The Depression in Wages: End of the American Dream

It’s not just the lack of jobs that’s hurting workers.  Even those workers who have jobs are suffering from a historic lack of wage growth. Workers’ wage growth over the last ten years has been lower than even the Great Depression.  The American dream of “doing better than Dad did” is effectively over. For the current generation (and the most recent), to do “as well as my parents” is now an ambitious goal.

n article by Jed Graham in Investors Business Daily yesterday documents the sad facts:

The past decade of wage growth has been one for the record books — but not one to celebrate.

The increase in total private-sector wages, adjusted for inflation, from the start of 2001 has fallen far short of any 10-year period since World War II, according to Commerce Department data. In fact, if the data are to be believed, economywide wage gains have even lagged those in the decade of the Great Depression (adjusted for deflation).

Two years into the recovery, and 10 years after the nation fell into a post-dot-com bubble recession, this legacy of near-stagnant wages has helped ground the economy despite unprecedented fiscal and monetary stimulus — and even an impressive bull market.

Over the past decade, real private-sector wage growth has scraped bottom at 4%, just below the 5% increase from 1929 to 1939, government data show.

To put that in perspective, since the Great Depression, 10-year gains in real private wages had always exceeded 25% with one exception: the period ended in 1982-83, when the jobless rate spiked above 10% and wage gains briefly decelerated to 16%…

That excess supply of labor has given employers the upper hand in holding back wage gains.

The causes are numerous: poorly conceived macroeconomics policies; disastrous deregulation of the financial industry; trade, monetary, and tax policies that encourage imports over domestic production; a thirty-year war on unions; etc.

The point I want to make here is how momentous this change is for the American political and economic system.  One of the dominant features of America in the last 200 years was the idea of the American Dream.  Anybody who worked hard, followed the rules, and showed initiative could get ahead.  For several generations in the 20th century that was true.  Almost every worker could reasonably expect to do much better than their parents did.  In the early 20th century much of the growth and improvement in living standards was the result of new inventions, technology, and infrastructure investment.  In the mid-20th century, the promise was a social contract that as productivity improved, both workers and capitalists would benefit.  That period is over. Now when productivity improves, corporate profits get the benefit but employees don’t.

When wages were increasing 25% or more every ten years, it meant that a after a 30 year period, the length of roughly one generation, that wages will be 1.95 times what they were at the beginning.  It’s no wonder that the generations who grew up after World War II came to expect every son (or daughter) should do better than their dad did.  They could reasonably expect to have double the real income their parents had – and that’s assuming they stayed at the same level on the income scale.  Now given the performance of the economy in the last ten years, wages will barely increase by 12-16% after 30 years.  No automatic “doing better than dad” just by participating in the American economy.

Actually, it’s much worse than that. For most Americans, to simply achieve the incomes their parents had means to have more education than their parents.  And during this period of slowing wage growth, we as a nation have also decided that workers should pay more of the cost of their education.  We saddle them with student loans. In previous generations, such as the 1950-60’s, higher education was subsidized directly by the government and student loans were a very minor part of the scene.  In some states such as California tuition was free. Now the younger generation must acquire more education than their parents and take on debt just to achieve relatively the same income as their parents.

It doesn’t have to be like this.  The trend could be changed.  It’s largely a political and social choice made by society.  But there appears little on the political horizon at this time that appears interested in reversing this “end of the American dream” dynamic of the last decade.