A Rising Tide and Income Disparities, via the Wall Street Journal
Speaking about the economy a half-century ago, President John F. Kennedy told Americans that “a rising tide lifts all boats.” Today many disagree, including those in his party who want to be the next Democratic president.
Hillary Clinton is one. She has repeatedly claimed, most recently in Omaha, Neb., last month, that “the deck is stacked,” with “the wealthy getting wealthier at the expense of hard-working families.”
Bernie Sanders also complains that the system “has been rigged by Wall Street.” At the Democratic debate on Jan. 17, he said that “ordinary Americans are working longer hours for lower wages, 47 million people living in poverty, and almost all of the new income and wealth going to the top 1%.”
Nevertheless, what Kennedy said is as true today as it was in the early 1960s.
Most economists who have examined income data believe that the gulf between top and bottom earners in the U.S. has widened. Yet data from the Bureau of Labor Statistics’ Current Population Survey (CPS) from 1980-2014 reveal that the periods when low-income workers do best are generally the same as those when high-income workers prosper.
From 1980-2000, the earnings of the 90th-percentile earner (the person whose earnings are higher than the bottom 90% of earners and lower than the top 10% of earners) grew three times as fast as they did from 2000 on. The same was true of the earnings of the 20th-percentile earner, which also grew three times as fast between 1980 and 2000 as they did between 2000 and 2014. The average annual GDP grew about twice as rapidly in the earlier period as it did during the latter period.
This linkage appears in bad times as well. The 90th percentile, the 20th percentile and the median earner (defined as the earner at the 50th percentile) saw actual declines in real earnings from 2008-14.
A more detailed analysis of CPS earnings data (posted on the Hoover Institution website) reinforces the point. There is a statistically strong correlation between the growth in earnings of the 90th-percentile earner, the median earner and the earner at the 20th percentile. The middle and bottom tend to grow when the top grows. The connection between the groups is quite strong with the exception of the highest 1%, where the correlation is still positive but statistically weaker in recent years. But there is no evidence that the success among top earners is at the expense of lower earners.
The “rising tide lifts all boats” metaphor is off in one respect. When a tide rises, all boats move up by the same amount. Earnings growth doesn’t follow that pattern; sometimes the bottom moves up by more than the top. In the mid-1980s, earnings of the 20th percentile grew about 40% more rapidly than earnings of the 90th percentile.
Over recent years, top earners have enjoyed more wage growth than those at the bottom. This is the source of the complaint that the rich have taken all the spoils of growth. But the bottom is not struggling because the top is thriving—and reducing earnings growth at the top wouldn’t increase earnings growth at the bottom.
All groups’ earnings grow when the economy is prospering, and high growth is especially important for lower-income earners. Additionally, the lagging earnings among the least-skilled workers reflect deficiencies in demand for those workers—and this deficiency, crucially, is a result of low productivity.
In a 2012 study published by the Kansas City Federal Reserve Bank, James Spletzer and Ifound that there are chronically high job-vacancy rates and low unemployment rates in the most skilled occupations, but the opposite in the least skilled occupations. In good times and bad, there are many more service workers unemployed than there are job vacancies for those types of workers.
But job vacancies for managers and professional workers usually outnumber the unemployed. Even in the housing boom year of 2006, while there were about two professional vacancies for every unemployed professional worker, there were more than seven unemployed construction workers for every construction job vacancy.
Wages move with demand. Just as high wages for skilled labor reflect strong demand for those who can do the jobs required in our advanced economy, low wages at the bottom reflect poor demand for those without the requisite skills.
To raise wages at the bottom, the productivity of the least-skilled workers has to improve. Better education is at least part of the answer. Redistribution through the tax system won’t improve those skills; if anything, it will work in the wrong direction by making skill acquisition less rewarding.
The earnings of individuals with low incomes are most likely to grow when the incomes of top earners also grow—and the best way to make the poor prosperous is by improving their skills and growing the overall economy. Some boats are bigger than others, but draining the ocean won’t help boats of any size.