On April 1st, my book, “Dagbok från USA”, came out in Sweden. It will also soon be published in English (as an e-book for Kindle and for other readers) with the title: “Diary from the United States – Notes on a society in crisis“. As an appetizer for English speaking readers, I will the coming weeks publish some excerpts from the book.

Growing income inequality – a development that could end in civil unrest and political chaos

Historically, productivity and wages usually go hand in hand, not slavishly from one year to another, but over time and aggregated for an industry or an entire country’s economy. In other words, if people work with higher productivity, it normally means higher real wages, and that wages will rise at about the same rate that productivity rises. By productivity is usually meant, if we use an economist’s jargon, value added per hour worked (or per employee). Value added in a company is the difference between the value of what is sold and the costs of inputs. Total value added in country is the same as the country’s GDP. Value added per capita, or GDP per capita, is often used as a productivity measure on an aggregate, national level.

This graph (click for bigger picture) is from an article in the January 2011 issue of the Monthly Labor Review (Fleck et al., 2011). It shows that the historically close relationship between real wages and productivity in the U.S. economy (here confined to U.S. manufacturing sector) has been broken in recent decades. Judging from the graph, the two curves began to move away from each other some time in the early 1980s. The gap has widened substantially every year since.

What does this mean in practice? It’s equivalent to saying that the share of value added (GDP) in U.S. manufacturing that goes to the capital owners is growing much faster than the part that goes to the wage earners. Certainly, for a shorter period it can be understandable and justifiable that we got such an outcome (for example, all else being equal, if real interest rates go up or if the risk increases for some reason). But a trend change going on for several decades as the curves in the figure show isn’t normal and cannot be explained by increased costs and risks for the capital owners. The consequence is that the residual, the net profit that fully goes to the capital owner, increases. In other words, income inequality in the U.S. will grow because when capital owners take, figuratively speaking, a larger slice of the economic pie, all others get a smaller portion.

Even income from work, quite apart from income from capital, in the U.S. economy has become more skewed over the past three decades. It means in reality that economic inequalities have become even greater. At one end of the scale, there is a relatively small cluster of high-income earners, say 20% of those who have income from employment. They have increased their already high incomes sharply from 1980 until today, in part because they in general also are capital owners, usually through owning stocks. Logically enough, the stock market has had, as the curves in the chart illustrate, golden decades since the early 1980s. At the other end of the scale is a big group of wage earners who have seen their incomes drop drastically during the same period, many of whom have lost their jobs. Of these, very few own stocks. In between is the great mass of wage earners, on average with only a very modest increase in real income during the last decades. Since the 1970s until today, median salary for an American household has virtually stood still in real terms.

One can explain why we have got into this situation. This is what globalization, technological change, and a policy that does the least possible to correct a skewed income distribution, do together. (This is something that I will come back to.) What’s worrying is that there’s nothing in sight that can break the trend. As far as one can see, income inequalities in American society will increase with time. Will it then be possible to maintain the existing social contract? No one knows for sure. That the Tea Party movement emerged with such force in just a couple of years after 2008 might mean that the social contract is questioned by many. The zeitgeist has been described as “the Age of Outrage”, The next step might be social unrest. The youth revolt in England (another country with large income gaps) in early August 2011 might be a sign of things to come even in the U.S..

P.S. Just to avoid a misunderstanding – the share of income accruing to capital owners also grew in other Western countries over the period we are talking about here. Globalization and technological advances have made an impact in all countries. It’s just that today, after more than three decades, the gap between productivity and real wages is one notch wider in the U.S. than in other Western countries. Furthermore, the dominant driving forces in American society have a tendency to favor those with already high incomes. Low-wage initiative is not something that characterizes the U.S. labor market – or gets attention from U.S. politicians. These two conditions ensure that the United States among OECD countries is a kind of “primus inter pares” in terms of injustice in the distribution of income.

Literature:

Fleck, S. et al., 2011, “The compensation-productivity gap: a visual essay”, Monthly Labor Review, January 2011;

Cohen, R. 2011, “The Age of Outrage”, op-ed, The New York Times, August 13, 2011;

First published (in Swedish): September 4, 2011