Apocalypse Deferred?
Unpacking the Census Bureau’s recent report on median income.
The 2016 election season has been gloomy. Concerns over terror and war abroad and income inequality and racial tensions at home have made for a pessimistic dialogue to say the least. Donald Trump ascended to the Republican nomination claiming that “we don’t win anymore” through issues like “weak” trade and poor governance, and Bernie Sanders’ dire predictions of an American oligarchy aroused considerable support among a generation that came into adulthood in the wake of the 2008 financial crisis.
Nevertheless, the Census Bureau provided an unexpected glimmer of hope a few weeks ago, when it reported that its Current Population Survey (CPS) had found an increase in median household income for the first time since 2007. Millions of people had escaped poverty and obtained health insurance, increasing their quality of life. Even more surprisingly, in a year when racial tensions have often boiled over, African American and Hispanic families made significant gains in wages and health. At first sight, it may appear as if the CPS portends a return to vibrant economic growth and an increase in national standards of living. Unfortunately, the root cause of the wage growth, a tightening labor market, is likely to harm the United States in the long term.
For the last few decades, American workers have seen their paychecks stagnate, putting pressures on households at or below the median income. The issue was thrust into the nation’s consciousness by the Occupy Wall Street movement of 2011, which sparked calls for measures designed to close the gap between low- and high-earning Americans, such as minimum wage increases.
At first sight, it may appear as if the CPS portends a return to vibrant economic growth and an increase in national standards of living.
Economists have often claimed that these trends are nearly irreversible. In his 2015 book The Internet Is Not the Answer, British-American journalist Andrew Keen claimed that the increasing “Uberization” of the economy, which had eroded traditional workers’ protections by increasing freelance and contract labor, would continue to depress wages if left unchecked. Others wrote that slow, unevenly spread growth was the new normal, and that the United States was at risk of reverting to the Gilded Age of the late 1800s, with extravagant displays of wealth at the top contrasted against stark poverty and unemployment at the bottom.
Despite media negativity, Gallup polls at the summer’s end found Americans to be increasingly confident in the economy. But even if the positive CPS results could have been predicted by examining economic confidence indicators, the gains shown in the CPS are impressive. Median income increased by a substantial 5.2 percent, or just under $3,000 per year. Poverty fell by 1.2 percent, freeing 3.5 million people from America’s lowest income brackets. Pre-2008 patterns of growth in the Sun Belt also reemerged. The middle class in southern states like Florida and Texas has begun to grow again (although the outburst of the Zika virus in Florida and an oil bust in Texas both occurred after the CPS data was collected, which may dampen the revival.) Gains in healthcare coverage were substantial, as 5.4 million people gained insurance between 2014 and 2015. These gains were also more evenly distributed than in the past.
While African American and Hispanic households have recovered from the financial crisis far more slowly, they too finally made real gains in the CPS. Hispanic household income climbed by a substantial 6.1 percent, while African Americans gained 4.1 percent. Middle-class black families are not in the clear yet; their household wealth remains much lower than that of their white counterparts and the value of their homes is still smaller than the national average. Nevertheless, the financial burden they have carried since the recession has grown lighter.
How did these gains happen? Conventional wisdom suggested that major political change would be needed to break the vicious cycle of falling income. Andrew Keen called for government prosecution of “new monopolies” like Google, while the Fight For $15 campaign claimed that a higher wage floor was needed to protect workers from abusive corporate practices. However such changes have not come to pass. Internet giants like Google remain as strong as ever, and the states that raised the minimum wage in recent years did no better in the CPS than their more conservative counterparts.
For middle-income workers today, the exodus of retirees from job fairs and payrolls may provide a needed financial cushion.
The most plausible explanation for the wage increase is a tightening labor market. The American Enterprise Institute’s Mark J. Perry pointed out in a December 2015 blog post that as the share of households with no earners grows and the working-age population shrinks, the labor market contracts. Consequently, a smaller pool of workers can command a much larger average paycheck. Perry believed that this would actually depress median incomes, as younger and less-experienced workers would draw smaller salaries than their immediate predecessors. But he fails to account for the overall shrinking of the workforce, which forces employers to pay higher wages. An aging workforce is bad news in the long term, as it dampens both productivity and overall economic activity. Firms are unable to find the workers they need. Consequently, swiftly graying countries like Japan and Italy are already paying the economic price for the loss of labor supply. But for middle-income workers today, the exodus of retirees from job fairs and payrolls may provide a needed financial cushion.
One year does not make for a long-term trend. Even if the aftermath of the financial crisis came to a stop today, the damage it inflicted upon Americans’ household savings and wage growth in the past eight years is likely to be permanent. Nor is it clear that the CPS’ growth will show up again in the next edition. Economic headwinds like Brexit and the weakening of America’s massive energy industry occurred after the CPS was compiled, and may already be depressing growth. But the CPS results have considerable ramifications for the American media. As former Washington Post reporter Ezra Klein pointed out last week, he and his colleagues almost entirely missed a trend toward high growth over the past year, focusing mostly on the more negative news from foreign policy and the presidential election cycle. Negativity may have a far stronger pull for readers and viewers. But commentators and reporters alike must take care to avoid casting real progress in a negative light.
