Tyler Cowen, of whom I'm generally a big fan, summarizes an interesting post by Michael Mandel on recent productivity growth (the lack thereof). But he ends by trumpeting Hamilton Project analyses claiming to show that men's earnings declined by 28 percent between 1969 and 2009. This claim, like the Mandel analyses, reinforces Cowen's argument that we are in a Great Stagnation, but it's not true! Stop this meme!
I've not had much time to blog recently, so I submitted a brief critique in the comments to the Leonhardt post that introduced the world to this unfortunate study (co-authored, unfortunately, by a fellow classmate of mine from Harvard's inequality program) and in the comments to the Hamilton post. Here's the basic problem: the analyses assign all nonworking men annual earnings of $0, and since labor force participation among men has declined, the result is a big drop in median earnings over time. But a lot of that decline in labor force participation is attributable to earlier retirement (they include men as old as 64), later and longer school enrollment (they include men as young as 25), rising "disability" rates (which do not correspond in any obvious way with changes in health or job demands but which do correspond with increasing generosity in disability benefits), and other factors having nothing to do with the strength of labor markets.
I re-crunched the numbers as follows. I included all men age 20 to 59 except for those who said they worked only part of the year or not at all because they were retired, going to school, in the Armed Forces, sick or disabled, or taking care of home and family. Using the inflation adjustment that the Hamilton guys likely used, I find a decline in median earnings of 9 percent, not 28.
Note, however, that comparing 1969 and 2009 holds up a likely peak year (when the business cycle was at a high) to a trough year (when it was at a low). Comparing 1969 to 2007 is apples-to-apples, and when I did that, the median was EXACTLY the same in both years (to the dollar, which is a pretty crazy coincidence). Finally, if I use the Bureau of Economic Analysis "personal consumption expenditures" deflator, which I think overstates inflation somewhat less than other commonly-used deflators, median earnings among men rose 7 percent from 1969 to 2007.
Seven percent is no great shakes, but this figure is also too small for assessing how men's economic fortunes have changed over time. None of these analyses account for the fact that as a group, husbands reduced their hours over time in response to rising work and wages among wives. Nor do they account for the rising share of non-wage benefits in total compensation (health and retirement benefits have eaten into wages, presumably following the preferences of the median worker). Nor do they include the impact of taxes (which have declined) and tax credits (which have increased). In addition, even my figures may overstate inflation, thereby understating the earnings increase over time--inflation measurement is much more tricky when choices within categories of goods and services and retail outlets explodes and when so much of what we consume is (thanks to the inter-web) free. Finally, the analyses do not account for changes in the composition of the population. For instance, the fact that more men today are nonwhite and foreign-born pushes the 2009 median down, but it is likely that the typical white, nonwhite, native-born, and foreign-born men are all doing better than the trend in the overall median implies. Someday I'll get to a full analysis.
Subject for discussion (and a future post): how are we as a nation supposed to clearly understand the state of the economy and our living standards when even moderate think tanks and researchers are so eager to hype negativity? As I've said before, policymakers aren't the only people who--individually or collectively--can talk down the economy.
Hope you find the blog interesting. Much like the Strokes, it will change your life (Correction: should be the Shins of course, who are not nearly as good as the Strokes. Correction 2: this blog will not really change your life.). And if you read The Empiricist Strikes Back more than the Times and just don't know, I have a piece in the current Room For Debate forum on Americans' views toward wealth inequality. Enjoy!
Yet again and again [economists and other researchers not named Hacker or Pierson] have found themselves at dead ends or have missed crucial evidence. After countless arrests and interrogations, the demise of broad-based prosperity remains a frustratingly open case, unresolved even as the list of victims grows longer.
All this, we are convinced, is because a crucial suspect has largely escaped careful scrutiny: American politics.
– Jacob Hacker and Paul Pierson, Winner Take All Politics
Here's a chart showing trends in the share of income received by the top one percent for all the modern industrialized nations for which data is available going back to the early twentieth century:
The data is from a new website created by several of the leading scholars studying inequality with tax data. The American trend, the thick black line, is from the much cited work of Thomas Piketty and Emmanuel Saez, which is part of this new database.
From 1910 to 1970, American inequality trends follow the broad international pattern, and inequality levels are in the middle of the pack. That's basically still true from 1970 to 1986:
It's rising a bit over the period, but only by a percentage point. Note I'm keeping the scale of the charts the same for each one. Here's the chart for 1988 to 2006:
Uh-oh. Now we look like our inequality levels are higher than everywhere else. What happened? 1986 to 1988 happened, as is evident from the 1970-2006 trend:
Wow, that's a four percentage point increase in two years—three times the increase over the 16 years from 1970 to 1986, and bigger than the 12-year increase from 1988 to 2000. Huh. There are two possibilities here. One is that the data is right. You can see where I'm going here.
It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase). And if this may be considered a permanent change in the tax regime, then the effect is for more income to show up on individual returns after 1986 than before, artificially lifting the top income share in every subsequent year.
Hmmm...which possibility is more likely? Let's look at another chart showing the trends just for the northern hemisphere Anglophone countries, to which I'll add a new line:
OK, from about 1940 to 1986, these trends line up strikingly, then the U.S. trend goes AWOL. However, let's instead assume the post-1986 U.S. trend is an artifact of the 1986 tax reform. First, let's increase the top one percent share from 1986 to 1988 by the same rate that it increased in the U.K. Then let's let the top share in the U.S. increase by the same rate that it actually did from 1988 to 2006, but from the new, lower 1988 level. The result is the revised line above. This makes the U.S. trend and level consistent with not just the U.K., but Canada.
Of course, if the 1988 to 2006 top share levels are more accurate in the U.S. after 1988 than before 1986, then rather than lowering the post-1986 trend, we should raise the pre-1988 trend. That would make U.S. levels uniformly higher than in the U.K. and Canada. But of course, the measured U.K. and Canadian top share levels may also be artificially low due to tax avoidance. And of course, the common trend over the three countries would remain.
So, to review, when the post-1986 U.S. trend is corrected, the U.S. experience with inequality over the past 100 years is broadly consistent with the rest of the modern world. Here's the summary chart for 1910-2006, with the revised U.S. trend.
Comparing levels is more difficult, but many recent cross-national comparisons related to inequality are about why trends differ. What these five charts clarify is that explanations for the recent rise in American inequality that focus on uniquely American causes—such as greater political muscle-flexing among corporations and the mega-rich—are insufficient (and unnecessary).
Update: I've received several responses offline that it's going to far to say the experience of the U.S. is like that "everywhere else" and that it is really only like the other Anglophone countries. To some extent, that's a fair criticism. But of 15 countries shown here, only Germany, the Netherlands, and Switzerland haven't experienced an increase in inequality since 1980. And the increases in Norway and Finland are as big or bigger than in the U.S., U.K., and Canada. Sweden's increase is also nearly as great in relative terms (starting from a much lower level of course). But even if this is a story about the U.S., U.K., and Canada or the Anglophone countries versus the rest of the world, that's still a problem for Hacker's and Pierson's U.S.-centric theory.