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Tuesday
Mar102009

The American Dream died in February 1973.  

Since Bob Herbert wrote about Reviving the Dream today, this is a good time to put up the problem-defining graphs from a longer analysis I haven't finished.

The American middle class and working class are essentially the more than 90 million non-supervisory "production workers" who constitute 84% of non-government, non-farm employment. For 26 years, from 1947 to January 1973, their average hourly pre-tax earnings, adjusted for inflation using current methods, grew robustly and steadily at an average annual "real" rate of about 2.2%. At that rate, average purchasing power would double in 33 years. Parents expected their children to have more prosperous lives than their own, and it was happening. It was the Golden Age of the Middle Class. Then, suddenly and permanently, it ended in February 1973.

From 1947 to 1973 real average hourly wage of production workers rose 2.2 percent annually to about $18 per hour in 2009 dollars and then declined to about $16 from the early 1980s to 1997 and stayed below $18 for 35 years until it spiked to just over $18 in late 2008

The proximate cause of the sudden change is obvious. By definition, all of these "production workers" are "employed," and the BLS hourly earnings statistics are gathered from payroll records. Before 1973, employers as a group were giving their existing workforces average annual pay increases that exceeded the inflation rate by 2.2 percentage points. After 1972, they handed out increases that on average only just kept even with inflation.

From 1948 to 1972 production workers got average annual real wage increases averaging 2.35 pct, but from 1973 to 2008 the average annual real wage increase was only 0.01 pct

Meanwhile, the larger economy measured by real GDP per employee had a stagnant decade from 1973 to 1983. But then it took off and averaged 1.14% annual average growth for 25 years. That is modest growth compared to the 2.69% average from 1947 to 1973, but since 5/6 of American workers got a zero share of the post-1983 growth, those who did —presumably management and the owners of capital—did quite nicely.

From 1947 real average hourly earnings of production workers tracked with real GDP per production worker until 1963 when real GDP per production worker began to increase faster and continued to increase faster every year through 2008

So, here's the problem in a nutshell. Average real earnings of the 5/6 of Americans who are production workers cannot go up—and the American Dream cannot be revived—unless employers consistently grant annual wage/salary increases that on average exceed the inflation rate. What changes would motivate and enable large, trend-setting employers to return to giving average annual wage increases—for their existing workforces—that exceed inflation by 1% or 2%?

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Reader Comments (3)

Skeptic: The inflation rate spiked to 12% in 1974 (and later to 15% in 1980), and there was a recession lasting until 1975.

But, if BLS data is payroll based, the recession means that the BLS "average" does not account for unemployed people. If based upon payroll data, indeed, it does not.

Meaning the American Dream (in terms of perpetually rising net incomes) must have tanked for the larger group of American workers that includes the unemployed.

March 17, 2009 | Unregistered CommenterLafayette

Lafayette, thanks for stopping by.

To your point, this graph from State of Working America shows the post-war unemployment rate hovering around 4-5% until about 1971, when it began a long upward trend peaking at about 9% in 1983-84. In addition, families have tried to cope by having a second spouse work and by working longer hours, both of which have been significant trends since 1973. Link. And, of course, the personal savings rate began to decline in the early 1980s from about 10% to less than zero in 2005. Link.

My point is that traditional success with job creation and reducing unemployment rates will not per se get the middle class as a group moving again. One of the goals of the White House Task Force on Middle Class Working Families headed by VP Biden is “helping to protect middle-class and working-family incomes.” Link. Elsewhere on the same page it says the initiative “is targeted at raising the living standards of middle-class, working families.” So which is it—“protecting” or “raising?” I have read (but can’t now find) a report that the Task Force is trying to settle on the metrics by which to measure success or lack thereof. Without disagreeing with your point, I think one of those metrics should be average real hourly earnings.

March 17, 2009 | Registered CommenterSkeptic

I came to this country from a war torn country as a teen. When I graduated high school, the first IBM-PC came out in mid-1970's. I remember choosing engineering since it was the least discriminatory field and finished my advanced degrees with a lot of sacrifice along the way. Working on non-managerial track, my technical skills have to be constantly updated to this day. My salaries have correlated with my motivation to either keep up or fall behind with each major technology refresh. It's not possible to stop learning, as the next graduate would take my job for much less. My son is now in college, and he's facing the same international competition in talent and wage as 35 years ago.

February 11, 2013 | Unregistered CommenterImmigrant

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