As it turns out, Bill Gates walking into a bar is a pretty good metaphor for what has actually happened in the United States over the past generation: Average income has risen substantially, but that’s mainly because a few people have gotten much, much richer. Median income, depending on which definition you use, has either risen modestly or actually declined.
About the complications: You might think that median income would be a straightforward thing to calculate: find the American richer than half the population but poorer than the other half, and calculate his or her income. In fact, however, there are two areas of dispute, not easily resolved: how to define the relevant population, and how to measure changes in the cost of living. Before we get to the complications, however, let me repeat the punch line: The fact that we’re even arguing about whether the typical American has gotten ahead tells you most of what you need to know. In 1973 there wasn’t a debate about whether typical Americans were better or worse off than they had been in the 1940s. Every measure showed that living standards had more or less doubled since the end of World War II. Nobody was nostalgic for the jobs and wages of a generation earlier. Today the American economy as a whole is clearly much richer than it was in 1973, the year generally taken to mark the end of the postwar boom, but economists are arguing about whether typical Americans have benefited at all from the gains of the nation as a whole.
Now for the complications: It turns out that we can’t just line up all 300 million people in America in order of income and calculate the income of American number 150,000,000. After all, children don’t belong in the lineup, because they only have income to the extent that the households they live in do. So perhaps we should be looking at households rather than individuals. If we do that we find that median household income, adjusted for inflation, grew modestly from 1973 to 2005, the most recent year for which we have data: The total gain was about 16 percent.
Even this modest gain may, however, overstate how well American families were doing, because it was achieved in part through longer working hours. In 1973 many wives still didn’t work outside the home, and many who did worked only part-time. I don’t mean to imply that there’s something wrong with more women working, but a gain in family income that occurs because a spouse goes to work isn’t the same thing as a wage increase. In particular it may carry hidden costs that offset some of the gains in money income, such as reduced time to spend on housework, greater dependence on prepared food, day-care expenses, and so on.
We get a considerably more pessimistic take on the data if we ask how easy it is for American families today to live the way many of them did a generation ago, with a single male breadwinner. According to the available data, it has gotten harder: The median inflation-adjusted earnings of men working full-time in 2005 were slightly lower than they had been in 1973. And even that statistic is deceptively favorable. Thanks to the maturing of the baby boomers today’s work force is older and more experienced than the work force of 1973—and more experienced workers should, other things being equal, command higher wages. If we look at the earnings of men aged thirty-five to forty-four—men who would, a generation ago, often have been supporting stay-at-home wives—we find that inflation-adjusted wages were 12 percent higher in 1973 than they are now.
Controversies over defining the relevant population are only part of the reason economists manage to argue about whether typical Americans have gotten ahead since 1973. There is also a different set of questions, involving the measurement of prices. I keep referring to “inflation-adjusted” income—which means that income a generation ago is converted into today’s dollars by adjusting for changes in the consumer price index. Now some economists argue that the CPI overstates true inflation, because it doesn’t fully take account of new products and services that have improved our lives. As a result, they say, the standard of living has risen more than the official numbers suggest. Call it the “but they didn’t have Netflix” argument. Seriously, there are many goods and services available today that either hadn’t been invented or weren’t on the market in 1973, from cell phones to the Internet. Most important, surely, are drugs and medical techniques that not only save lives but improve the quality of life for tens of millions of people. On the other hand, in some ways life has gotten harder for working families in ways the official numbers don’t capture: there’s more intense competition to live in a good school district, traffic congestion is worse, and so on.
Maybe the last word should be given to the public. According to a 2006 survey taken by the Pew Research Center, most working Americans believe that the average worker “has to work harder to earn a decent living” today than he did twenty or thirty years earlier.[1] Is this just nostalgia for a remembered golden age? Maybe, but there was no such nostalgia a generation ago about the way America was a generation before that. The point is that the typical American family hasn’t made clear progress in the last thirtysomething years. And that’s not normal.
As I’ve suggested with my Bill-Gates-in-a-bar analogy, ordinary American workers have failed to reap the gains from rising productivity because of rising inequality. But who were the winners and losers from this upward redistribution of income? It wasn’t just Bill Gates—but it was a surprisingly narrow group.
If gains in productivity had been evenly shared across the workforce, the typical worker’s income would be about 35 percent higher now than it was in the early seventies.[2] But the upward redistribution of income meant that the typical worker saw a far smaller gain. Indeed, everyone below roughly the 90th percentile of the wage distribution—the bottom of the top 10 percent—saw his or her income grow more slowly than average, while only those above the 90th percentile saw above-average gains. So the limited gains of the typical American worker were the flip side of above-average gains for the top 10 percent.
And the really big gains went to the really, really rich. In Oliver Stone’s 1987 movie Wall Street, Gordon Gekko—the corporate raider modeled in part on Ivan Boesky, played by Michael Douglas—mocks the limited ambition of his protégé, played by Charlie Sheen. “Do you want to be just another $400,000 a year working Wall Street stiff, flying first class and being comfortable?”
At the time an income of $400,000 a year would have put someone at about the 99.9th percentile of the wage distribution—pretty good, you might think. But as Stone realized, by the late 1980s something astonishing was happening in the upper reaches of the income distribution: The rich were pulling away from the merely affluent, and the super-rich were pulling away from the merely rich. People in the bottom half of the top 10 percent, corresponding roughly to incomes in the $100,000 to $150,000 range, though they did better than Americans further down the scale, didn’t do all that well—in fact, in the period after 1973 they didn’t gain nearly as much, in percentage terms, as they did during the postwar boom. Only the top 1 percent has done better since the 1970s than it did in the generation after World War II. Once you get way up the scale, however, the gains have been spectacular—the top tenth of a percent saw its income rise fivefold, and the top .01 percent of Americans is seven times richer than they were in 1973.
Who are these people, and why are they doing so much better than everyone else? In the original Gilded Age, people with very high incomes generally received those incomes due to the assets they owned: The economic elite owned valuable land and mineral resources or highly profitable companies. Even now capital income—income from assets such as stocks, bonds, and property—is much more concentrated in the hands of a few than earned income. So is “entrepreneurial income”—income from ownership of companies. But ownership is no longer the main source of elite status. These days even multimillionaires get most of their income in the form of paid compensation for their labor.
1.
“Public Says Work Life Is Worsening, but Most Workers Remain Satisfied with Their Jobs,” Pew Center for People and Press, Labor Day, 2006, http://pewresearch.org/assets/social/pdf/Jobs.pdf.
2.
Dean Baker of the Center for Economic Policy Research estimates that “usable” productivity growth—the increase in the net value produced per U.S. worker-hour adjusted for rising consumer prices—was 47.9 percent between 1973 and 2006. However, nonwage labor costs rose due to rising payroll taxes, rising health care costs, and other factors, so that the amount available for wages rose about 36 percent. Dean Baker, “The Productivity to Paycheck Gap: What the Data Show,” at www.cepr.net, Apr. 2007.