July, 2000, Vol. 123, No. 7
Incomes of Americans
Book reviews from past issues
Incomes of Americans
The New Dollars and Dreams: American Incomes and Economic Change. By Frank Levy. New York, Russell Sage Foundation, 1998, 248 pp. $16.95, paperback; $39.95, hardcover.
In the first quarter century after World War II—from 1946 to 1973—the economy grew rapidly and achieved most of the Nation’s economic goals. In the quarter century since 1973, the American economy’s performance has been much weaker. Average wage growth slowed sharply after the early 1970s. As a consequence, many of today’s older workers have not seen significant income gains over their careers, contends Frank Levy in this book which updates his 1987 "Dollars and Dreams," that concentrated on the post-1973 slowdown in productivity and income growth.
But the economy may be entering a period in which it can once again generate broadly rising incomes, says the author. Whether or not this happens depends upon three factors:
The growth rate of labor productivity: the increase in output per hour of work.
The economy’s level of skill bias, the degree to which new production processes, including expanding trade, favor better educated workers over less educated workers.
The quality of the Nation’s equalizing institutions; public and private education, the welfare programs, unions, international trade regulations, and the other political structures that blunt the most extreme market outcomes and try to ensure that most people benefit from economic growth
Contrasts and parallels are made. Sixty percent of white male workers were over age 35 in 1947, and among white men age 65, one-half still worked, compared with about one-sixth today. While the men were experienced, they did not have much formal education. Two-thirds had not finished high school, while only one-eighth had some college. In 1947, the average income gap between 30-year-old and 40-year-old white men was 7 percent. By the late 1960s, when white men were better educated, the gap was 13 percent.
Only one-third of black men, compared with three-quarters of white men, had gone beyond the seventh grade. Blacks’ weak position was enforced by both legal and informal discrimination. But the demands of war production opened up manufacturing jobs to blacks, and encouraged migration out of the South, largely to Northern and Midwestern cities. Black migration was also forced by the mechanization of Southern agriculture, which eliminated farm labor jobs.
During World War II, women’s labor force participation—the proportion of women older than 14 years who were working or looking for work—peaked at 35 percent in 1944, in contrast to today’s 58 percent. At the war’s end, it declined only modestly to 31 percent in the early postwar years.
The full employment of the Kennedy-Johnson years drew more people into the labor force, and so distributed growing incomes more equally, and the average family’s real income grew by 30 percent. In both 1968 and 1969, the black male unemployment rate stood at 3.8 percent, 6 percent below its 1955 and 1965 average and about 4.5 percent below the 1997 level. Low black unemployment was strong medicine for black incomes. The proportion of black families headed by women had risen from 15 percent in 1950 to 22 percent in 1960 and 31 percent in 1969. By itself, the trend should have caused the black-white income gap to grow, but the improved economy was so powerful the ratio of black-to-white median family incomes increased from 52 to 61.
In the early 1970s, the collapse of productivity growth was a sign that U.S. firms had to organize work in new ways. But four factors undercut what should have been competitive pressure to restructure: (1) Since the late 1940s, better transportation and communication had laid the groundwork for a more competitive economy. Competitive forces were held in check by government regulations. Regulation limited a new firm’s ability to enter the industry, and an existing firm’s ability to change prices, both of which reduced possibilities for competition. (2) Between 1973 and 1979 prices at both the wholesale and retail levels rose more than 100 percent. (3) The value of the dollar was declining abroad. (4) Finally, labor force demographics provided a buffer of a different kind. Its numbers, amplified by the baby-boom cohorts and older married women, saw to it that the labor force grew at a very rapid 30 percent per decade.
In the 1980 presidential campaign, Ronald Reagan argued that the role of government should be limited. People and business should be given strong incentives to produce more. At the same time, Reagan proposed a series of supply side tax cuts. Today, the combination of Reagan tax cuts and no corresponding budget cuts, a policy popular at the time, is blamed for the large Federal budget deficit that extended into the 1990s.
By the late 1980s, most people knew wages were growing steadily, but growing job instability, particularly among white-collar workers, was something new. In contrast to the blue-collar recession of 1980–82, the layoffs of 1989 was a white- collar recession. Layoffs and the threats of layoffs made people cautious about pushing for wage increases.
For two decades, the most durable economic change has been the Nation’s shift to a service economy, Levy says. Service firms were often labor intensive, so wage costs were important. Production was often spread over many locations, and so unionization and wage bargaining were harder. While many manufacturing jobs required physical strength, sales and clerical jobs required "soft skills" that women were supposed to have and less educated men were supposed to lack, putting the men at a disadvantage.
Levy identifies four trends in his book:
The post-1973 slowdown in wage growth.
The post-1979 surge in skill bias that lowered demand for high school graduates and high school dropouts
The long-term employment shift away from agriculture and goods production and toward the service sector.
An increasingly competitive environment and a shift in power away from employees and toward a firm’s stockholders.
By 1996, 49 percent of white male workers were in white-collar jobs, up from 32 percent in 1950. In a related trend, white men increasingly acquired a college education. By 1950, 30-year-old white men with 4 or more years of college earned an average of 27 percent per year more than 30-year-old men with high school diplomas. This pattern continued throughout the decade. Among whites in their late 20s, the proportion with 4 or more years of college rose from 6 percent in 1947 to 12 percent in 1959. Demand grew as well, however, and the gap between college and high school earnings of 1960 was 30 percent, slightly higher than in 1950.
Beyond the educational earnings gap, a second source of earnings inequality was the growing gap among men and women with the same race, age, education, and so forth. Then in the 1970s and 1980s, many young college graduates confronted slow career starts. Slow starts reflected the softness of demand, enabling employers to enforce apprenticeship terms in journalism and other overcrowded occupations.
Levy points out that most discussions of earned income focus on inequality in the broad middle of the earnings distribution. But the growing share of all income at the very top of the distribution is increasingly attracting media attention. U.S. Census Bureau data provide little guidance here. To preserve confidentiality and elicit the public’s cooperation, the Census Bureau imposes upper limits on the income data it records, and even stricter limits on the income data it releases for research analysis. To examine high incomes, the best data comes from the U.S. Treasury Department’s "Statistics of Income" which annually reports adjusted gross incomes from a sample of tax returns. Treasury maintains confidentiality by recording no information about the tax filers’ personal characteristics—where they live, their gender, age or education. Each observation does include the tax return’s adjusted gross income and the source of that income—wages and salaries, interest and dividends, capital gains, and so on. In 1994, the top 5 percent totaled 558,000 tax filers (out of 116 million) with annual incomes of at least $282,000 in 1994 dollars, equivalent to $302,000 in 1997 dollars. Average income of these high income taxpayers was $718,000, and about 69,000 tax filing units — one return out of every 1,700 — had 1994 adjusted gross income of more than $1 million.
However, it should be noted that Internal Revenue Service numbers are for taxable income, very different from the standard definition of income, and, of course, much broader than earnings, particularly when it concerns taxpayers with high incomes. Too, Internal Revenue Service numbers would include income for both husband and wife for virtually all married couple families (which would be a large portion of the high income filers). So Treasury’s data is difficult to use in connection with Census Bureau and BLS data.
After the mid-1970s, and particularly in the 1980s, economics and demography worked together, but this time to increase inequality. We have seen that earnings inequality grew as a consequence of both increasing educational requirements and the growing number of very high earners. Living arrangements reinforced these trends, both through the growth of female-headed families and increased work among wives of high-income husbands. Two other trends in this period, however, moderated the trend in inequality: the growing number of middle-income singles and rising incomes among elderly families. Without these two trends, both family and household income inequality would be even larger than they are now.
Since 1993, as the historic U.S. expansion gathered steam, real income has risen for families at the bottom of the income scale as well as for those at the top—in sharp contrast to the previous 20 years— the President’s Council of Economic Advisers (CEA) reported in February of this year. The CEA report was published after Levy had completed his research, and its data is therefore not included in The New Dollars and Dreams. In its annual economic report, the CEA contends that from 1993 through 1998, the latest year for which figures are available, real incomes for the lowest 20 percent of families rose an average of 2.7 percent a year—compared with a 0.8-percent annual decline for the previous 20 years. Real incomes for this group actually have been going up faster than for those in the top 20 percent, who averaged a 2.4-percent gain. Of course, in dollar terms, the increases were much larger at the top. So far, the more even nature of the income gains has done little to reduce the gap between the top and bottom groups. CEA figures show, for example, that in 1973, the average income for the top 20 percent of families was 7.5 times higher than the average income for those in the bottom 20 percent. By 1993, that had widened to 11.4 times higher, and it is close to that today.
Levy’s book does include a thoughtful explanation of the history of Federal economic policies, and includes insights that may be applied to public policy today. The technological explosion, coupled with the increased educational levels of the American workers, is undoubtedly a significant factor in any analysis of the disparity between high and low incomes, as well are international events and social and foreign policy decisions of every kind.
Mary Ellen Ayres
Office of Publications
Bureau of Labor Statistics
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