In 2014, the US economy added more jobs than in any year since the 1990s. In fact, this longest streak of job growth on record has persisted into 2015. Inflation-adjusted wages are up by 1.4% annually over the last two years, more than twice the pace of the last recovery. But this is still not enough to make up for decades of subpar gains for middle-class families–a challenge shared by many other OECD economies. President Obama’s approach to what he has termed “middle-class economics” is about remedying this decades-long challenge for the future.
In the US, median incomes are up 17% since 1973. Two facts suggest that this increase falls far short of what we should have been able to accomplish: from 1948 to 1973 middle-class incomes rose 98%; and from 1973 to 2013 productivity increases should have allowed an ordinary worker to purchase 82% more per hour of work, well above the increase actually experienced by typical families.
Family incomes critically depend on three factors: the overall productivity growth in the economy, the degree to which those gains are broadly shared and labour force participation. These three factors have evolved differently in different economies, but all three have trended worse across a wide range of OECD economies in recent decades.
The largest factor in the US has been the slowdown in productivity growth. From 1948 to 1973, productivity grew by 2.8% annually, but since 1973 it has slowed to 1.8%, in part reflecting disruption from the oil shocks and the breakup of the Bretton Woods monetary system. But the slowdown is also the result of policy choices: for example, the US made significant investments in the Interstate Highway System in the 1950s and 1960s, but in subsequent decades infrastructure investment as a share of GDP decreased substantially.
The second largest factor in the household income slowdown in the US has been the increase in inequality. In 1973, the bottom 90% of households received 68% of the nation’s income, but receives just 53% today. Increased inequality partially reflects technology, but also the policy choices we have made– including the failure to maintain expansion in education just as unionisation and the real minimum wage were declining.
The third factor in the US is the falling labour force participation. Although the post-2007 decline–primarily caused by demographic changes and the recession–has garnered the most attention, prime-age male participation has been falling since the 1950s and prime-age female participation since the 1990s. These trends reflect societal forces, but also choices we have made about our training systems, tax laws and policies on workplace flexibility.
Of course, we cannot change the last 50 years, but we can continue the work we began in the depths of the crisis–including investments in infrastructure and manufacturing, tax cuts for working families, steps to slow the growth of health costs, and more.
The initial indication is that these policies are working. Not only has the US enjoyed stronger growth and faster job gains in recent years, but it is leading a global revolution in technology and innovation, such as in cloud computing, mobile devices, personalised medicine and advanced materials to make major advances across our economy.
President Obama has proposed a range of other measures to boost productivity growth, including expanding overseas markets for our exports, reforming our business tax system, encouraging investments in technology, expanding education and reforming our immigration system.
While higher productivity is necessary for sustained increases in middle-class incomes, it is not sufficient, which is why President Obama is also calling for steps to expand opportunity like an increased minimum wage, expanded tax credits for low-income workers and the middle class, and a fairer tax system overall.
Enabling more people to participate in the workforce is critical, a goal that will be furthered by better child care; more flexible workplace practices, including paid leave and paid sick days; a tax system that supports secondary earners; and a better system for training and job matching.
The facts are clear: a strengthening economy is helping to boost jobs and pay, but a focus on increasing shared growth is essential in the US as elsewhere in the OECD to achieving the goal of higher incomes for middle-class households.