Middle-class wage stagnation is the biggest economic fact driving American politics. Over the past many years, so the common argument goes, capitalism has developed structural flaws. Economic gains are not being shared fairly with the middle class. Wages have become decoupled from productivity. Even when the economy grows, everything goes to the rich.
This account of reality, which I’ve certainly repeated, explains why the Democratic Party has moved from the Bill Clinton neoliberal center to the Bernie Sanders left. It explains why the Republicans have moved from the pro-market Mitt Romney right to the populist Donald Trump right.
On both left and right, movements have arisen to fix capitalism’s supposed structural flaws, either by radically interfering in the marketplace (Bernie) or by clamping down on global competition (Trump).
But what if there are no structural flaws? What if the market is working more or less as it’s supposed to?
That’s certainly the evidence from the past two years. Over this time, the benefits of economic growth have been shared more widely.
In 2015, median household incomes rose 5.2 percent. That was the fastest surge in percentage terms since the Census Bureau began keeping records in the 1960s. Women living alone saw their incomes rise 8.7 percent. Median incomes for Hispanics rose 6.1 percent. Immigrants’ incomes, excluding naturalized citizens, jumped more than 10 percent.
The news was especially good for the poor. The share of overall income that went to the poorest fifth increased 3 percent, while the share that went to the affluent groups did not change. In that year, the poverty rate fell 1.2 percentage points, the steepest decline since 1999.
The numbers for 2016 have just been released by the Census Bureau, and the trends are pretty much the same. Median household income rose another 3.2 percent, after inflation, to its highest level ever. The poverty rate fell some more. The share of national income going to labor is now rising, while the share going to capital is falling.
In a well-functioning economy, workers are rewarded for their productivity. As output, jobs and hours worked rise, so does income. Over the past two years, that seems to be exactly what’s happening.
The evidence from the past two years strongly supports those who have argued all along that income has not decoupled from productivity. A wide range of economists, including Martin Feldstein, Stephen Rose, Edward Lazear, Joao Paulo Pessoa, John Van Reenen, Richard Anderson of the St. Louis Fed and a team from Goldman Sachs, have produced studies showing wages tracking very predictably with productivity.
If anything, as Neil Irwin of the New York Times’ Upshot blog has noted, wages are a little higher than you’d expect from looking at the productivity and inflation numbers alone.
The problem of the middle-class squeeze, in short, may not be with how the fruits of productivity are distributed, but the fact that there isn’t much productivity growth at all. It’s not that a rising tide doesn’t lift all boats; it’s that the tide is not rising fast enough.
For those interested, Shawn Sprague has a good summary of the data at the Labor Department’s “Beyond the Numbers.” He shows conclusively that during this recovery we’ve endured a historically low labor productivity growth rate of 1.1 percent. By some estimates if productivity increases had kept pace with the mid-20th-century norm, median incomes would be $40,000 higher than they are today.