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Growing Apart

A Political History of American Inequality

Colin Gordon, Author

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A Detailed Look at Wages and Earnings

American inequality is rooted in the weakness of the wage structure. Job insecurity and low wages were, of course, commonplace through formative years of the modern American economy, an era capped by the Great Depression. But the political response to the Depression, and to the challenges posed by World War II, dramatically improved the bargaining power of ordinary workers—and just as dramatically increased chances that they might claim a living wage, and a modicum of security against illness, unemployment, and retirement.1   

Wage (and income) inequality lessened during the turmoil of the Great Depression and World War II, and that “compression” held through the 1960s—largely as a result of the policy innovations (minimum wage, social insurance, collective bargaining) of the 1930s and 1940s.2  This began to unravel in the 1970s as wage-setting policies and institutions upon which they relied came under attack. 

One consequence of this was that the share of national income paid out as wages and salaries began to fall.3    For the last generation (and accelerating in recent years) capital (interest, rent, dividends) has claimed a greater share of national income, while the share claimed by labor (wages and salaries, work-based benefits) has slipped. Labor’s share of national incomehovered around 65 percent for most of the postwar era and then—beginning in the early 1980s—began to fall off [see FIG below]. This is not just a categorical shift.  Labor income is distributed across American households but capital income is not so, as the latter gains share, it feeds inequality.  And it also understates the damage.  The declining labor share tracks all wages and salaries—including those claimed by overpaid CEOs—so leaves uncounted the widening inequality gap in the distribution of wages and salaries.

More starkly, wage growth for most Americans slowed to a crawl [see sidebar below].  At the lower income thresholds, workers lost ground with the slow collapse of the labor movement (especially important for men) and with the sliding value of the minimum wage (especially for women). During the 1970s and 1980s, the wage gap widened at both ends of the income spectrum: the gap between the poorest 10 percent of workers and those at the median wage grew at roughly the same rate as the gap between those at the median and the richest 10 percent of workers. Since then, the gap has been much more pronounced at the top end: the gap between the poorest and the median has leveled off, while the gap between the richest and the median has continued to grow.4

Sidebar: Wage Ratios, 1973-2011

The key point here is not just that wages have stagnated, but they have done so over an era in which the productivity and educational attainment of American workers have improved dramatically. The last generation has been marked by a stark disconnect between productivity growth (up 80 percent between 1973 and 2011) and slow or stunted wage growth.5   

As the graphic below shows, economic productivity in the United States has sustained a consistent upward trajectory since the end of the Second World War. For the first generation of this era, economic growth lifted with it the wages and earnings of most Americans (the red line on the graph shows the real hourly compensation [wages and benefits] of production and nonsupervisory workers). Beginning in the mid-1970s, wage growth slowed—even as the economy continued to grow.  It is not the health of the economy, in other words, that has battered workers—but a dramatic change in the distribution of its rewards. The gap between the two lines represents inequality. And the wedges prying the lines apart, as we explore in the pages that follow, are essentially political.

The sharp contrast between the early and the latter postwar years is also evident if we look more closely at wages by gender and decile. The real hourly wages of the median worker grew only 4 percent over this span, and real hourly compensation (wages and benefits) grew only 10.7 percent [see FIG below]. For all workers, the erosion of real wages was broad and uneven from 1973 through 1995. The upturn of 1995–2000, the latter part of the 1989–2000 business cycle, brought a brief respite of across-the-board wage growth, some of which spilled past 2000 (although the wage growth from 2000–2007 skews much more to higher earners). The recent recession (2007–2011) brought with it wage losses for most workers.

For men, the pattern is particularly stark. Real wages began falling for low-wage men in the mid-1970s, and this spread across all but the highest percentiles through 1979–1989 and through the first half of the 1990s. The late 1990s brought some relief, but this was short-lived: wage growth slowed in 2000–2007 and then lost ground—for all but highest earners—from 2007–2011. The wage numbers alone (which include only men who are working) undercount the real damage. In 1970, 94 percent of men aged 25-64 worked. Today—reflecting chronic unemployment and higher rates of incarceration—that share is closer to 80 percent. The real earnings of all working-age men, whether they have a job or not, have dropped almost 20 percent since 1970.

The pattern, then, is pretty clear: Low– and middle-wage men and women lost ground across the last 40 years—a pattern interrupted only by the sustained growth, low unemployment, and minimum wage increases of the late 1990s. And the lessons are clear as well: Shared prosperity rests on policies and institutions (collective bargaining, a decent minimum wage, strong labor standards, etc.) that sustain the bargaining power of workers. In the absence of those institutions, only exceptional stretches of full employment have interrupted the failure of the wages, incomes, and living standards of ordinary Americans to benefit from the fruits of economic growth.

Some of this growing wage gap is shaped by education [see FIG above]: The median wage for those with less than a high school education has fallen by almost 20 percent in the last 30 years. The median wage for those with just a high school diploma has fallen slightly. And the median age for those with a university education has risen about 20 percent. In 1979, to put it another way, the median wage for a worker with a University education was about $8.00 higher than the median wage for a worker who had not graduated high school; today that gap is closer to $15.00/hour. Similar patterns held during the recent business cycle—as both median earnings and the prospects for unemployment were much weaker for less-educated workers [see FIG below].

At the same time, educational payoff has slowed in recent years, and the rewards of pushing beyond high school can no longer be taken for granted. In 1979, 40 percent of low-wage workers had not completed high school and just over 25 percent had completed some college [see FIG below].  By 2011, these numbers had nearly reversed: fewer than 20 percent of low-wage workers came from the “less-than-high-school” cohort; and more than 43 percent had some college under their belts.7 

Underlying the weakness of wages and earnings is a dramatic decline in the quality of jobs. A nasty combination of recession, inflation, union decline, concessionary bargaining, and deindustrialization through the 1970s and early 1980s undercut wages for those at the median wage and below. As business refocused its managerial and political energies on cutting costs, the employment relationship itself began to deteriorate—not only with the losses of union coverage, but with relentless waves of downsizing and outsourcing. The patterns for the subsequent decades were clear: less security and job tenure, longer bouts of unemployment, more part-time work (much of it involuntary), more nonstandard “contingent” or “temporary” work arrangements.8  

This has been accompanied by a steady erosion of workplace benefits, so that real compensation has slipped even further [see FIG above].  Employment-based health care has fallen off since its peak in the early 1970s, much more sharply for low-wage workers. And, as coverage has slipped so too has its quality: premiums and out-of-pocket costs continue to run well ahead of inflation, especially for family coverage. And, while employment-based pension coverage has not fallen as steeply, the coverage that remains offers less value and less security. If we look to a higher threshold, the share of “good jobs”—those that pay a living wage, and offer job-based health and retirement coverage—we can see these trends clearly [see FIG below]. In 1979, almost 28 percent of jobs met this modest threshold; in 2011, less than 25 percent did so—a decline that was even sharper for male workers (from 37 to 29 percent).9

We can also see this playing out in the persistently high share of low-wage work. About one in four American workers are in low-wage jobs (those paying less than two-thirds of the median wage), a share that is growing—and easily the highest rate among our democratic and developed peers.  In 31 states (as of 2011), more than a quarter of the workforce work at a wage insufficient to pull a full-time worker above the poverty level [see sidebar below]. Across our most recent business cycles, low-wage workers have suffered the brunt of economic downturns and enjoyed few of the fruits of economic booms or recoveries. Since 2007, the lion’s share of recovery jobs are in lower-wage occupations than those lost during the preceding recession. And projections of future job growth are heavily skewed towards low-wage service occupations.10

Sidebar: Low Wage Work: Past, Present, Future

All of this is abetted—as we shall see below—by remarkably weak labor market institutions and policies. The minimum wage sets a meager floor. Workers lack voice or bargaining power. Employment standards are accompanied by little serious enforcement of those (overtime, minimum wages, tipped wages) that do exist. Indeed many public policies (in the form of contracts, concessions, and tax breaks) actively sustain and subsidize low wages and lousy jobs.11  In the face of both declining workplace benefits and the shrinking rewards of education and hard work, the broader promise of economic insecurity has collapsed.12 

Back to: Introduction

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