8 October, 2008
According to a paper by two economists from the Massachusetts Institute of Technology (MIT), Peter Temin and Frank Levy, as is true for the rest of the American workforce, the income of college graduates has not kept pace with the growth of productivity. The findings of Temin and Levy refute the oft repeated claim that social inequality is the result of levels of education. Instead, social inequity is much more a product of technological change.
By way of preface, the report notes that the past 25 years (from 1980-2005) have seen an increase in non-farm business productivity of 67%, while over the same period “median weekly earnings of full-time workers rose from $613 to $705, only 14%.” Conversely, 80 percent of all income gains reported on federal tax returns between 1980 and 2005 went to the wealthiest one percent of filers. And the top one percent has seen their share of total annual income more than double between 1980 and 2005!
Still Blaming the Poor
As the vast majority of Americans cannot fathom the wealth of the super rich, and the capacity for working people to live, paycheck to paycheck, become more precarious, official representatives of American welfare-capitalism and corporate subsidy for the mega-rich try to tell us that all economic changes are due merely to the different “skill sets” of skilled and unskilled workers – a euphemism for those with college degrees versus others.
For example, the Chair of the private Federal Reserve Banks, Ben Bernanke presented this argument in a speech to the Omaha Chamber of Commerce in February 2007. Bernanke attributed the intensification of social inequality in the United States to technological change, and stressed that individuals can win in the rat race through education to overcome wage stagnation. Further, Bernanke claimed that income inequality is justifiable because, he reasoned, that talented people born into the lower social strata can go to college and overcome the problem of stagnant wages.
Looking Behind the Curtain
Bernanke’s assessment comes up against some inconvenient facts. A recent report published by the Pew foundation noted that, as a group, the current generation of American males in their 30s has a median income 12 percent lower than that of their parents’ generation – despite the fact that as a group, the 30-somethings have more years of education than their parents. The report also notes a decrease in social mobility within the United States. “Using the relationship between parents’ and children’s incomes as an indicator of relative mobility, data show that a number of countries, including Denmark, Norway, Finland, Canada, Sweden, Germany, and France, have more relative mobility than does the United States.” The report continues, “Compared to the same peer group, Germany is 1.5 times more mobile than the United States, Canada nearly 2.5 times more mobile, and Denmark 3 times more mobile.”
At the level of access to higher education, though a lower proportion of Europeans go to university, their costs of tuition are either nothing or a fraction of the costs for their American counterparts here in the United States. Hence we have reason to believe that “education” is not the key – in America – to living the American (consumer) dream. Instead we need to look at wages in relation to economic output, worker productivity, distribution of corporate profits and compensation schemes.
When Fair is Foul
Levy and Temin note that the years 1947 to 1975 saw the median income of an American household grow lockstep with productivity. By the early 1980s, however, productivity growth continued while the rate of wage increases fell. For the past several years in particular, median wages have declined even as productivity growth has accelerated.
Levy and Temin point out that from 1945 through the late 1970s, “income equality increased, as very high incomes grew more slowly than labor productivity.” By 1986, however, incomes in the top one percent began growing rapidly and have outpaced productivity growth through to the present day. By contrast, both college graduates and non-graduates have seen their wages stagnate relative to productivity since the 1980s.
The authors ask: “Is the average bachelor’s degree still sufficient to catch the rising tide? In the case of most men, the answer is “no.” More generally, something over three-quarters of the labor force currently faces insufficient labor demand [or alternative economic opportunities] to keep compensation growing in line with economy-wide productivity.”
It’s the Structure, Stupid!
Contrary to the standard explanation of income inequality as the natural outcome of technological development, Levy and Temin conclude that growing economic disparities and Third-World income distribution patterns reflect a concerted shift in federal policies toward labor, corporate subsidies and tax laws. Hence a steady and determined attack on unions and union organizing, coupled with lowering taxes on the rich and the destruction of the social safety net.
For the authors, this shift in policy was exemplified by the reduction in income taxes on the highest bracket and the stagnation of the minimum wage. “In 1938, annual earnings at the first minimum wage represented 27% of the economy’s average output per worker … and stands at something less than 13% today.” At the same time, the past 50 years have seen a dramatic reduction in taxation on corporations and the highest income bracket – both in absolute percentages and as a percentage of total federal receipts.
Levy and Temin argue that the explosion in the income growth rate of the top one percent during the mid-1980s, at least in the short term, can be seen as a product of policies implemented by the Reagan administration and deepened by Bush, Clinton, and Bush II. They write:
“In Reagan’s first year in office, he made three decisions that proved central to wage determination. He gave [Federal Reserve Chairman Paul] Volcker’s anti-inflation policy full backing. [Reagan] introduced a set of supply-side tax cuts, lowering the top income tax on non-labor income from 70 to 50 percent to align it with the top rate on labor income. And, when the air traffic controllers’ union, one of the few unions to support Reagan, went out on strike, he fired [them and ultimately decertified the union].”
These policies were followed by a drastic decline in manufacturing sectors, which facilitated the destruction of working class jobs and an attack on wage and benefits gains achieved by workers over previous decades. Concurrently, there was a boom in the banking, finance and legal professions. As a result, Levy and Temin observe:
“Between 1980 and 1995, the share of economy-wide compensation and profits in the Finance, Insurance and Real Estate Industry rose from 6.75 percent to 10.03 percent, while manufacturing’s share fell from 27.9 percent to 20.4 percent.”
As long-time Republican Kevin Phillips finds, finance now makes up over 21% of the American economy – exceeding manufacturing. That is, the largest sector of the economy thrives off of debt and inducing people with relatively lower incomes, to borrow at exorbitant rates with the promise of paying back … tomorrow.
The combination of overt federal policy, protection of the financial elites (recall the S&L bailout) has moved the United States to resemble nations of the Global South with our gated communities, burned out slums, empty strip malls, and decimated rural areas. In summation, the report notes:
“The declining bargaining power of the average worker has resulted in two observable changes: a shift of income from labor to capital and a shift of both labor and capital income to the top of the income distribution.”
This conclusion points to the fundamental issue involved in wage stagnation for the over 150 million Americans who live in households under the median income line (a line which is dropping steadily during the reign of G. W. Bush). The basic antagonism expressed in deepening social inequality is not one between different sections of the working class, but between capital and labor, i.e., roughly speaking, between the super-rich and everyone else.
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The paper by Levy, Frank S. and Temin, Peter is titled, “Inequality and Institutions in 20th Century America” (May 1, 2007). You may find that MIT Department of Economics Working Paper No. 07-17 at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=984330
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