Saturday, June 17, 2006

The Widening Gap

Politicians have already begun the fall campaign. "Issues" are being discussed and formatted in the best thirty-second ad-buy possible. Since it seems that both sides have decided to revert to familiar issue ground (war+terrorism=national security) offering the American public no real alternative but a hard or lite version with side issues (immigration, gay marriage, privacy) that only the respective core bases will swallow it might be still early enough to raise a real issue of concern.

America's economy has outpaced other rich countries' for a decade, due to a leap in productivity after 1995. American workers now produce over 30% more each hour than ten years ago. A legacy of the late 1990s was that everybody shared in this boom. True, incomes rose the fastest at the top, but all workers' wages outpaced inflation. After 2000 something changed. The pace of productivity growth has been rising again, but now it seems to be lifting fewer people. After you adjust for inflation, the wages of the typical American worker—the one at the very middle of the income distribution—have risen less than 1% since 2000. In the previous five years, they rose over 6%. If you take into account the value of employee benefits, such as health care, the contrast is a little less stark. But, whatever the measure, it seems clear that only the fruits of productivity gains are skewed towards the highest earners, and companies, whose profits have reached record levels as a share of GDP.

Average after-tax income per person, President Bush often points out, has risen by more than 8% on his watch, once inflation is taken into account. He is right, but this is misleading, since the median worker—the one in the middle of the income range—has done less well than the average, whose gains are pulled up by the big increases of those at the top.

Of course in this highly polarized country, and in haste to applaud or lament these facts, the exact size of the gap depends on how you measure it. If one looks at wages, the main source of income for most people, you understate the importance of health care and other benefits. Look at household income and you need to take into account that the typical household has fallen in size in recent decades, thanks to the growth in single-parent families. Look at statistics on spending and you discover that gaps between the top and bottom have widened less than for income. However, every measure shows that, over the past quarter century, the top has done better than those in the middle, who in turn have outpaced those at the bottom. All this means that productivity growth has become increasingly skewed. After 2000 most people lost ground, but, interestingly enough, those in the middle of the skills and education ladder have been hit relatively harder than those at the bottom. People who had some college experience, but no degree, fared worse than high-school dropouts. Some statistics suggest that the annual income of Americans with a college degree has fallen relative to that of high-school graduates for the first time in decades. So, whereas the 1980s were hardest on the lowest skilled, the 1990s and this decade have squeezed people in the middle.

The one truly continuous trend over the past 25 years has been towards greater concentration of income at the very top. This is a fact that both sides of the political spectrum discuss, the difference is how it is considered a problem or a success. In the recent issue of The Economist the article on this very issue points to several recent studies that have dissected tax records to investigate what goes on at the very top. The figures are startling. According to Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Ecole Normale SupĂ©rieure in Paris, the share of aggregate income going to the highest-earning 1% of Americans has doubled from 8% in 1980 to over 16% in 2004. That going to the top tenth of 1% has tripled from 2% in 1980 to 7% today. And that going to the top one-hundredth of 1%—the 14,000 taxpayers at the very top of the income ladder—has quadrupled from 0.65% in 1980 to 2.87% in 2004. Put these pieces together and you do not have a picture of ever-widening inequality but of what Lawrence Katz of Harvard University, David Autor of the Massachusetts Institute of Technology and Melissa Kearney of the Brookings Institution call a polarisation of the labor market. The bottom is no longer falling behind, the top is soaring ahead and the middle is under pressure. Here is a real issue for America’s politicians to debate and campaign on this fall. Will anyone be courageous enough to tackle the issue?

Note: For an in-depth report on the gap between rich and poor in America visit:

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