Benjamin Studebaker

When we evaluate whether or not the economy is performing well, we sometimes pay too much attention to GDP. Gross domestic product tells us about the total amount of exchange going on in an economy, but many of those exchanges only serve to enrich those at the top of the economic ladder. To get a better sense of how ordinary people are doing, we need to look at real (inflation-adjusted) median household income. Today I checked in on the American figures, and they are bleak:

The median American family is not only poorer than they were before the 2008 crisis–they’re poorer than they were during the Monica Lewinsky scandal. What on earth is going on?

The numbers are actually much worse than the median household income makes it appear. Median household income takes into account the incomes of all the people in the household. This means that household income will increase if more people in the household enter into work, even if those people earn wages that are no higher or perhaps even lower for that job than they were in the past. Between 1948 and the 1990’s, female labor force participation rose from 32% to 60%, but after 1997 it stabilizes and then declines to around 56%:

But this was in part offset by a decline in male labor force participation. In 1948 the gap between male and female participation was around 53 points, but today it is only about 12 points:

When we put both of these trends together, we get a total participation rate that peaks at around 67% in the late 90’s before falling to around 62% today:

This suggests that a great deal of the growth in household income prior to the 1990’s came from increases in labor force participation by women that was partially offset by a smaller fall in participation by men. This suggests that wage increases have not played nearly as big a role in the increase in household income as many believe, and the data we have on wages corroborates this to a degree. Wage increases played a role in raising household incomes during the 50’s and 60’s, but starting in the 70’s real hourly wages began to stagnate:

In the 80’s, increases in labor force participation helped median household income grow even as wages stagnated, and in the 90’s the tech bubble gave wages a minor bump, but once overall labor force participation began to fall and the tech bubble popped, there was nothing left to drive growth in median household incomes. They peaked in 1999 along with labor force participation and the NASDAQ.

What’s more, even people quite high up in the distribution have been adversely affected. Recent work by Pew shows that even the top 20% have seen a fall in real household income since the year 2000:

This suggests that even for most affluent, highly educated families, increases in household income since the 1970’s have come primarily from increases in labor force participation by females, not from wage increases. There are two ways in which this is a big problem:

1. Economic Sustainability
2. Social Stability

Let’s say a bit about each.

Economic Sustainability

To continue growing the economy, we must continue to grow consumption. To grow consumption, we have to increase household incomes. If we are relying on increases in the labor force participation rate to increase household incomes in perpetuity, we are in big trouble for two reasons. Firstly and most obviously, the labor force participation rate cannot rise higher than 100%. Secondly, like most affluent countries, the US median age is increasing, which means that a larger percentage of the population will in the future consist of retired seniors. So while the labor force participation rate is still somewhat depressed below where it should be as a result of the 2008 crisis, the long-term trend is for the participation rate to fall, not rise.

If we can’t increase household incomes by having additional members of the household enter the workforce, there are only two other ways to increase income and facilitate additional consumer spending:

1. Raise Wages
2. Increase Household Debt

Between the late 2000 and 2008, we tried drastically increasing household debt to fuel the economy:

Unsurprisingly, we found out that households cannot borrow unlimited amounts of money in perpetuity without any underlying wage increases that might enable them to pay off those loans. As a result, when we look at the median household income chart from the beginning of this post, we see that household income nearly reached the 1999 level in 2007, before collapsing as the debt bubble burst:

For too long, American businesses have been relying on increases in labor participation and on borrowing to supply American consumers with the additional income they need to purchase more goods and services. It’s long past time they relearned what everyone in the 50’s and 60’s knew–that economic growth requires wage growth. Many businesses are unlikely to raise wages on their own because in the short term any business that raises wages reduces its profits and puts itself at a competitive disadvantage. So government is going to have to step in with policies that will push up wages throughout the economy–minimum wage increases, unionization, and increased wages for public sector employees like teachers, police officers, veterans, and so on. Otherwise weak household income will continue to hold back economic growth, reducing returns on investment, harming technological development, and generally restraining the standard of living throughout society.

Social Stability

A further consequence of demanding unlimited increases in the labor force participation rate is that it has become steadily harder for families to have one parent of either gender work part time or stay home with children. This hits families at the bottom of the distribution particularly hard. Even in low income families where two parents are present, two full time low income jobs will not provide the same level of resources as one full time job further up the wage scale. Many low income families are one-parent households, and in these families the single parent’s life is inevitably dominated by work. This gives lower income families less available time and energy to spend on their children’s growth and development, putting those children at serious disadvantages, crippling their social mobility later in life, and contributing to the reproduction of a cycle of poverty. Even in two parent households, the effect on child outcomes is mortifying. As I put it a couple weeks ago:

Social conservatives often point out that poverty is fueled by broken families, but they often do not acknowledge that these families are broken due to the immense pressure placed on families, especially low income families, to have both parents work full time (or the one remaining parent work multiple jobs). In addition to denying children attention at home, this pressure leads to fights about money, crime and incarceration, mental health issues, and drug abuse, all of which contribute to higher divorce rates, more low income single parent households, and so on. These are the inevitable consequences of an economy in which wages do not increase for the vast majority of workers and where growth in household income and therefore consumption relies on labor force participation increases or unsustainable borrowing.

In the 1950’s and 1960’s, the American economy grew much more rapidly alongside strong increases in household income. Many Americans want to find a way to make the American economy perform the way it did during this period. The right often claims that growth was driven by strong families, but those strong families were strong because they were economically secure, and they were economically secure because the benefits of growth reached ordinary families through regular increases in the real wage. Whether you’re on the left or the right, whether your concern is inequality as a moral principle or the strength of the American family and American family values, both of these things are ultimately going to depend on wage increases.