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Monday, March 27, 2006

Falling Real Wages and Widening Inequality

Greg Ip summarizes the data and debate on real wage growth and changes in inequality since 2000:

Wages Fail to Keep Pace With Productivity Increases, Aggravating Income Inequality, by Greg Ip, Wall Street Journal (free): Since the end of 2000, gross domestic product per person in the U.S. has expanded 8.4%, adjusted for inflation, but the average weekly wage has edged down 0.3%. That contrast goes a long way in explaining why many Americans ... don't believe the Bush administration when it trumpets the economy's strength. What is behind the divergence?...

Some factors aren't in dispute. Since the end of the recession of 2001, a lot of the growth in GDP per person ... has gone to profits, not wages. This reflects workers' lack of bargaining power in the face of high unemployment and companies' use of cost-cutting technology. ... Another factor holding down wages is that employer-paid health benefits, pensions and payroll taxes have risen almost 16% since 2000, making employers less generous with wages. Also ..., people at the top -- executives, managers and professionals -- are widening their lead on the rest.

The role of inequality is contentious. Treasury Secretary John Snow... says, "Since the early 1980s on, we've seen a rise in inequality but we've also seen ... a continuous rise in living standards." How the average family is doing in absolute terms is more important than how it is doing relative to others ... Still, the gap between the wages of the highest- and lowest-paid workers has continued to widen. Based on Labor Department data, ... the weekly wage of the worker at the 10th percentile ... fell 2.7% from 2000 to 2005, adjusted for inflation. The wage of the worker at the 90th percentile rose 5.3%.

Many economists predict that with the U.S. unemployment rate below 5% now, workers will regain their leverage. Indeed, wages have picked up recently. Still, wage inequality may continue to rise. Lawrence Katz, an economist at Harvard University ... says the wage gap has been growing for the past 25 years, particularly between the top and the middle. He believes the biggest factor is technology, which has complemented the skills of the well-educated while rendering redundant routine skills of many in the middle.

"The factors that seem to be driving it are continuing: the broad span of the computer revolution," he says. "For people in the middle the big question is: Will our education system give them ... skills that are very valuable?..." Mr. Snow, a Ph.D. economist, says income equality ultimately reflects "equality of educational opportunities," and if the U.S. can "reduce the variability of educational opportunities," it will also reduce the income gap.

History suggests that with unemployment low and growth steady, the typical family will see its income rise noticeably. As that happens, Americans' spirits will rise, as well.

    Posted by on Monday, March 27, 2006 at 12:06 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (13)

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