July 27, 2012 · 1 Comments
Source: Jared Bernstein
By Jared Bernstein:
So, I see where the NYT is introducing a series on the economic challenges facing the American middle class. That’s good news—it’s obviously a topic of great concern, yet there’s surprisingly little systematic analysis of the economic plight of middle-income families.
I wanted to offer a bit of orientation or background material from my own perspective, having worked on this question for decades by now.
First, what do we mean by middle class? Back when I was at the White House (and could get smart people to do cool stuff), our middle-class taskforce asked colleagues at the Commerce Department to take a whack at this question. I thought what they came up with was great and didn’t get nearly enough attention.
Instead of a mechanical explanation (e.g., “the middle-class is the 40-60th percentiles of the family income distribution”), they start by recognizing that “middle-class” is:
…a combination of values, expectations, and aspirations, as well as income levels. Middle class families and those aspiring to be part of the middle class want economic stability, a home and a secure retirement. They want to protect their children’s health and send them to college. They also want to own cars and take family vacations. However, aspirations alone are not enough; middle class families know that to achieve these goals they must work hard and save.
If you make a reasonable list of these aspirations—think of it as the consumption, investment, and saving budget of the American middle class family—you can then price it and compare it to family incomes. That’s basically what the Commerce study does (see their Table 2), and the findings provide some insight into what’s come be known as the middle-class squeeze.
Basically, the costs of certain components of the middle-class budget, like housing, health care, and college, have gone up a lot faster than a) the rest of the budget, and b) for many families, their incomes (regional variation is very important here, btw—see Commerce’s Fig 2). In fact, as the NYT’s first post shows, middle class incomes have seriously sagged for awhile, but were especially whacked in the recent recession and subsequent slog.
[A few remarkable data points re that last observation: The picture in the NYT shows real median family income, i.e., adjusted for inflation. Towards the end of the figure, you see a 6% decline in real family income, down more than $4,000 in 2010 dollars. But what you don’t see there is that even in nominal dollars, median family income was lower in 2010 than in 2007, by almost $1,000. Such weak growth, before you even account for inflation, never occurred before in a series that begins in 1947.]
At any rate, I’m hoping the NYT looks at these budgetary issues–they provide an important granular dimension to the analysis of the squeeze.
I’m sure they’ll get to the usual suspects that always show up in these discussions (as they should): trade, technology, education, inequality, mobility…but I wanted to make sure that those interested in this don’t forget a factor so important yet so obvious that it sometimes gets overlooked: full employment.
I discuss the issue at some length here, and at greater length in this book, co-authored with Dean Baker. There’s a bunch of statistical evidence to wade through (the first link provides a friendly summary), but as regards middle-class income growth, the important thing to internalize is quite simple: when labor markets were very tight, the middle class did much better than when labor markets were slack.
I know, a lot has changed over the decades in terms of family type, trade, immigration, skill demands, and so on. Neither would I want to reduce the middle-class squeeze down to one variable—there are many moving parts to this (costs of college, health care, housing, as in the Commerce report).
But the relationship between middle-class economic well-being and labor market slack has remained remarkably important. In fact, the last time median (and low) incomes grew at the pace of productivity, instead of lagging behind it, was in the latter 1990s, when the job market hit full employment for at least a New York minute.
I’ll end for now by repeating one figure from the earlier post cited above because it riffs off of the series of real median family income in the NYT post. I created a simple model of middle-income growth as a function of labor market slack, and then simulated how the median family would do under full employment and “half-full employment” (a pretty tight job market) compared to the actual outcomes.
Source: Census data, my calculations.
From the earlier post:
In the first simulation, by 2007, right before the Great Recession, middle-class incomes under “pure full employment” were $9,200 above the actual; under “half-full employment,” they were $4,400 higher. Where would this extra income come from? In fact, we’re sacrificing output when we run slack labor markets, so some would come from missing growth. But another source would be more equitable distribution of growth, such as prevailed throughout the first few postwar decades when median family income tracked productivity growth.
I expect the scholarly folks at the NYT will get to this in their series, to which I’m quite looking forward. But I wanted to get out in front with some aspects of this debate I’ve found to be particularly germane.
[BTW, a great full employment anecdote for you: The other day I’m sitting in an airport in a northeastern city, reading about full employment (Hyman Minsky on Keynes), when I hear my name. Turns out Bob Pollin, old friend and great lefty economist, was heading for a flight. He stopped for a quick chat and next thing you know he hit me with his new book, called…wait for it…Back to Full Employment. I’ve just started it and it’s great so far, both on the economics and especially the politics. That's got to be a sign, right?!]