The Invisible Recession: How Forty Years of Stagnant Incomes Got Lost in the Shuffle

The recession is over.  The US economy has been growing since July, 2009.  In the final quarter of 2011 it grew at a 3% annual pace.

Personal spending is up.  New unemployment claims are down.  The economy is back.

So why are so many people still having such a hard time?

The economy may be back, but the realonomy has been in recession for almost forty years.  This invisible recession continues today.  The last time the average American had a raise was 1973.  That’s not socialist rhetoric; that’s statistical reality.

It’s even worse if you’re young.  The average young American worker today (age 25-34) makes an astonishing 26% less than the average young American did in 1973.

Many people don’t see how that can possibly be true.  Older people especially look back to what they were making in the 1970s and see themselves being much better off today.  Is it really true that ordinary people made more forty years ago?

There are several reasons why people don’t get the math right when they try to remember what things were like forty years ago.  The first is inflation.

[pullquote]The “ordinary” American doesn’t have a post-graduate degree.  The ordinary American was lucky to graduate high school.[/pullquote]

It’s very difficult to adjust for inflation in your head, but conveniently the Bureau of Labor Statistics has a handy inflation calculator on its website.  One dollar from 1970s is worth $5.87 today.

According to a 1987 Harvard study published in the Economics of Education Review, the average starting salary of a Michigan teacher was $7581 in 1970.  That would be worth about $44,500 today.  According to TeacherPortal.com, the average starting salary of a teacher in Michigan today is just $35,557.

Another reason people have trouble seeing the invisible recession in wages over the past forty years is that they rely on their own personal experiences.  For most people, their wages go up as they get older.  As a result, they think wages are rising.

The proper way to think about wage changes over time is to ask “how much does someone make today who is as old as I was then?”  If you’re 40, don’t compare your ages with what they were when you were 30.  Compare them to what 40-year-olds made ten years ago.  You’re likely to come away disappointed.

The third reason we don’t hear much about the invisible recession in ordinary people’s wages is that most of us who follow economic news aren’t ordinary people.

The average American graduated high school and maybe did a few credits at community college.  One out of four Americans didn’t even graduate high school.  For most of you reading this article, that’s hard to believe, but look up the statistics: it’s true.

While Americans with advanced degrees have experienced rising wages over the past forty years, American high-school dropouts and high-school graduates haven’t.  Their wages have declined.  And they’re Americans too.

They’re not just Americans; they’re the majority.  Roughly speaking, the bottom quarter of Americans drop out of high school while the top quarter finish college.  The fifty percent in the middle are typical Americans.

[pullquote]Would it be such a terrible thing if fast food workers got a twenty percent raise this year while executives took a pay cut?[/pullquote]

The “ordinary” American doesn’t have a post-graduate degree.  The ordinary American was lucky to graduate high school.  And wages for ordinary Americans have been declining for almost forty years.

There’s no reason for anyone’s wages to be going down.  Personal income per capita, adjusted for inflation, has doubled over the past forty years.  If the income distribution today were as equal as it was in 1973, everyone’s wages could be twice as high.

Instead, a few people at the top make 1000% more than people at the top did in the 1970s, while the bottom half of Americans have had no raises at all.

Literally all of the economic growth of the past forty years has gone to the top half of Americans.  Most of it has gone to the top twenty percent, and an obscene proportion of it has gone to the top tenth of one percent.  That’s just not right.

We’ve gotten so used to the idea that the rich get richer that most of us now take it for granted.  What America needs, however, is forty years in which the rich get poorer.  The rich can afford it.

Would it be such a terrible thing if fast food workers got a twenty percent raise this year while executives took a pay cut?  It’s sad that most people seem to think so.  If that’s true, it’s not our economy that needs rethinking; it’s our entire system of values.