Divided

In 2012 dollars, the median wage in America has been stuck at slightly more than $500 per week since 1999, and the average income of the bottom 90 percent of Americans has been falling. In 2012 it fell back to the level of 1966 when Lyndon Johnson was president. A Harvard professor of social policy explains the reasons for these trends.

The American economy turned out $7.6 trillion worth of consumer goods and services in 2004—enough to provide every man, woman, and child with almost $26,000 worth of food, housing, transportation, medical care, and other things. If all that stuff had been divided equally, the typical household, which now has three members, would have gotten about $78,000 worth.

Yet as an abundance of recent research confirms—and as all can plainly see—many Americans had to scrape by on far less than that. About one American worker in six reported having been paid less than $8 an hour in 2003. That works out to less than $17,000 a year even for someone employed full-time. And many low-wage workers earned far less than $17,000 because they were unemployed part of the year, worked fewer than forty hours a week, or earned under $8 an hour.

Some of those low-wage workers were teenagers who didn’t have to pay most of their own expenses, much less support anyone else. For them, $8 an hour was a pretty good wage. But many of America’s low-wage workers were single mothers trying to support a family. Others were married men whose wives stayed home with their children. These workers are eligible for the Earned Income Tax Credit, but most of them still find making ends meet a constant challenge.

Most Americans think these workers deserve a better deal and tell pollsters that the minimum wage (currently $5.15 an hour) should be raised. But a market economy is not designed to ensure that workers get paid what other people think they deserve. The logic of a market economy is that we should all be paid the smallest amount that will ensure that our work gets done, and that is what low-wage workers generally receive.

American economists and business leaders have long argued that the best way to improve low-income families’ standards of living is to make the economy more productive. At times economic growth truly has benefited almost everyone. When World War II dragged the United States out of the Great Depression, unskilled workers and their families gained proportionately more than most other Americans. Even after the war ended, the rich and the poor enjoyed roughly similar percentage gains in income until the early 1970s. So when John F. Kennedy said “a rising tide lifts all boats,” he was describing the experience of his generation. Since 1973, however, things have been very different. Productivity and national income have increased but wages have diverged.

Measuring changes in purchasing power is complicated and contentious, but the best historical measure is probably what the Commerce Department’s Bureau of Economic Analysis calls the chain price index for personal consumption expenditure. Using this measure, the nation’s output of consumer goods per worker rose 58 percent between 1973 and 2003. Yet if we use the same price index to measure the mean hourly earnings of nonsupervisory workers, we find that they rose only 6 percent.

Among men without any college education, real wages have actually fallen since 1973. Immigrants now do many of the jobs that native-born high school graduates would once have done, and this competition has driven down wages. As a result, male high school graduates and dropouts are having more trouble supporting a family.

Meanwhile, more women have entered the labor force, and their tolerance for men who cannot pay the bills has diminished, especially if these men are also hard to live with, as they often are. Marriage rates have fallen, and divorce rates exceed 50 percent among couples with below-average earning power. More than half of all mothers without college degrees now spend some time as a single parent. Most married couples now feel that they need two breadwinners rather than one. Partly for that reason, the number of workers has grown more than the adult population, while the number of children has grown less than the adult population.

The net result of all these changes is that while the economy grew dramatically between 1973 and 2004, most of the benefits went to those who needed them least: affluent, college-educated couples.

The best trend data on household income now come from the Congressional Budget Office (CBO), which pools data collected by the Census Bureau with data on similar individuals collected by the Internal Revenue Service. These figures, which are available from 1979 through 2000, allow the CBO to calculate households’ total income, including capital gains and noncash benefits like food stamps, and also to subtract taxes.

Mean household income rose 40 percent between 1979 and 2000. But in sharp contrast to the situation between 1940 and 1973, more than a third of the total increase since 1979 has gone to the richest 1 percent of all households, and another third has gone to the next richest 19 percent. That hasn’t left much for the bottom 80 percent. While the incomes of the top 1 percent tripled between 1979 and 2000, the income of the median household rose only 15 percent, and the incomes of those in the bottom quintile rose only 9 percent. The gains at the bottom almost all came between 1994 and 2000.

The moral of this story seems clear: while economic growth is almost always a necessary condition for improving the lives of those in the bottom half of the income distribution, America’s experience over the past generation shows that growth alone is not sufficient.

So what makes the difference? Why are the benefits of growth sometimes widely shared and sometimes not? If you ask economists and business leaders why households in the bottom half of the distribution have benefited so little from economic growth since 1973, they tend to talk about impersonal forces like globalization, computers, and skill deficits. But if these explanations were sufficient, we would see the same pattern in every rich country, and we don’t.

The Luxembourg Income Study (LIS) now provides roughly comparable measures of how household income is distributed in most wealthy democracies. Data on Britain, Canada, France, Germany, Sweden, and the United States are available back to the 1970s. Even then the United States was the most unequal of the six nations. Sweden was the most equal. But at that time, Canada, Britain, France, and Germany all looked more like the United States than like Sweden.

Since then the distribution of household income has grown substantially more unequal in both Britain and the United States, while hardly changing at all in Canada, France, Germany, or Sweden. The LIS has data going back to the 1980s on a number of other rich democracies. This body of evidence also tells a mixed story. Household income inequality increased somewhat in Australia, Austria, Belgium, Finland, and Norway, but it has hardly changed in Denmark, Ireland, or the Netherlands.

Today the United States is by far the most unequal rich democracy in the world.

Impersonal forces like globalization, computerization, and skill deficits are not promising explanations for these differences. Most of the countries with stable income distributions are even more dependent than the United States on the global economy. Computer use and sales spread faster in the United States than in most other countries, but by the end of the 1990s, computers had permeated every affluent society. Thus, if the skills required to use computers or interpret their output were in short supply, and if this explained the run-up in inequality, we should now see the same pattern in every technically advanced society.

The International Adult Literacy Survey does suggest that workers’ reading and math skills are somewhat more unequal in the United States than in the other wealthy countries, but because the correlation between these skills and workers’ earnings is quite modest, the distribution of such skills cannot explain why inequality is greater in the United States.

A somewhat more credible story points to faster growth in postsecondary school enrollment in Europe than in the United States, which could have kept the price of skilled labor lower in Europe. But European workers still have less schooling than their American counterparts, and educational change cannot easily explain why European workers’ pay is more equal than ours.

So why do ordinary American workers get to keep less of what they produce than ordinary workers in other rich countries? And why is this form of American exceptionalism becoming more pronounced? The answer turns out be pretty simple: “It’s politics, stupid.” Political scientists have been churning out papers on this question for more than a decade, and while the details differ, they mostly tell a broadly similar story. At least in rich democracies, differences in income distribution seem to be traceable to differences in constitutional arrangements, electoral systems, and economic institutions. Those differences in turn affect the political balance between left and right, the level of spending on the welfare state, and a wide range of economic policies.

Economic inequality is less pronounced in countries where the constitutional system has few veto points, allowing the government of the day to make fundamental changes. Rules that favor a multiparty system rather than a two-party system also produce more equal economic outcomes. So does proportional representation. Such arrangements apparently make it more likely that a ruling coalition will seek to protect labor unions, raise the minimum wage, and centralize wage negotiations, all of which tend to reduce wage inequality. Such coalitions also tend to expand the welfare state.

If you think all of this sounds very different from the United States, you are right. The men who drafted the U.S. Constitution were property holders. Most of them worried about the possibility that democratic governments might be tempted to appropriate their property, or at least impose very high taxes in order to provide benefits to less affluent voters. The founders wanted a system of government that would make such populism easy to resist, and to a large extent they got what they wanted.

Despite the subsequent spread of cultural egalitarianism, both federal and state legislators have remained remarkably solicitous of property holders’ rights. Legislators have also shown a persistent preference for relying on private markets rather than public institutions to make economic decisions.

These legislative priorities enjoy broad popular support. Americans are less likely than Europeans to tell pollsters that income differences are too large. Americans are also more suspicious of government than Europeans, which means that Americans are less likely to endorse policies for reducing wage inequality that involve government “meddling” in the marketplace. But these attitudes are not built into Americans’ DNA, nor are they an inescapable legacy of our history. In part, of course, they reflect the public’s tendency to endorse the institutional status quo, which most Americans think has served the nation well.

The promarket consensus also reflects the influence of journalists and political pundits, most of whom seem to be even more skeptical about government than about private enterprise or the current influence of the business elite. This consensus owes something to the absence of a political party that questions it. The absence of such a party derives both from rules that make third parties extremely difficult to organize and from a system of campaign finance that makes every party dependent on rich contributors.

But none of these obstacles to redistribution is insuperable. Americans are not as unhappy as Europeans about economic inequality, but most Americans still say that income differences are too large and, by a sizable majority, favor increasing the minimum wage. While there are certainly institutional obstacles to redistribution, most of those obstacles also existed between 1940 and 1970, when the distribution of income became more equal.

Low-wage America is a mosaic of occupations and industries. Many tightfisted employers face relentless competitive pressure to cut costs, and many are operating in fields where logistical considerations and other factors make it particularly easy to knock down wages domestically or ship work overseas.

In almost every line of business, though, executives turn out to have a good deal of discretion about how they structure and reward work. Some take the low road and squeeze their frontline workers, driving down wages and working people harder. Others take the high road, adopting new technologies that keep their operations competitive, upgrading workers’ skills, and reorganizing the way work gets done.

You can find instances of both in the same sector of the economy. In retailing, for example, Walmart has been a Wall Street darling, in part because of its low wages and stingy benefits, which analysts and investors associate with high profits.

But Costco, whose warehouse sales outlets directly compete with Walmart’s Sam’s Club stores, has achieved similarly impressive results while paying its workers about 40 percent more in wages (an average of $15.97 an hour in 2004, compared to Walmart’s $11.52) and providing much more generous and inclusive (and costly) health insurance. In return, Costco gets a remarkably productive and loyal workforce; only 6 percent of its employees leave after the first year, compared with 21 percent at Sam’s. “I’m not a social engineer,” says Costco CEO James D. Sinegal. “Paying good wages is simply good business.”

You can find plenty of success stories along the high road. Indeed, it defies common sense as well as economic logic to believe that a poorly skilled and badly paid American workforce could, in anything but the very short run, be the key to global competitiveness (never mind an attractive society). Which road a firm chooses depends on the social context in which its managers operate. They are more likely to take the high road if they are connected to institutions, public and private, that promote such alternatives. The U.S. system for connecting highly skilled work to advanced technology, unfortunately, is rudimentary and fragmented. Managers are also more likely to choose the high road if they face a strong progressive union that can make abusing workers costly while simultaneously making collaborative efforts between workers and managers easier. But American business is almost uniquely hostile to unions.

The experience of other countries suggests that managers will also be more inclined to choose the high road if they have to pay a high minimum wage, forcing them to think more inventively about how to keep a firm competitive. Perhaps most important, managers will be more likely to take the high road if they are honored and rewarded for doing so. Too often, sadly, the honor and the rewards go to those who drive wages down instead of up.

Adapted from Inequality Matters: The Growing Economic Divide in America and Its Poisonous Consequences, ed. James Lardner and David A. Smith.