Report Finds Top 1 Percent Getting Richer Faster Than Everyone Else
While unemployment has dropped to near historic lows, wages have not seen a corresponding rise. June saw a 2.7 percent growth in hourly wages from last year, but the gain was largely offset by inflation, which was reported in May to have increased by 2.8 percent, according to the New York Times. This situation, noted the Times, arises despite a strong demand for labor that economists believe should eventually translate into higher wages. Fed Chair Jerome Powell earlier said he finds this development puzzling, given that so many companies have reported that they're having trouble finding workers, which ought to have led them to begin offering higher wages, as economic theory would indicate.
As one possible reason, he said that productivity hasn't risen as quickly, meaning there's not enough value being added for each additional job. This flagging productivity, however, represents its own kind of inequality, as recent data suggest that the top 5 percent of manufacturers and service providers accounted for most of the productivity growth in the economy since 2001. Data from the Organization for Economic Co-operation and Development (OECD) reveal that, between 2001 and 2013, the top 5 percent of manufacturers saw productivity gains of 33 percent, and the top 5 percent of service providers saw 44 percent gains. By contrast, every other manufacturing firm saw an average of 7 percent productivity growth in the same time period, and every other service provider recorded an average of only 5 percent productivity growth. This is in contrast with other historical periods, when productivity growth was more evenly distributed throughout the entire economy as innovations spread quickly from company to company and industry to industry.
Another factor to consider is that most of the growth since the economic crisis of 2008 has been in sectors that traditionally offer lower wages. Employment projections from the Bureau of Labor Statistics, showing the 31 occupations with the most expected growth over the next few years, indicate that 12 of the fastest growing jobs have median wages between $20,000 to $29,000. Meanwhile, seven have wages between $30,000 to $39,000, two have wages between $40,000 and $49,000, and 10 have wages $50,000 or more.
That growth has come primarily in low-wage jobs is supported by other research in this area. A 2014 report from the National Employment Law Project found similar patterns: lower-wage industries accounted for 22 percent of job losses during the recession, but 44 percent of employment growth between 2010 and 2014. At the time the report was written, lower-wage industries employed 1.85 million more workers than at the start of the recession. By contrast, 958,000 fewer were employed in mid-wage industries, and 976,000 fewer were employed in high-wage industries.
Beyond specific industries, another factor could be that many more people than before are underemployed, meaning they are technically employed but do not enjoy the benefits of a full-time job. This number, according to a recent paper, has been rising in every advanced country since even before the recession, as the study looked at data from between 2001 and 2017. The Federal Reserve Bank of San Francisco, in a study of its own, found that the number of people stuck in part-time jobs is 40 percent higher than expected, and that, echoing the BLS stats and the 2014 report, this is almost entirely because of which industries managed to thrive in the wake of the financial crisis.
The San Francisco Fed report also pointed to the rise of gig economy platforms such as Taskrabbit, Uber and Fiver, which base their business model on having a vast number of inconsistently paid workers who don't receive benefits due to being classified as independent contractors. A report from Intuit last year found that the gig economy makes up about 34 percent of the workforce, and expects that number to rise to 43 percent by 2020. A McKinsey study found that there are 23 million people relying on gig work as their primary source of income, not because they want to, but because they don't have other options; a further 26 million rely on gig work for supplementary income for the same reason.
If so much of the 99 percent struggles with low wages at a time of rising prices, how exactly are they staying alive? The answer to that, more and more, is debt. CNBC today reports that Americans have paid $104 billion in credit card fees and interest alone in the past year. Meanwhile, the New York Federal Reserve reports that total household debt reached a new peak in the first quarter of 2018, rising by $63 billion to reach $13.21 trillion. Balances climbed by 0.6 percent on mortgages, 0.7 percent on auto loans, and 2.1 percent on student loans this past quarter, while they declined by 2.3 percent on credit cards. Perhaps, then, it should not be surprising that even if people are still making money from month to month, one in seven Americans actually have a negative net worth.
Outside of consumer debt, student debt is also a major factor to consider. The average college graduate now has about $37,000 in loans. Fed Chair Powell, speaking before Congress earlier this year, said that this debt load could be having an adverse effect on the economy as a whole. One research paper released by the Federal Reserve two years ago not only found that rising student debt was impacting home ownership, it also calculated the exact ratio: every 10 percent increase in student loan debt reduces home ownership by 0.1 percentage points among 25- and 26-year olds who had attended college. Another research paper from the Federal Reserve found that increases of one standard deviation in student debt reduced the number of businesses with one to four employees by 14 percent on average between 2000 and 2010.
Not surprisingly, large debt levels are also making college graduates miserable.
With this in mind, some have advocated for a cancellation of student debt. A paper from the Levy Economic Institute at Bard College found that a one-time policy of student debt cancellation would have a meaningful stimulus effect, with only moderate effects on the federal budget, interest rates and inflation.
At the other end of the economic spectrum, private-sector bonuses not directly tied to performance now represent the largest share of overall pay and benefits cost, 2.8 percent, since 2008, the latest apogee of a trend that has been going on for the past four years. The Chicago Tribune reported that the average Wall Street bonus is now $184,220, which is 17 percent higher than last year and the closest it has come to the all-time record of $191,360. When looking specifically at the CEO's office, an MIT study said that CEO compensation grew dramatically between 1971 and 2000. Recently implemented rules mandating that companies disclose the pay ratio between their CEO and the average worker have revealed an average ratio of 339 to 1, with some companies having a gap as high as 5,000 to 1.
Beyond direct compensation, however, another thing to consider is that wealthier people are more likely to have investments and so are more likely to benefit when, say, the NASDAQ, Dow or S&P 500 indices break record after record. The Congressional Budget Office, in a 2014 report, said that, "Over the entire 33-year period [from 1979 to 2011], cumulative growth in inflation-adjusted market income was 16 percent for households in the bottom quintile, 16 percent for households in the next three quintiles taken together, and much greater for households in the top quintile, CBO estimates. Specifically, cumulative growth in inflation-adjusted market income for households in the 81st through 99th percentiles was 56 percent over the period, and cumulative growth for households in the top 1 percent of the distribution was 174 percent over the period."
Another study from 2007 found that the top 0.1 percent of households in the U.S. accounts for 50 percent of all investments in stocks, financial securities, trust equity and business equity in the country. This is in contrast to the middle three income quintiles. For the middle class, two thirds of their investments are sourced in private home equity, although when mortgage debt is taken into account. this accounts only for 25 percent of total assets. Meanwhile, only 7 percent of their total portfolio, on average, is taken up by stocks. Overall, while 49 percent of people own stock of some sort, such as through pension funds, the study found that about 90 percent of the total value of stock shares, bonds, trusts, and business equity, and about 80 percent of non-home real estate were held by the top 10 percent of households.
While the principle of meritocracy might demand such outcomes, on a pragmatic level it has been found that extreme levels of inequality can have, beyond cultural and political consequences, negative economic effects as well.
A paper from the International Monetary Fund, for example, found that more equality is correlated with faster and more durable growth for an economy. OECD data, meanwhile, indicated that extreme levels in inequality can inhibit economic growth and, by contrast, countries where income inequality is decreasing grow faster than those with rising inequality. In fact, the OECD report said that "rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand over the past two decades up to the Great Recession. In Italy, the United Kingdom and the United States, the cumulative growth rate would have been six to nine percentage points higher had income disparities not widened, but also in Sweden, Finland and Norway, although from low levels. On the other hand, greater equality helped increase GDP per capita in Spain, France and Ireland prior to the crisis."
Beyond growth, another paper found that income inequality has predictive power in forecasting a financial crisis, in addition to and above loan growth and several other financial variables. This conclusion is backed up by another paper, which said that income inequality causes financial instability by increasing the leverage in the economy.
Regardless of whether there are negative consequences, recent policy developments, particularly the Tax Cuts and Jobs Act, mean that this trend is unlikely to slow or stop. That legislation contains many provisions specifically designed to benefit higher-earning individuals, such as doubling the estate tax threshold, increasing the alternative minimum tax threshold, and creating a 20 percent deduction for pass-through entities.