Wednesday, October 31, 2012

Middle Class Battered, Social Mobility Declining

More than five years after the start of the Great Recession, its lingering after-effects continue to diminish the standard of living of the once-thriving American middle-class.

Median household income, after adjusting for inflation, fell 1.5 percent last year to $50,054, according to the Census Bureau's annual report on income and poverty, which was released in September. Meanwhile, the poverty rate, at 15 percent, remained stuck at the highest level since 1993.

The erosion of the middle-class has been a long and continual process. Median household income, adjusted for inflation, has been steadily dropping for 13 years.

While the median income slipped last year, those at the top of the income ladder continued to move ahead. The top 5 percent of incomes rose by 5.3 percent last year, according to government data.

The fact that the rich continue to get richer should surprise no one. What may be a surprise, however, is that the notion that hard work can lead a person from rags to riches is largely a fantasy. The famed Horatio Alger stories were, after all, works of fiction from the 19th Century.

The U.S. has less economic mobility than Canada and much of Western Europe, according to economic research cited by The New York Times. Seven in ten Americans that start out in the bottom fifth of family income stay in the lower class as adults, and more than six in ten Americans that start out in the top family income quintile stay in the upper class as adults, according to a July report by the Pew Charitable Trusts.

In other words, if you are born rich or poor you are likely to remain that way throughout your lifetime. America is simply not the "land of opportunity" that many believe it is.

A new report from the Organization for Economic Co-Operation and Development (OECD) finds that America is 10th in social mobility between generations, dramatically lower than in nine other developed countries. This means that America is now 10th in the world in the American dream.

Just 35 percent of American households can be classified as upwardly mobile, meaning they have a higher household income than their parents at the same age and are at a higher point in the income distribution ladder than their parents had been.

This means that roughly two-thirds of Americans are financially stagnant and will not have a higher standard of living than their parents, which was the norm for generations.

Work and income are the means by which most people historically extricated themselves from the lower classes — not inheritance and not the lottery. However, such a rise up the social ladder is becoming increasingly difficult.

Entry-level wages for high school graduates are actually lower than they were in the 1970s. For college grads, starting wages are below what their counterparts pocketed in the late 1990s. Today, the average wage for all these young adults, no matter education level, is about $15 an hour.

How can a young person start a family or buy a house on that income?

Out of 34 industrialized countries, the U.S. had the highest share of employees toiling away at low-wage work in 2009, according to OECD data.

Remarkably, one in four U.S. employees were low-wage workers in 2009, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

Low-wage jobs are replacing jobs that can sustain a middle-class lifestyle, according to a new study by the National Employment Law Project. Most of the jobs lost during the recession paid middle wages, while most of those gained during the recovery are low-wage jobs.

However, while the lower and middle-classes continue to struggle and even fade, the wealthiest Americans continue to prosper.

The U.S. now has the biggest income disparity gap of any industrialized country in the world

According to a recent study by University of California economist Emmanuel Saez, based on an analysis of American tax returns, in 2010, 93 percent of all new income growth went to the top 1 percent of American households. Everyone else, the bottom 99 percent, divided up the remaining 7 percent.

Clearly, the problem of wealth inequality in America continues to worsen. The evidence abounds.

American CEOs saw their pay spike 15 percent last year, after a 28 percent pay rise the year before. That's in line with a trend that dates back three decades.

CEO pay spiked 725 percent between 1978 and 2011, while worker pay rose just 5.7 percent, according to a study by the Economic Policy Institute released in May. That means CEO pay grew 127 times faster than worker pay.

Last year, CEOs earned 209.4 times more than workers, compared to just 26.5 times more in 1978. That disparity is mind-boggling and it is indicative of the way in which incomes have been siphoned off to the richest Americans and away from the common workers.

"We've always had inequality, but the magnitude of our inequality has actually increased dramatically," says Nobel Prize-winning economist Joseph Stiglitz. "The fraction of the income that goes to the upper 1 percent has doubled since 1980. The fraction that goes to the upper .1 percent has almost tripled since 1980. So yes, we've always had inequality, but not of this magnitude.

"The United States has become the most unequal country among the advanced industrial countries," says Stiglitz. "Some people have said, 'We don't care about equality of outcome, what we really care about is equality of opportunity. America's the land of opportunity.' We have less opportunity than not only the countries of all of Europe, but any of the advanced industrial countries for which there's data. And what that means is very simple: The life chances of an individual are more dependent on the income and education of his parent than in other countries. And an implication of that is people born in the bottom, who unfortunately chose the parents who were poor or not well-educated, will be more likely not to be able to live up to his potential."

Yet, this is more than just a matter of inequality. It has implications that effect the broader economy.

Rising income inequality is resulting in lower levels of economic growth. In a consumption-based economy, the masses must have adequate resources to maintain the economy. Consumer spending represents 70 percent of U.S. GDP, which is plainly unsustainable given current trends.

Undoubtedly, having a healthy middle class is a requisite to having a healthy economy.

But an abundance of low-wage jobs will not get us there. The vast majority of Americans are in long term economic decline. It should surprise no one that our economy is following right along.

"The tidal wave of low-wage jobs is dragging us down and the wage problem is not going to go away anytime soon," says Peter Edelman, director of the Georgetown Center on Poverty, Inequality and Public Policy.

Our gross inequality will lead to social instability. Obviously, those at the top are heavily invested in maintaining the status quo. But eventually that will lead to societal breakdown.

The American dream is falling further and further out of reach for far too many Americans, and our once-great economy is suffering for it. As that suffering works its way up the economic pyramid, there will be a critical mass, a mass movement for change. But by then it will be too late.

The America that our parents and grandparents grew up in will be irrevocably altered, for the worse.


  1. Anonymous9:26 AM

    Bull Shit!

    Hard Work and saving 20% of your earnings(pay yourself before you pay your Bills AND don't pay more than you earn). ALL people can be rich if you follow the above..Live within your means and accumulate wealth!

    1. It's rather remarkable that you could read the article and miss the entire point; tens of millions of Americans don't make enough money to save, and their ranks are continually growing. They live paycheck to paycheck and week to week. For huge swaths of this nation, the idea of saving 20% of their earnings is nothing more than a pipe dream. For these people, living within their means amounts to living in poverty.