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To boost incomes, Uncle Sam should lend a hand

Low wages in the US are unlikely to rise. And other ways to increase household income, such as two earners and easy credit, have run their course. Washington can immediately help Americans struggling to make ends meet by expanding the successful earned income tax credit.

By Lane Kenworthy / October 4, 2011

Tucson, Ariz.

The Great Recession and its aftermath are at the forefront of Americans' concerns right now. But wages were in trouble long before the economic crisis hit in 2008. After rising steadily for a generation following World War II, the wages paid to Americans in the lower half of the earnings distribution have barely budged since the 1970s.

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That isn't because the US economy has failed to grow. It's because growth of wages no longer tracks growth of the economy. Economic growth and wage growth have become decoupled.

This is worrisome. Rising income, even more than the opportunity to go from rags to riches, is at the core of the American dream. And people who feel they are better off than before tend to be more generous, altruistic, and participatory. If wage stagnation continues, America risks heightened frustration, alienation, and selfishness.

Moreover, given that pay and incomes have been growing rapidly for those at the top, the country has experienced a sharp increase in polarization. At some point this could engender serious societal friction.

Maxing out on two-income households

According to one view, though, household living standards have been improving without wage growth, and they can continue to do so.

It's true that incomes in households with two adults have risen in spite of stagnant wages. But that's due largely to the steady increase in second earners. America is approaching the end of its ability to use rising household employment as a substitute for rising wages. And in any case this isn't a solution for single adults.

It's also true that during the past few decades, Americans have benefited from improvements in product quality and the invention of new gadgets – new medical technology, personal computers, cellphones, the Internet, MP3 players, e-readers, and so on. These enhance quality of life. Maybe this trend will continue, but it doesn't seem wise to assume it will. Nor would that be enough. iPhones are great, but owning one won't help pay a mortgage or college tuition.

In the 1990s and 2000s, borrowing helped to substitute for rising wages and household incomes. With home values appreciating, middle-class families could take on more and more debt in order to fund rising consumption. But for many, that option is now foreclosed.

A second view holds that wage stagnation actually is healthy, because low wages spur job creation. This seems plausible in the abstract; low wages should make it more attractive for employers to hire. Is it true in practice?

If it's correct, the lack of wage growth over the past three decades should have resulted in increasingly strong job growth. But that hasn't happened. The rate of employment growth has slowed in each successive business cycle from the 1980s to the 1990s to the 2000s. Job growth was especially lackluster during the 2000-07 business cycle; the country's employment rate did not increase at all.

Wage growth unlikely to return

A third approach is to hope that wage growth will return. Alas, I suspect that's unlikely.

The key to rising wages prior to the 1980s was that many firms faced limited global competition, little pressure from shareholders to maximize short-run profits, and significant pressure from unions to pass a "fair" share of profits on to employees. These three features of America's postwar economy are gone, and it's unlikely that they will return.


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