Wall Street Journal
By: Josh Zumbrun
June 4, 2014
From the 1950s until sometime in the 1970s or 1980s, the U.S. economy was the proverbial rising tide lifting all boats. Living standards were rising for the broad middle class. Economic growth was driving down the poverty rate. Then something shifted.
The left-leaning Economic Policy Institute is launching a new initiative to study what drove that shift - and what can be done to reverse it - that places a large part of the blame on U.S. labor market policies. The initiative is already drawing attention from the administration of President Barack Obama, whose labor secretary, Tom Perez, will give a keynote speech at the launch event for the effort Wednesday morning.
The lengthy EPI analysis seeks to lay out the case for what went wrong and then to chart a policy path forward. But it also takes a few detours into a more utopian past, examining what the world would have looked like if these inequality trends had not arisen.
The report ponders what the incomes of the broad middle class, defined as the 20th to 80th percentile, would be if they had merely kept up with average wage growth - in other words, had inequality not worsened . The average middle class household would be earning an extra $12,000, or about $85,000.
"Because the top captured so much of the growth, there was simply less left over for everybody else," said Heidi Shierholz, a labor market economist at EPI and one of the co-authors of the report.
Instead, in a trend that's been well-documented, the wealthiest 1% have seen quick wage growth. The wages of households as wealthy as the 80th to 90th percentile have wages that have not kept pace, and even declined, in recent years.
While middle class wage growth has been slower, it has still been positive. That's not true for the poverty rate.
Prior to the 1970s, the poverty rate was falling as economic growth improved--until that relationship frayed, too.
The EPI produced a projection of what would have happened to poverty if growth continued to reduce poverty as quickly as it did from 1959 to 1973.
Their conclusion: poverty was on track to being eliminated by the mid-1980s.
"This shows the statistical link between GDP growth and poverty reduction before 1973," said Josh Bivens, another co-author of the report. "Would it have actually gone to zero? Maybe not zero. But the link between growth and reduced poverty stopped with the rise of income inequality"
While poverty may not have been completely eliminated, the rate was quickly heading in that direction, with the poverty rate falling from 22% to 11% over the 15 year period ending in 1973.
The EPI released the report as part of its "Raising America's Pay" initiative, designed to focus on labor market policies that could raise wages. The authors argue that stagnant middle-class wages result primarily from policy decisions and business practices. The role of technological change and globalization, often fingered as key culprits in the rise of inequality, were lesser factors, they argued.