In the political and economic climate created by consistently high unemployment and shaken by the Occupy Wall Street movement, last week’s Congressional Budget Office report on trends in U.S. household income had the effect of pouring kerosene on a bonfire.
The report’s most striking finding, that “for the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007,” led to apocalyptic predictions not just from those at Zuccotti Park but also from the likes of Vice President Joe Biden’s former chief economist, Jared Bernstein, who insists that “such concentration of income is unsustainable in a democratic society.”
We agree that a chasm between classes certainly runs counter to the American idea, and can only increase social and political strife, to the detriment of the economy and overall well-being. Nonetheless, it’s worth examining all
The skyrocketing earnings of the very wealthiest get the headlines, but the vast middle of U.S. workers didn’t do too badly either over the study period: the 21st through 80th percentiles saw their inflation-adjusted incomes rise about 40 percent, and even the very poorest 20 percent had an 18 percent increase in real dollars. Mean household income, not including government transfers, rose by 62 percent; median income by 35 percent. (Many other studies have shown a slowing of middle-class earnings growth over the last decade; the CBO report doesn’t cover the years since the economic crisis of 2008.)
So what caused the top earners to get a larger slice of the pie? Here’s what the budget office says: “Numerous researchers have concluded that, on balance, the technological changes of the past several decades -- and perhaps the entire past century -- increased employers’ demand for workers with higher skills and more education. That increase, along with a smaller increase in the supply of workers with higher skills and more education, generated substantial gains in the relative wages of more-educated workers.” This phenomenon, the report noted, has been global.
Looking at the report in conjunction with 2010 Census data reveals some telling distinctions between Americans at the top and bottom. The average household in the top 20 percent has 2.03 wage earners, as opposed to just 0.43 earners in the bottom 20 percent. The marriage rate in the top group is 78 percent, but just 17 percent among the lowest earners. Unsurprisingly, educational achievement is vital: 60 percent of earners in the top group have at least an undergraduate degree; just 12 percent in the lowest-income households graduated from college, and 27 percent are high-school dropouts.
The data do much to contradict claims that America has become a permanently stratified society. A Treasury Department report on income mobility found that half the taxpayers in the bottom 20 percent in 1996 moved to a higher bracket by 2005. As one moves through life, one moves through earnings groups: 74 percent of people in the top 20 percent of households are in their peak earnings years, between ages 35 and 64; fewer than half the people in households in the bottom 40 percent are.
In sum, the vast increase in the wage gap may not be fair or good, but it isn’t arbitrary. And it’s certainly not a conspiracy of the so-called 1 percent. The pattern is clear: The best way to get ahead financially is to be part of a married couple in which both partners have a college degree and a career.
Nobody is obliged to follow that path, but it’s one worth highlighting, and one that government, even limited government, can support. On education, this means better schools, promoting a greater focus on math and science, and ensuring access to universities and jobs-oriented community colleges. As we look to reform the tax code, changes to help married couples, promote progressivity and favor wages over wealth are worth considering.
The CBO report is a far more complicated and promising document than the conventional wisdom holds. Americans did move apart -- but it’s worth remembering that most of us moved up, too.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.