.6% 17.7% 58.2% 1992 14.3% 17.9% 59.6% 1993 14.1% 18.5% 58.1% 1994 13.7% 18.7% 59.6% 1995 11.9% 16.7% 63.4% 1996 11.6% 16.0% 65.1% 1997 10.7% 14.0% 67.5% 1998 9.6% 13.2% 69.8% 1999 9.3% 12.5% 69.1% 2000 9.1% 12.6% 69.1% 2001 8.6% 15.6% 70.2% 2002 9.5% 15.2% 69.5% 2003 9.0% 15.5% 70.1% 2004 8.6% 15.9% 70.1% 2005 7.5% 15.7% 71.7% 2006 6.7% 15.8% 71.9% 2007 6.6% 16.1% 71.3% 2008 7.7% 16.7% 74.3% 2009 10.2% 18.6% 70.3% 2010 10.5% 18.3% 69.7% Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. * Data are derived from weighted average of non-elderly childless households and households with children. Note: Wages and benefits, cash transfers, in-kind income, and tax credits comprise 98.5 percent of all pretax income for the bottom fifth non-elderly population in 2010. The other 1.5 percent is made up of capital gains, proprietors' income, other business income, interest and dividends, and other income. Source: Authors' analysis of Congressional Budget Office (2013) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Efforts to boost living standards for the bottom fifth often focus intensely on the design of public transfers and tax credits. However, while transfers and tax credits are clearly important to families in the bottom fifth, it is crucial to recognize that this group depends on pay from the labor market for the majority of their income. And, as Table 7 shows, increases in annual wages at the bottom stemmed primarily from increased annual hours worked rather than from increased hourly wages.

Table 7 Contribution of hours versus hourly wages to annual wage growth for working-age households, by income group, selected years, 1979–2013 (2013 dollars) Period changes 1979 1989 1995 2000 2007 2013 1995 – 2000 2007 – 2013 1979 – 2007 Real average annual wages All $61,845 $68,199 $72,705 $81,686 $81,567 $80,324 11.6% -1.5% 27.7% Bottom fifth $15,114 $15,383 $14,856 $17,697 $17,094 $15,360 17.5% -10.7% 12.3% Annual hours worked All 3,092 3,286 3,317 3,378 3,314 3,253 1.8% -1.9% 6.9% Bottom fifth 1,716 1,884 1,837 1,977 1,880 1,725 7.4% -8.6% 9.2% Implicit household wages per hour worked All $20.00 $20.75 $21.92 $24.18 $24.61 $24.70 9.8% 0.3% 20.8% Bottom fifth $8.81 $8.16 $8.09 $8.95 $9.09 $8.91 10.1% -2.1% 3.2% Contributions to annual wage growth Hours worked All – – – – – – 15.8% 121.3% 25.0% Bottom fifth – – – – – – 42.2% 80.7% 74.4% Hourly wages All – – – – – – 84.2% -21.3% 75.0% Bottom fifth – – – – – – 57.8% 19.3% 25.6% Note: Working-age households are those headed by someone under age 65. Data are for money income. Percentage changes are approximated by taking the difference of natural logs of wages and hours. Source: Authors' analysis of Current Population Survey Annual Social and Economic Supplement microdata Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Among working-age households, annual earnings in the bottom fifth grew a modest 12.3 percent from 1979 to 2007, rising from $14,898 to $16,849. However, the bulk of the improvement (nearly three-fourths) was due to more work (increased annual hours of work), while only a small part of the improvement (one-fourth) was due to higher earnings per hour worked (rising wage rates). This means there was very little growth in hourly earnings of low-wage workers between 1979 and 2007.

Between 1979 and 2007, annual hours worked by bottom fifth working-age households rose by 165 hours, while (inflation-adjusted) average hourly wages of the bottom fifth rose by $0.28. As noted previously, the late 1990s was the only period of sustained wage growth over the last four decades. Outside of this period, wages were either stagnant or fell for low-wage workers. This can be seen by comparing the actual 1979-2007 outcomes with those that would have prevailed had the late 1990s boom not occurred. Without the late 1990s, annual hours of bottom-fifth workers still would have increased, thoug