Part 2 - The Economic Growth & Prosperity The American Middle Class Has Been Cheated Out Of

This is Part 2 of the subject post.

 

Meanwhile the U.S. Census Bureau's annual report for 2018 entitled Income & Poverty in the United States: 2017 was released on September 12 & highlighted that median household income was $61,372 in 2017, an increase in real terms of 1.8% from the 2016 median of $60,309 (2017 CPI-U-RS adjusted income).  This measure includes both private & public sector incomes & reports the composite for the country – i.e., the higher incomes of the public sector as described above will raise the income levels indicated in this report.

 

A good portion of the 2016 – 2017 increase in household income was the result of more Americans working longer hours as the U-6 unemployment/underemployment rate dropped as more part-time part-year workers found year-round full-time work.

 

From 1978 to 1999 the inflation-adjusted median household income rose @ a pitiful annual compound rate of 0.70% per year from $52,089 to $60,062 – both years in 2017 dollars.  Since 1999 the median household income, in constant 2017 dollars, never surpassed the 1999 level until 2016 as indicated above – a miserable annual compound rate of 0.36% per year over this 38 year period.  Please note that household incomes did go up & down during these years – the annual compound rates are calculated for illustration only to show the effective growth rates from the start of the periods considered to the end points.

 

The above described phenomenon continues to play out – the Labor Department reported that private-sector hourly wages rose 2.9% in August compared to a year earlier while the Consumer Price Index (CPI) increased 2.7% for the same period.  Also, the fiscal year 2019 defense appropriations bill includes a 2.6% military personnel pay raise meaning that members of the military will lose purchasing power if the CPI continues to increase @ the August pace. 

 

Now there have been many posts on RTE over the years regarding income mobility – i.e., it is not the same people in the top quintile every year or the bottom quintile.  As older higher paid workers retire each year (currently 10,000 per day) they are replaced by younger lower paid workers so even though the median household income growth was pathetic, as indicated above, many people did see good income growth as they moved from the bottom quintiles when they started work toward the top quintiles as their careers' progressed & then back down the rungs as they entered retirement.

 

There are boom periods & recessions but over a person's working lifetime (say 22 to 62) their income typically takes about 40 years to double in real inflation adjusted terms – an annual compound increase of 1.8% per year in real terms - the increase realized between 2016 & 2017 for the median household.  The higher your starting salary the higher your final salary & standard of living by this measure. 

 

Say you started work in 1978 @ a salary of $10,000 per year when you were 22 years old.  If you retired in 2018, @ age 62, you would have been making $76,800 if you doubled your starting salary in real inflation adjusted terms. 

 

Stop & think of the purchasing power & standard of living in 1978 of a $20,000 annual income – they were very good.

 

Because of the U.S. skills gap – i.e., not enough qualified Americans to fill the number of job openings - many firms have changed the compensation type paid.  See the following graphic that shows wages & salaries increased 22.6% from 2009 to 2018.  During that time inflation increased 17% so the real wage gain per year was a little less than one third the 1.8% per year average annual figure needed to double your salary over a lifetime of work.  But companies have shifted compensation toward benefits, as indicated in the graphic below, & away from baseline salaries except for employees deemed strategically important, so total compensation is a better measure of how workers are doing.  For instance, from 2009 to 2018 the inflation adjusted value of bonuses & supplemental pay increased over 7 times greater than the inflation adjusted value of wages & salaries.

 

click on graphic to enlarge

 

The following graphic shows the effect of the Tax Cuts & Jobs Act of 2017 is in line with the above change in compensation trends – namely, companies continue to minimize additions to their fixed labor costs (i.e., permanent payroll – wages & salaries).

 

click on graphic to enlarge

 

The above information shows the history, that is where we have been the past several decades regarding wage, salary, & total compensation growth for both the public & private sectors. 

 

To see where we could have been please look @ the following graphic & in particular focus on the increasing slope of the green line (earnings of men) from 1960 to 1973, after which it declined & then leveled off for the next 44 years.  Yes, the real median annual earnings for men has never been higher than it was in 1973 measured in 2017 dollars. 

 

Using the data from Table A-4 of the aforementioned Census Bureau's 2018 annual report I calculate that the growth in real median annual earnings for men between 1960 ($38,991) & 1973 ($55,317) was 2.75% per year.  Had this growth rate continued @ the same rate the typical male worker would today be making over $182,400 per year.

 

So now we know where we have been, where we are, & where we could have been.  To find out all the reasons why the American middle class was cheated out of the economic growth & prosperity they were on track to achieve 44 years ago click on the referenced post below.

 

click on graphic to enlarge

 

Reference Post:  An Explanation Of The Deterioration Of America's Middle Class