Saturday, January 28, 2012

There Is No Great Stagnation, Only Great Integration

. Saturday, January 28, 2012

There are a lot of ways to think about what's happened to the flattening of median American income growth. One of the most interesting is Cowen's stagnation hypothesis, which attributes the lack of wage growth to not generating enough job-creating innovation. I like some parts of that hypothesis -- although I prefer to look at changes to political systems and developments in the global economy -- but there have been other things going on as well. One of them is this:

I want to focus on the period ending around 2000. If you go from the early-1970s trough to the late-1990s peak, the U.S. added about 9 percentage points of its labor to the workforce in about 30 years. At current population levels, that's about 30 million people. Even if you go from 1970 peak to the 2000s average, it's about 15 million people or so. Often these would be members of disadvantaged groups, such as women and minorities, whose wage potential would be lower than that of white males that were already in the workforce, so we're adding a bunch of relatively low salaries to our statistics over that stretch.

Looked at that way, it's almost impressive that median wages have been flat. If there had actually been stagnation, median wages would have gone down as more people got added to the labor force at low wages.

Or, instead of looking at median individual wages, we could look at median household wages:

As you can see, until the 2000s we had pretty strong growth that was actually accelerating over time. This doesn't consider everything -- more two-worker households means greater expenses for child care, etc. -- but we generally think employment is good for its own sake. It yields psychological benefits, allows greater flexibility for satisfying preferences and tastes, etc. In terms of social justice, excluding fewer women and minorities from pursuing the good life is also a good thing.

If we're thinking about trends in the U.S. economy over the past few decades we might consider it good news that we've been able to integrate more people into the workforce and that household incomes have increased. That's not stagnation. That's improvement.

This only gets us up to the 2000s, and it doesn't tell us anything about the future, but it's a component of the U.S.'s postwar economic history that doesn't get talked about enough.


LFC said...

Not sure I follow every nuance of this post, but isn't there a tension between the first part and the second? You start by emphasizing that a lot of the jobs added to the US economy in recent decades have been low-wage jobs, then you switch (in the household-median-income part of the post) to celebrating the psychological benefits of employment, etc. Everything's relative, so I guess there might be psychic benefits to being employed even at McDonald's, say, as opposed to being unemployed, but I don't think an economy generating a disproportionate number of low-wage jobs is necessarily doing all that much on the 'psychological benefit' front.

I understand the point that real household median income was on an upward path till the 2000s but I am not sure that one can infer too much from that in terms of subjective experiences. I'm reminded that Robert Lane published a book a few years ago about 'the decline of happiness in market societies' (I can't remember the exact title but that's close). Haven't read it and not sure how it's been received, but thought worth a mention...

LFC said...

Robert E. Lane, The Loss of Happiness in Market Democracies (Yale U.P., 2000)

There Is No Great Stagnation, Only Great Integration
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