Anxious middle: why ordinary Americans have missed out on the benefits of growth

By Krishna Guha, Edward Luce and Andrew Ward
Published: November 2 2006 02:00 | Last updated: November 2 2006 02:00
Median wage stagnation。
protectionist populismってのはよく分かる表現だな。

Mr Drake is among millions of educated middle-class Americans seeing their pay stagnate and blaming that on technology and globalisation. "It would be hard to outsource my job because there is so much specialist knowledge and business jargon involved," he says. "But it is used as an unspoken threat to keep wages down."

The experience of people like Mr Drake helps explain why the Republican party is not getting the political credit that policymakers in the administration of President George W. Bush think it deserves for the state of the US economy. At a time when the party is already under siege over Iraq, failure to win credit for economic growth could prove costly.

The nub of the problem for the Republicans is this: since 2000 there has been a striking disparity between growth in productivity and gross domestic product on the one hand and growth in wages for the average American worker on the other. Economists call this phenomenon median wage stagnation.

Median measures give the best picture of what is happening to the middle class because, unlike mean or average wages, median wages are not pulled upwards by rapid gains at the top. As the joke goes: Bill Gates walks into a bar and, on average, everyone there becomes a millionaire. But the median does not change.

Between 2000 and 2005, the US economy grew by 12 per cent in real terms and productivity, measured by output per hour worked in the business sector, rose 17 per cent. Over the same period, the median hourly wage - the wage the average American takes home - rose only 3 per cent in real (inflation-adjusted) terms. That compares with a 12 per cent gain in the previous five years. Real median family income fell every year from 2000 to 2004. It increased last year but is still lower than it was in 2000.

Jared Bernstein, an official in Bill Clinton's administration and now at the Economic Policy Institute, says the gap between productivity and median wage growth "is the most significant economic challenge of the day". He adds: "Workers have a right to be concerned about the large and growing gap between productivity growth and their pay cheques. They are working harder and smarter, baking a bigger pie more efficiently, but ending up with smaller slices."

One partial explanation for the gap between productivity and median real wages is that total compensation - including non-cash benefits - has grown faster than wages, in part due to rapid increases in health insurance premiums. "Anything that just looks at cash wages is incomplete," says Greg Mankiw, a Harvard professor and former chairman of the Bush council of economic advisers. "On the other hand, no question there is increasing inequality between high and median income people - no adjusting for compensation would change that."

Unfortunately, there is no good and timely measure of median total compensation that includes all these non-cash benefits. At the mean average level, hourly compensation has grown steadily since 2001, but still much less than productivity.

Another partial explanation is that prices of consumer goods have risen faster than those of domestically produced goods in general, so a given increase in output productivity buys fewer additional consumer goods.

Mr Bernstein and Larry Mishel, also at EPI, estimate that these two factors account for a little less than half of the total divergence between productivity and real median wages since 2000. The other half reflects growing inequality among wage earners and a shift in the share of national income captured by labour and capital.

Thomas Piketty, a professor at Paris Jourdan Sciences Economique, and Em-manuel Saez, a professor at Berkeley, estimate that the share of total income captured by the top hundredth in the US doubled from8 per cent in 1980 to 16 per cent in 2004. In fact, the gap between the middle and upper income brackets grew more rapidly in the late 1990s under Mr Clinton than it has subsequently under Mr Bush. The difference is that in the late 1990s the rising tide in the labour market was so strong that it lifted all boats, even if some rose a lot higher than others. In the early 2000s some remained stranded while others went up.

Mr Mankiw says: "Nothing special happened since 2000. Increasing inequality happened some time in the 1970s." The late 1990s was the "exceptional period" - with real wage gains across the income spectrum - but only because the economy was "going through a bubble". This "was not something that could be sustained".

Democrats, however, claim labour market gains under Mr Clinton were largely the result of sound economic policies, including the elimination of the budget deficit, which encouraged business to hire.

A fundamental feature of the late 1990s economy was a dramatic shift in the share of national income going to labour, which surged from 56.7 per cent in 1997 to 58.2 per cent in 2000 - and then fell dramatically from 2001 onwards, reaching a low of 56.8 per cent in 2005. Meanwhile, profits soared, reaching 13.6 per cent of GDP in the second quarter of 2006 - close to an all-time high.

It is possible that over the next few years labour as a whole will capture a bigger share of income from corporate profits. It is also possible that it will not, since globalisation may have permanently changed the relative bargaining power of capital and labour in the industrialised world.

But even if average wages start to catch up with productivity gains, median wages may grow at best sluggishly, reflecting an increasing gap between the average American and the high-salaried elite. Glenn Hubbard, dean of Columbia business school and another former chairman of the Bush council of economic advisers, says most explanations for this revolve around the "familiar culprits - globalisation and technology".

Increased global competition has eaten away the economic "rents", or excess returns, earned by US manufacturing workers, he argues. Meanwhile, the growth of global corporations and markets allows "superstars" - whether in business, finance, sports, law or entertainment - to apply their talents across a much bigger base, increasing the economic return to their skills.

The most potent force, though, may be technology rather than globalisation - though the two are inextricably linked. Larry Katz, a Harvard professor who worked in the Clinton administration, says information technology is essentially "complementary to workers at the top, a substitute for workers in the middle" and of minimal relevance to those at the bottom of the income scale.

"The question is: what's your remedy?" says Mr Hubbard. Most economists favour increased investment in education; Mr Hubbard thinks the government should fund personal retraining. accounts for workers.

The difficulty that orthodox economists have in coming up with effective ways to spread the benefits of growth opens the door to protectionist populism. This month, median wage stagnation is a problem for the Republicans. Longer term, though, it may prove an even bigger political challenge for the Democrats. This will be the subject of a feature in tomorrow's FT.