Despite Growth, Families Struggle To Prosper in US

For American workers, these are "neither the best of times nor the worst of times," says economist Frank Levy.

Yes, 10 million new jobs have been created since President Clinton took office. But for many, wages are falling, and have been for years.

On the eve of the Republican and Democratic national conventions, politicians will be putting their own spins on the American economic outlook. Economists say the picture is actually mixed: solid though sluggish growth, modest inflation, and a growing gap between rich and poor that ignites political sparks.

"Widespread wage erosion persists in this economy," insists Jared Bernstein, an economist at the Economic Policy Institute, a liberal Washington think tank. He sees a "disconnect" between the economic expansion, now more than five years old, and the incomes of most individuals.

President Clinton, preparing for the November election, appears before the media when there is good news - such as the 4.2 percent annual rate in real economic growth during the April-June quarter that was announced last week.

"Our economy is doing well because we put in place the right policies, a comprehensive strategy," says Joseph Stiglitz, top economic adviser to Mr. Clinton.

To Republican candidate Bob Dole, the Clinton administration's handling of the economy leaves much to be desired.

On Monday, he proposed.a 15 percent cut in all personal-income tax rates, spread over three years, to pump up the economy. His plan, slashing taxes overall by $548 billion, would also cut capital-gains taxes in half.

During an election period, politicians often exaggerate or select statistics to fit their case. Following is an analysis of several facets of the United States economy, to help citizens sort through the campaign rhetoric.

The Economy

COMPARED with most postwar recoveries, the pace of the current expansion is modest. Growth in the economic output, after inflation, has ranged from a high of 3.5 percent in 1994 to a low of 2 percent in 1995. Growth in the l980s averaged 3.2 percent a year and in the 1960s 4.9 percent.

This year, the economy expanded at a 2 percent annual rate in the first quarter and 4.2 percent in the second. Most economists, including Federal Reserve chairman Alan Greenspan, expect growth to slow in the last half of 1996. "Historically," he said last month, "current levels of slack, measured in terms of either the unemployment rate or capacity utilization, have often been associated with a gradual strengthening of price and wage pressures. Yet, the recent evidence of such pressures is scant."

Inflation

INFLATION soared in the 1970s. The consumer price index peaked at 13.3 percent in 1979 and 12.5 percent in 1980 before the Federal Reserve's tight-money policy brought a deep recession. Inflation fell to 1.1 percent by 1986. It rose again to 6.1 percent in 1990 before the 1990-91 recession discouraged price hikes. Since then, inflation has been modest under the Fed's slow-money-growth policy. Most economists expect 3 percent or lower inflation this year.

Unemployment

LAST Friday the Labor Department reported that the economy generated 193,000 new jobs in July, somewhat fewer than economists and financial markets had expected. This pushed up the unemployment rate slightly, to 5.4 percent of the civilian labor force, from 5.3 percent in June.

The jobless rate was 7.4 percent when Clinton was inaugurated and peaked at 7.7 percent in June 1992.

The Fed used to reckon that inflation would start accelerating again if unemployment dropped below 6 percent. That happened in September 1994, but inflation so far has not changed much.

Mr. Stiglitz boasts that 10 million jobs have been added to the economy since Clinton took office. This is slower job growth than in the 1980s expansion.

Budget Deficit

THE Clinton administration predicts a deficit of $117 billion in the fiscal year ending Sept. 30, a $47 billion drop from the previous year. The deficit peaked at $290 billion in 1992.

Both the Clinton administration and the Republican Congress claim credit for the deficit reduction.

A combination of higher taxes on the well-to-do, as a result of the 1993 tax legislation, capital gains from the booming stock market, and a more peppy economy than anticipated has boosted revenues. And Congress cut spending.

Individual Income

WAGES of most American workers have continued to slip so far this year and last year, Mr. Bernstein maintains. Over the past 15 years, the median wage of men has slipped 15 percent - about 1 percent a year - after accounting for inflation.

Bernstein is looking at the median wage - the wage level at which half of workers earn more and half earn less.

There are, however, many ways of examining the income status of Americans. Taking account of total compensation - wages plus benefits such as health-care plans, the decline in real median individual income of most workers has been a bit less in the past 15 years - about 13.5 percent rather than 15 percent, Bernstein calculates.

By either measure, the incomes of the bottom 70 percent of American workers today are lower, after inflation, than the bottom 70 percent 15 years ago.

Such statistics don't tell the whole story. For one thing, most workers progress up the wage scale as they gain experience and seniority. But most workers aren't progressing as rapidly as did workers during the 1950s, '60s, and '70s. In many cases, wage hikes do not keep up with inflation. Moreover, if a worker loses a job, it will often be difficult to find a new one paying as well as the old one. So the median wage falls.

The relatively poor income growth of most workers reflects a redistribution of income toward the well-to-do. Indeed, per capita disposable income - in 1992 dollars the income of the average individual after deducting income and Social Security taxes - peaked at $18,008 early in the recession of 1990-91. Then it slipped a bit before climbing to $19,006 in the first quarter of this year. These numbers are averages, which are different from the median. The average - total disposable income divided by population - can rise if a prosperous minority becomes more prosperous while most employees find their income stagnating, which drags down the median.

Stiglitz sees another factor that may be depressing the median wage. With unemployment dropping by two percentage points since 1992, most new entrants into the labor force (not those just changing jobs) are likely to be less-skilled, and thus get relatively low pay.

Most of the job growth in the past three years has been in sectors that pay above-median wages, finds a study released this past spring by Stiglitz, the chairman of Clinton's Council of Economic Advisers (CEA). The study debunked stereotypes that most new jobs were "lousy" or part-time, Stiglitz says.

Bernstein, however, calls the CEA analysis "bogus." The CEA, he says, has no way of knowing what these new jobs actually pay in these sectors. In many of these sectors, real wages have actually been falling, he adds. He has the same complaint about a more recent study by Regional Financial Associates, an economic consulting firm in West Chester, Pa. The firm, he says, uses the same methodology as does the CEA report, and lacks precise wage data.

Mark Zandi, chief economist of the firm, admits the weakness in his data, but nonetheless holds that the economy is creating more higher-paying, quality jobs than it did earlier in the expansion.

Income inequity

DOLE'S tax-cut proposals, if enacted, would help the middle class and the rich more than the poor, says Lynn Karoly, an economist at RAND, a public-policy research institution in Santa Monica, Calif.

"It would support a continued widening of the income gap," Ms. Karoly says. Since the poor pay little in the way of income tax, they benefit little from a tax cut. And since the wealthy own a large share of stocks and other financial assets, they would benefit most from a capital-gains tax cut.

The welfare measure that Clinton approved last week will also reduce incomes of the hard-pressed. It will push 1.1 million children into poverty, says Sandra Clark, an economist at the Urban Institute in Washington. She and three colleagues last month completed a study that indicated the welfare-reform legislation before Congress would cut the safety net by about $16 billion per year when fully phased in. They estimate 2.6 million more persons would fall below the poverty line as a result.

Explaining his approval of the welfare bill, Clinton said, "We have got to be willing to experiment, to try to work to find ways to break the cycle of dependency that keeps dragging folks down."

Ms. Karoly says she is "discouraged by the dismantling of the safety net."

The long-term trend toward greater income polarization was confirmed in June by a Census Bureau study. From 1968 to 1994, the study noted, the share of the nation's aggregate income that went to the top 20 percent of its households increased to 46.9 percent from 40.5 percent. The share of income earned by the rest of the nation's households has declined in the same period.

For the top 20 percent, average household income rose to $105,945 in 1994 from $73,754 in 1968, a gain of 44 percent. The bottom 20 percent of households saw their income go up in constant dollars to $7,762 from $7,202, a 7 percent improvement.

Statistics for 1995, to be released in October before the election, should show whether this trend has continued or eased as a result of lower unemployment and rising average incomes. The numbers will also show if the number of poor people has fallen; presidential adviser Stiglitz expects this to occur.

Who has prospered and who has not

OF those in the bottom fifth of incomes in the US in 1979, 61 percent were still there in 1989, 23.8 percent had moved up to the second fifth of incomes, 9.5 percent to the middle fifth, 4.4 percent to the fourth fifth, and 1.5 percent to the top fifth. Very similar percentages applied to the decade after 1969. Most of those making income progress were doing so in the normal ways - graduating from school and going to work, getting promotions or better jobs, starting businesses.

In the two decades up to 1993, the young, least educated, and families with a single head fared worst as real incomes stagnated or declined. The majority of men did poorly. Most women enjoyed rising incomes up to 1989, but lost ground since then. By joining the work force or working longer hours, many women made up for the declining incomes of poorly educated husbands in the 1970s and 1980s. These two-earner families did make some financial progress.

But since the participation of women in the labor force has leveled off, and women are not putting in more hours at paid work in the 1990s, many households are struggling to keep up with their bills, says economist Bernstein of the Economic Policy Institute.

The senior population on average prospered in the last two decades.

Causes of inequity

'THERE has been a tendency to blame [growing income inequality] on particular policies or administrations," says Karoly, an expert on income distribution. "But it is much more fundamental than what any one administration does during its four-year term in office."

A few critics say the movement of income toward the top is not so bad, because households have shrunk in size with high divorce rates and more single mothers, or because people have moved up and down the income ladder quickly.

But Bernstein and Karoly take account of family size in their analysis.

And the amount of income mobility has been "greatly overstated," says Peter Gottschalk, an economist at Boston College who has studied the issue closely. Contrary to widespread opinion, people change income levels about as often in the US as in other countries, such as Germany or Finland.

More important, income mobility has changed little in the last two decades as income inequity rose. "People are not stuck," Mr. Gottschalk says. Yet, given its static level, income mobility has not been a factor in growing income disparities.

Economists find a multiplicity of factors caused growing income inequity:

*Organized labor lost clout in recent decades.

*Technological advances often reduced the demand for unskilled workers.

*Companies could outsource production to plants in Mexico or elsewhere as tariffs and other trade barriers fell.

*High-wage industries like autos and steel faced severe foreign competition.

*Deregulation in such high-paying industries as airline, trucking, banking, broadcasting, hospitals, and telecommunications swept away many jobs or trimmed pay.

*The high-wage defense industry shrank rapidly.

*The minimum wage declined in real terms as executive salaries soared. Handsome profit increases helped boost the price of corporate stocks, owned disproportionately by the well-to-do.

Solutions

SOME important countervailing changes are taking place. According to an analysis by Kevin Murphy of the University of Chicago, the gap between the wages paid to college and high school graduates, which zoomed upward in the 1980s, has plateaued. More people have been attending college or getting other training and are now flooding the job market. This is beginning to restrain the wage premium given those with higher education versus high school graduates or those with less education.

Also, Congress last week voted to raise the minimum wage by 90 cents an hour. Over the next two years, this should boost the income of about 10 million people working at or close to the current minimum wage of $4.25 an hour. Fairly low interest rates have pushed the nation's homeownership rate to a 15-year high of 65.4 percent.

Finally, the labor market is getting tighter. Employers "can't say automatically" that they need a college grad to fill a job such as bank teller, when the skill level is more suitable for a high school graduate, says Mr. Levy, an economist at the Massachusetts Institute of Technology in Cambridge, Mass.

"In the long run, the most important thing government at all levels can do to address inequality involves education," write Edward Gramlich and Mark Long of the University of Michigan in Ann Arbor. But even well-designed education programs aimed especially at those at the bottom income levels "will not cause a significant improvement in the income distribution by, say, the year 2000," they write in an Urban Institute publication.

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