 | | Kip Beckman
Principal Research Associate,
Economic Services |
The Occupy Wall Street Movement that emerged last autumn in the United States and quickly spread around the world was, in large part, a reaction to the incredible increase in income inequality that has transpired over the past few decades. The rich have become even richer while the income of everyone else in the United States has either remained stagnant or declined. Unfortunately, the reasons behind the disparity in income suggest that growing income inequality will be a difficult challenge to solve over the next few years.
The United States has historically trumpeted the fact that it is a middle class society. However, changes in income distribution since the late 1970s belie this claim. The share of income going to the top 1 per cent of US families grew from 8 per cent in 1979 to 18 per cent in 2008. In fact, the gains are even greater the further one goes up the income distribution scale. The super-rich—families at the 99.99th percentile—saw their real incomes surge by over 300 per cent between the late 1970s and 2008! At the same time, real median household incomes increased by a miniscule 7 per cent. Even when household income is adjusted to include benefits such as employer contributions to healthcare plans, income for average American families has only grown by around 1 per cent per year since 1980.
Why have household incomes for middle- and lower middle-class families stagnated so much over the past few decades? Globalization and technological change are major factors and, for those at the very bottom of the scale, the drop in the minimum wage has hurt. The minimum waged declined by around one-third in real terms during the 1980s. Also, the real trade-weighted value of the greenback increased by 50 per cent between 1980 and 1985. This surge led to massive job losses for lower-skilled workers in, for instance the textile industry, which was decimated by a flood of imports.
Many of the pressures on low-skilled workers have started to ease and even reverse course recently. The dollar depreciated sharply throughout much of the 2000s while the real minimum wage has stabilized. However, the role of technology and the forces of globalization that are influencing the income of low- and middle-income families have persisted. Of course, globalization (i.e. openness to trade and investment) and technological change are good for an economy in that they boost productivity growth and increase competition, which results in higher output and income over the long term. Productivity growth in the US economy started to surge in the late 1990s and has resulted in rising incomes for some segments of the labour market—but certainly not all. Technological change has led to restructuring of US labour markets and the loss of bargaining power for some workers, especially those in lower skilled jobs.
The fact that technological change reduces the demand for low-skilled workers is nothing new—remember the telephone operators who were replaced by electronic switchboards. However, the impact of technological change has moved up the income ladder in recent years. The automation of routine jobs is no longer simply a problem for low-skilled workers—technology now affects workers in the middle class with medium skills as well. For instance, computer programs are capable of reviewing case law and legal precedent more efficiently than humans, which has lowered the demand for legal clerks. The analysis of X-rays by technicians can be outsourced to India and the growing use of pattern-recognition software implies that eventually, these jobs may be completely computerized—which will boost productivity in health care.
Technology and outsourcing helps explain why the incomes of low- and middle-class families have stagnated over the past few decades, but it doesn’t adequately address the issue of why pay for the super-rich CEOs has soared so much in the past 10 to 15 years. One possible explanation could be the increasing use of stock options since the early 1990s. Ironically, legislation passed by Congress in 1993 may have inadvertently contributed to the rise of stock option compensation for CEOs. This law limited the tax deductibility of any compensation above $1 million in the form of standard salary and bonus pay. As a consequence, companies started to increase the portion of CEO pay in stock options. This factor, combined with surging profitability at the time, has resulted in astronomical pay in the tens of millions of dollars for CEOs. Many CEOs now make even more money than professional athletes!
Unfortunately, the long-term trend in sluggish income growth for middle and lower class families is not going away anytime soon. Globalization has increased the supply of low-skilled workers in the world economy, depressing wages of similar workers in the United States. The impact of technological change on the incomes of medium-skilled workers will continue. What should young people do to counteract these forces and succeed in an ultra-competitive global labour market? The answer is simple: Get as much education as possible.
Reference
The Bank Credit Analyst, Income Inequality in America: Facts and Fantasies (December, 2011).