August 22, 2018
About two decades ago, when my colleagues at the Economic Policy Institute were first beginning to make serious inroads in getting the media to accept that growing inequality was a problem, there were several studies that argued we shouldn’t be concerned because we had high rates of mobility. The argument was that even if a snapshot showed there was a bigger gap between the top and everyone else, this wasn’t a big deal because we saw people constantly changing places in the income hierarchy. People who were in the bottom income in one decade could be in the top or fourth quintile a decade later, with those at the top often sliding down one or two quintiles.
It turned out that this result was driven by the inclusion of students in the analysis. Guess what? Many medical students and business students don’t have very high incomes when they are in school, but ten years later they may be in the top quintile of income earners. Aren’t you glad that we have highly skilled economists (and highly paid) to discover facts like this?
Of course, when you do the analysis seriously and just take people in their prime earning years (above age 25) there was very little mobility. People may move up or down a quintile, but very few from the bottom quintile ended up in the top or even fourth quintile.
Robert Samuelson seems to pull the same sort of trick as the mobility studied in presenting new research from Pew. Samuelson tells us that we might be “richer than we think.” He tells us of a seeming paradox.
“When Pew economist Richard Fry crunched the numbers of a recent Federal Reserve study, he found that most generations of working Americans now have higher incomes than before the recession. Even so, he also reported that median incomes for all U.S. households had actually declined about 3 percent since 2007.”
It turns out that the paradox is resolved by the fact that most workers are richer today than they were ten years ago. The median has fallen because it includes non-workers, the largest chunk of whom are retirees. Retirees generally have much lower income today than when they were working.
Okay, so is this good news about workers seeing rising incomes? Not exactly, we expect people’s income to rise over time. A modest benchmark would be a 1.0 percent increase in real wages annually. This is modest because in good times, like the years from 1947 to 1973, real wages rose at close to twice that pace. That means to have acceptable growth over this period we should want to see workers have income in 2017 that were around 10 percent higher than in 2007.
But actually, Samuelson’s comparison should imply even larger gains. We expect workers income to rise throughout their working lifetimes, or at least until they reach their fifties. We expect a 35-year-old to be earning more money than she had when she was 25, and at 45 to be earning more money than when she was 35.
So, if we compare the earnings of today’s 45-year-olds to their earnings ten years earlier, we might expect a gain on the order of 15–20 percent. Ten percent of this gain would be due to economy-wide improvements in productivity and the other 5–10 percent would be due to these workers moving into their prime earning years.
This means that when Samuelson tells us we should be happy because most workers are earning more now than ten years ago, he has set a ridiculously low bar. People have every right in the world to be upset if they are only earning 2–3 percent more at age 45 than they did at age 35, and it would be absurd to try to tell them otherwise.
To be clear, this is entirely Samuelson’s story. The Pew study gives the analysis but does not give an interpretation about people being richer than we thought that Samuelson put in his column.
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