Why are American incomes declining?

Why are American incomes declining? In beginning to identify the answer to this important question, it is important to identify the timing of the decline. If the decline in real incomes began decades after a certain kind of policy change, it is difficult to blame this decline on the policy change in question. For example, the Wagner act, which made it easier for US workers to form unions and was passed in 1935 could hardly be blamed for declining wages if the decline in incomes begins in the 1980's or 1990's, fifty or more years after the Wagner act was passed.

One difficulty in identifying the start of the decline in US real incomes, is that the decline begins for different subsets of the population in different years. For the average American male the decline began quite early, around 1970. The average American male has a lower income -- in real terms, adjusted for inflation -- than their counterparts forty two years ago, when Richard Nixon was President and Neil Armstrong's moon walk was a recent event. As economists Michael Greenstone and Adam Looney with the Brookings Institute have documented, for American males without a high school diploma, real median earnings are a whopping 66% lower than in 1969. For better educated American men, the decline has been less steep, with those with a college degree earning 12% less than males with a B.A. in 1969.

For some readers these declines might strike them as odd, perhaps especially from the perspective of their own life experience. A reader might question the evidence of general income decline, because they themselves have a higher standard of living than they did twenty or thirty years ago. In this case they are comparing apples with oranges, however, and not giving themselves enough credit for their skills and experience. As workers become more experienced they should earn more.

This point can be clarified by considering the effects of mass famine on human height. It is well known that the people of North Korea have suffered recurring famines over the last few decades and are generally much shorter than well-nourished South Koreans. Nevertheless, within North Korea the average 20 year old is taller than the average 10 year old who is taller than the average 5 year old. The increasing height of the individual North Korean from birth to maturity does not undermine the claim that mass famine is reducing the average height of North Korean birth cohorts.

The evidence that Looney and Greenstone have put together strongly suggests that the declines in US incomes began around the year 1970. Some important factor must have changed in the early 1970's that sent the US on a path of stagnation and real economic decline. Greenstone and Looney think they have an answer to this question, and it has to do with educational attainment. They argue that in the decades before 1970, American males continued to increase their educational attainment, and earned higher wages as a result. Since 1970, however, the share of American males earning a college degree has held roughly constant, which they suggest is the key reason for declining median incomes among US men. As additional evidence, they point to the fact that American women have enjoyed rising median incomes, improvement that has coincided with a rising share of women earning college degrees.

As it turns out, Looney and Greenstone's analysis is a good example of the ecological fallacy: women are earning more today than they did in the early 1970's for reasons that are only tangentially related to the fact that more women today have college degrees. The primary reason they are earning more today is because better kinds of economic activities are available to them than in the bad old days. As we will see later, what economists call the division of labor, is not only present at the level of individuals operating in a national economy, but also exists at the level of countries operating in a global economy. For the country as a whole, its position in the global division of labor is deteriorating. As we shall see, the US is taking on (or more accurately, being forced into) the role of hewer of wood and drawer of water. [Joshua 9:23]