September 14, 2020; New York Magazine
Does the moral arc of history bend toward neofeudalism?
Others have posited that it bends toward justice, of course, but the question that Eric Levitz poses in New York Magazine is provocative. And the data, certainly, illustrate the severity of the income shift that has taken place over the past 45 years.
Specifically, Levitz examines a study by Carter Price and Kathryn Edwards from the Rand Corporation. And, yes, that is the same Rand Corporation of Pentagon Papers fame, so it’s fair to call it an establishment-based source. Anyhow, Price and Edwards in their study, which was conducted in partnership with the Fair Work Center, ask the following question: If the share of worker income to total income were the same in 2018 as in 1975, and growth was the same, how much would the median worker earn in 2018?
The answer: $92,000. That’s a full $42,000 greater than the actual 2018 median worker income, which was $50,000.
This is a matter of simple math, but it is nonetheless a stark reminder of how much income has shifted over the years from labor to capital and from the median worker to the elite. It is a product of a sustained gap between growing productivity and stagnant wages. For example, an Economic Policy Institute study a while ago demonstrated that productivity (output per worker) had increased 74.4 percent between 1973 and 2013, while wages had risen only 9.2 percent during those same years.
So, how do Price and Edwards calculate their numbers? Well, between 1975 and 2018, per capita GDP grew 118 percent while median wages grew 17.4 percent. The median wage in 1975 (in inflation-adjusted 2018 dollars) was $42,000. Increase $42,000 by 17.4 percent and—voilà!—you have 2018’s median wage earner income of (about) $50,000.
By contrast, if wage growth had matched GDP growth, that number would be $92,000.
Sign up for our free newsletter
Subscribe to the NPQ newsletter to have our top stories delivered directly to your inbox.
And, it might be worth emphasizing that for median wages to rise less than 118 percent, that means someone else’s wages rose more than 118 percent. And, surprise—you guessed it!—that someone else would be the top one percent, whose mean earnings rose 321.6 percent.
Let’s do the math in reverse. The mean wage for the top one percent in 1975 was $289,000. In 2018, the mean wage for the top one percent was $1,384,000. If the mean wage for the top one percent had “only” increased by 118 percent (i.e., by the overall rate of economic growth), it would have been $630,000.
So, to review, wages by the median earner are $42,000 less than if they had kept pace with the rate of economic growth, while wages for the mean wage earner in the top one percent are $754,000 more than if they had risen merely at the rate of overall economic growth.
By the way, you might have noticed that for the top one percent, I used the mean, not the median. The median worker in the top one percent did less well, which tells you that gains are actually concentrated in the top half (or even smaller portion) of the top one percent. That said, median wages for the top one percent did rise faster than the economic growth rate, just less fast. Specifically, median wages for the top one percent rose from $257,000 in 1975 to $761,000 in 2018, which is $201,000 more than the $560,000 that would have resulted if median wages for the top one percent had tracked the rate of overall US economic growth.
All told, the shift has been massive, an amount that Levitz notes adds up to a $2.5 trillion reduction in annual income for the bottom 90 percent of wage earners.
Levitz acknowledges the study has limitations. First, the calculations are based on taxable income, so benefits are excluded. Second, one can’t just assume the economy would look the same if you changed who benefits from the economy. Levitz notes that consumption of household goods would be higher—and stock and real estate prices lower—if ordinary Americans earned more and elites less. Because the consumer price index measures, as you might imagine, consumer prices, higher prices on household goods would likely mean higher inflation.
But one thing that probably would not be lower if the distribution of income were more equitable is economic growth. In fact, inequality is likely a drag on economic growth. Levitz notes, “In 2014, OECD economists estimated that increases in income inequality had reduced US GDP growth by as much as eight percentage points over the preceding two decades.”—Steve Dubb