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Executive Summary

Introduction: Life and times in the new economy

Starting in 1995, a new and important change occurred in the U.S. economy: productivity—the output of goods and services per hour worked—began to grow more quickly. After growing 1.4% per year since the mid-1970s, productivity accelerated to 2.5% a year from 1995 to 2000, and then jumped to 3.1% a year from 2000 to 2005. The post-1995 shift in productivity growth, partly attributed to the diffusion and more efficient use of information technology, has sometimes been labeled the “new economy.” Because productivity growth provides the basis for rising living standards for everyone, its acceleration is an unequivocally positive development for the economy.

Yet, despite this unequivocally beneficial development, many Americans report dissatisfaction with where the economy seems to be headed, and many worry about their own and their children’s well-being. These concerns have led some policy makers and economists to ask: why aren’t people happier about the economy? The question seems reasonable to those who follow the top-line numbers of the economy, such as the growth of the total economy (e.g., gross domestic product), the stock market, or corporate profits. The question is easily answered, however, for those who follow and report on the data that fill the chapters in this book.

Our findings show that while faster productivity growth creates the potential for widely shared prosperity, if that potential is to be realized, a number of other factors have to be in place. Those factors include labor market institutions (such as strong collective bargaining), an appropriate minimum wage, and, importantly, a truly tight labor market, all of which are necessary to ensure that the benefits of growth reach everyone, not just those at the top of the wealth scale.

When these institutions are weakened or absent, growth is likely to bypass the majority of working families. The chapters that follow elaborate this story in greater detail by examining trends in incomes, mobility, wages, jobs, wealth, and poverty, and by placing recent developments in their historical, regional, and international context.

A family’s income is, of course, one of the most important determinants of their economic well-being. Most working families depend on their income to meet their immediate consumption needs (like food and gas), to finance longer-term investments in goods and ser-vices (like housing and education), and to build their savings.

Many families face two separate but related challenges regarding the growth of their real incomes: (1) post-2000 wage stagnation, especially among middle- and lower-income families, and (2) the gap between income and productivity growth. Despite the fact that the most recent economic expansion began in late 2001, the real income of the median family fell each year through 2004, the most recent available data. Between 2000 and 2004, real median family income fell by 3%, or about $1,600 in 2004 dollars.

The post-2000 income trends stand in stark contrast to the extent and pattern of family income growth in the latter 1990s. Then, during a period of uniquely tight job markets, full employment conditions compelled employers to more broadly share the benefits of accelerated productivity growth. Between 1995 and 2000, output per hour grew 2.5% per year, while real median family income grew 2.2% annually. Importantly, the income growth of less-advantaged groups proved to benefit the most from the availability of more and better jobs fostered by the tight labor market. Real median income was up 2.9% per year for African Americans, 4.6% for Hispanic families, 2.3% for young families (family head: 25-34 years old), and 3.1% for single-mother families.

The post-2000 reversal of these favorable trends was a function of diminished employment opportunities, not just during the recession, as we would expect, but over the protracted jobless recovery that followed. This decline in median income during the initial years of expansions appears to be more the norm than the exception in recent recoveries. Over both the 1980s and 1990s recovery, it took seven years for median family income to regain its peak, far longer than in earlier cycles.

In fact, when it comes to income growth over the past generation, the extent of a family’s prosperity is largely the result of their placement in the income scale, with the richest families experiencing the fastest income growth. Between 1979 and 2000, for example, the real income of households in the lowest fifth grew 6.1%; the middle fifth was up 12.3%; the top fifth grew 70%; and the average income of those in the top 1% grew by 184%.

Higher inequality shows up whether we look at consumption or income. Although inequality is not driven by tax changes, lowering the tax burden on the wealthy has demonstrably exacerbated the problem.

Greater inequality has also been generated by an expansion of capital income and an increased concentration of capital income among the very highest income families. Whereas the top 1% received 37.8% of all capital income in 1979, their share rose to 49.1% by 2000 and rose further to 57.5% in 2003 (most recent data). This shift toward greater concentration of capital income reflects an increase in the share of income flowing to corporate profits and that profit rates in 2005 are the highest in 36 years (excepting 1997). If the pre-tax return to capital (i.e., profit rate) in 2005 had remained at its 1979 level, then hourly compensation would have been 5.0% higher in the corporate sector, equivalent to an annual transfer of $235 billion dollars from labor to capital (measured for 2005).

One way that middle-income families have kept their incomes rising over the past few decades has been for women in general and wives in particular to enter the paid labor market. Among married-couple families with children, for example, middle-income wives added over 500 hours of work to total family work hours between 1979 and 2000. While this has been a positive force for women’s economic independence, it has also put a strain on the need to balance work and family.

Another important dimension of income and living standards involves income-class mobility. How much progress do families typically make in terms of income growth over their lifetimes? To what extent are children’s economic fates determined by the income position of their parents? And is there more or less such mobility in the United States versus other advanced economies?

In fact, we find significant income correlations between parents and their children, implying that income-class mobility is at least partially restricted by a parent’s position in the income scale. For example, one recent study finds the correlation between parents and children to be 0.6. One way to view the significance of this finding is to note that it implies that it would take a poor family of four with two children approximately nine to 10 generations— over 200 years—to achieve the income of the typical middle-income four-person family. Were that correlation only half that size—meaning income differences were half as persistent across generations—it would take four to five generations for the poor family to catch up. In a similar vein, we find that sons of low-earning fathers have slightly less than a 60% chance of reaching above the 20th percentile by adulthood, about a 20% chance of surpassing the median, and a very slight chance—4.5%—of ending up above the 80th percentile.

In other words, the extent of income mobility across generations plays a significant role in the living standards of American families. It is, for example, a key determinant of how many generations a family will be stuck at the low end of the income scale, or snugly ensconced at the high end.

Our folklore often emphasizes the rags-to-riches, Horatio-Alger-like stories that suggest that anyone with the gumption and smarts to prevail can lift themselves up by their bootstraps and transverse the income scale in a single generation. The reality in the United States, however, shows much less mobility than such stories suggest. Surprisingly, international comparisons reveal less mobility in America than other countries with comparably advanced economies. For example, one study reveals the intergenerational income correlations in Finland, Sweden, and Germany to be 0.22, 0.28, and 0.34, respectively, compared to the U.S. correlation of 0.43. Note that these are countries that U.S. economists often criticize for their extensive social protections—each one has universal health coverage, for example—yet their citizens experience greater mobility than do our own.

Another important dimension of the mobility story is the question of how it has evolved over time. One reason this is so important relates back to our findings regarding income inequality. The growth of inequality between two time periods, say between the late 1970s and today, is of less concern if mobility is up, thus offsetting the greater distances between income classes. The evidence reveals, however, that mobility is either flat or diminished over the very period when inequality has been on the rise. For example, one study shows that the intergenerational correlation between fathers’ and sons’ income has grown from 0.32 to 0.58 (higher correlations imply less mobility). Another study shows that the share of families remaining in the top fifth of the income scale went from 49% in the 1970s to 53% in the 1990s.

What explains the lack of mobility here in the United States? Certainly unequal education opportunities and historical discrimination play a role. As such, opportunities for advancement are limited for those with fewer economic resources. For example, we show that children from wealthy families have much greater access to top-tier universities than kids from low-income families, even once innate skills are taken into account. We also find wealth concentration to be correlated across generations, and this creates another impediment to the upward mobility of the economy’s “have-nots.” For instance, about two-thirds of children whose parents were in the lowest fifth of the wealth scale ended up in the bottom 40% as adults.

The major development in the labor market in recent years has been the stunning disconnect between the rapid productivity growth and pay growth, especially given the rapidity of productivity’s growth and the how stunted pay growth has been in the past several years.

Also of great concern is the tremendous widening of the wage gap between those at the top of the wage scale, particularly corporate chief executive officers, and other wage earners.

The importance of these two developments cannot be overstated because wages and salaries make up about three-fourths of total family income, and as such, are the primary driving force behind income growth and income inequality. Over the 1995-2005 period, productivity grew a remarkable 33.4%, and over half of that growth has occurred since 2001. This pace of productivity growth far exceeded that of the earlier period from 1973 to 1995. However, despite enormous growth in productivity, wages for the typical worker and for those with either a high school or a college degree were about the same in 2005 as in 2001.

By comparison, pay did rise in the earlier period from 1996 to 2001, fueled by the higher productivity and the progressive drop in unemployment to 4.0% by 2000. Moreover, the wage momentum carried forward through 2001 and into 2002, despite rising unemployment. The wage momentum from the late 1990s is important to understand when looking at trends over the 2000-05 period—all of the wage growth from the 2000-05 period occurred within the first two years. The poor job creation and increased job shortages during the early 2000s recession and its lackluster recovery eventually knocked wage growth down so that prices rose at least as fast. This was the case even in 2005, when the unemployment rate fell to 5.1%.

In short, historically high productivity growth and historically low unemployment have benefited compensation and wages very little. While productivity grew 33.4% between 1995 and 2005, benefits (health and pension) grew less than half that much and wages for typical workers grew one-third as much as productivity. After 2001, there has been basically no wage improvement for typical workers regardless of significant gains in productivity.

Digging a little deeper into these trends, we find that women are much more likely to earn low wages than men. In 2005, 29.4% of women earned poverty-level wages or less, significantly more than the share of men (19.9%). Women are also much less likely to earn very high wages. In 2005 only 10.1% of women, but 17.6% of men, earned at least three times the poverty-level wage. The proportion of minority workers earning low wages is substantial—33.3% of black workers and 39.3% of Hispanic workers in 2005. Minority women are even more likely to be low earners—37.1% of black women and 45.7% of Hispanic women in 2005.

The trend in the share of workers earning poverty-level wages corresponds to the patterns previously described: momentum in reducing poverty-level work began in the late 1990s, continued until 2002, then dissipated. So, although the share of workers earning poverty-level wages actually fell from 25.1% to 24.5% in the 2000-05 period, this progress came in the first two years of that period and then partially reversed. Among blacks the increase in low-wage work after 2002 was large enough to reverse the progress from 2000 to 2002.

A historical look at wage inequality shows that it has worsened considerably over the past three decades. The deterioration in real wages from 1979 to 1995 was both broad and uneven. Wages were stagnant or fell for the bottom 60% of wage earners over the 1979-95 period and grew modestly for higher-wage workers—over 16 years the growth was just 5.0% at the 80th percentile and 10.9% to 13.9% at the 90th and 95th percentiles, respectively.

More recently, the importance of the late 1990s full-employment labor markets that provided across the board wage increases is in contrast to the most recent 2000-05 period. Starting in the early 1990s low-wage workers experienced either more or comparable wage growth to that of middle-wage workers, so that the expanding wage gap between the middle and bottom lessened and then stabilized. Tight labor markets along with increases in the minimum wage in the early and late 1990s combined with the drop in unemployment in the late 1990s can explain this trend.

There are three key elements of wage inequality. One is the gap at the “bottom,” meaning the difference between median-wage and low-wage workers. Another measure of wage inequality takes into account the “top half” gap, that is, between high-wage (90th or 95th percentile wage earners) and middle-wage earners. The third element is the gap at the very top, i.e., the growth of wages for those in the upper 1%, including chief executive officers (CEOs). These three elements have had differing historical trajectories. The gap at the bottom grew in the 1980s but has been stable or declining ever since, whereas the “top half” wage gap has persistently grown since the late 1970s. The very highest earners have done considerably better than other workers for at least 30 years, but they have done extraordinarily well over the last 10 years.

Explaining these shifts in wage inequality requires attention to several factors that affect low-, middle-, and high-wage workers differently. The experience of the late 1990s is a reminder of the great extent to which a low unemployment rate benefits workers, especially low-wage earners. Correspondingly, the high levels of unemployment in the early and mid-1980s and again in recent years has disempowered wage earners and provided the context in which other forces—specifically, a weakening of labor market institutions and an increase in globalization—could drive up wage inequality. Significant shifts in the labor market, such as the severe drop in the minimum wage and de-unionization, can explain one-third of the growth in wage inequality. Similarly, the increasing globalization of the economy—immigration, trade, and capital mobility—and the employment shift toward lower-paying service industries (such as retail trade) and away from manufacturing can explain, in combination, another third of the total growth in wage inequality. Macroeconomic factors also played an important role: high unemployment in the early 1980s greatly increased wage inequality, the low unemployment of the late 1990s reduced it, and high unemployment in recent years has renewed it.

The shape of wage inequality shifted in the late 1980s as the gap at the bottom—i.e., the 50/10 gap between middle-wage workers at the 50th percentile and low-wage workers at the 10th—began to shrink. However, over the last few years, this progress against wage inequality at the bottom has been halted among men and wage inequality at the bottom among women has resumed its growth. This reversal is partially the effect of the jobless recovery and the still-remaining shortage of jobs and partially a result of the continued drop in the real value of the minimum wage. The greatest increase in wage inequality at the bottom occurred among women and corresponded to the fall in the minimum wage over the 1980s, the high unemployment of the early 1980s, and the expansion of low-wage retail jobs. The positive trend in this wage gap over the 1990s owes much to increases in the minimum wage, low unemployment, and the slight, relative contraction in low-paying retail jobs in the late 1990s. The wage gap at the top half—the 90/50 gap between high- and middle-wage earners—continued its steady growth in the 1990s and early 2000s but at a slightly slower pace than in the 1980s. The continuing influence of globalization, de-unionization, and the shift to lower-paying service industries (“industry shifts”) can explain the continued growth of wage inequality at the top.

The erosion of the extent and quality of employer-provided benefits, most notably pensions and health insurance, is an important aspect of the deterioration in job quality for many workers. Employer-provided health care coverage eroded from 1979 until 1993-94, when it stabilized, and then began falling again after 2000 through 2004 (the latest data). In fact, coverage dropped from 69.0% in 1979 to 55.9% in 2004, with a 2.9 percentage-point fall just since 2000. Employees have absorbed half the rise in costs for employer-provided health premiums (not counting any of the higher deductibles or co-pays paid by employees) since 1992, even though their share of costs in that year was just 14%. Employer-provided pension coverage tended to rise in the 1990s but receded by 2.8 percentage points from 2000 to 2004 to 45.5%, 5.1 percentage points below the level in 1979. Pension plan quality also receded, as the share of workers in defined-benefit plans fell from 39% in 1980 to just 19% in 2003. Correspondingly, the share of workers with a defined-contribution plan (and no other plan) rose from 8% to 31%.

Young workers’ prospects are another good barometer of the strength of the labor market. Wages actually fell for all entry-level workers since 2000, whether high school or college educated, male or female. This contrasts to the extremely strong wage growth for each of these groups from 1995 to 2000, when wages rose roughly 10% for entry-level high school men and women, 20.9% for entry-level college men, and 11.7% for college women.

Unionized workers earn higher wages than comparable non-union workers and also are 18.3% more likely to have health insurance, 22.5% more likely to have pension coverage, and 3.2% more likely to have paid leave. The erosion of unionization (from 43.1% of blue-collar men in 1978 to just 19.2% in 2005) can account for 65% of the 11.1 percentage-point growth of the blue-collar/white-collar wage gap among men over the 1978-2005 period.

The real value of the minimum wage has been steadily falling in real terms, there-by causing the earnings of low-wage workers to seriously fall behind those of other workers and contributing to the rise in wage inequality. Those affected by the lower minimum wage make important contributions to their family’s economic well-being. For instance, minimum wage earners contribute 58% of their family’s weekly earnings; in 43% of the affected families the minimum wage earner generated all of the family’s earnings. Moreover, there are 7.3 million children living in the families that would benefit from a modest minimum wage increase. While minorities are disproportionately represented among minimum wage workers, 60% are white. These workers also tend to be women (59% of the total) and concentrated in the retail and hospitality industries (46% of all minimum wage earners are employed in those industries, com-pared to just 21% of all workers).

Conversely, the 1980s, 1990s, and 2000s have been prosperous times for top U.S. executives, especially relative to other wage earners. Over the 1992-2005 period the median CEO saw pay rise by 186.2%, while the median worker saw wages rise by just 7.2%. In 1965, U.S. CEOs in major companies earned 24 times more than an average worker; this ratio grew to 300 at the end of the recovery in 2000. The fall in the stock market reduced CEO stock-related pay (e.g., options), but by 2005 CEO pay had recovered to the point where it was 262 times that of the average worker. The lion’s share of the gains for the top 1% in the pay scale accrued to the upper 10% of that elite group (i.e., those in the 99.9th percentile). Of the 3.6 percentage-point gain in the share of all earnings that the top 1% experienced between 1989 and 2000, 3.2 of them accrued to very upper tier.

The jobs of the future will require greater education credentials, but not to any great extent. In 2004, the occupational composition of jobs required that 27.7% of the work-force have a college degree or more. This share will rise by just one percentage point, to 28.7%, by 2014, according to BLS projections.

Strong job creation that fully utilizes the available workers and skills in our workforce is a critical component to a strong, lasting, and equitable recovery. A robust job market is what is needed to ensure that the proceeds of economic growth are broadly shared. By that mea-sure, the current recovery has fallen short. As is well known, this recovery, which began in late 2001, was a “jobless recovery” well into 2003. That is, real gross domestic product was expanding, but we were losing jobs on net for a year and a half into the expansion (net jobs refer to the number of jobs created minus the number of jobs lost).

Historically, it took just less than two years—21 months—to regain the prior employment peak; in this current cycle, it took almost four years (46 months). Since then, we have consistently added jobs on net, but at a slower rate than in past recoveries. As of this writing the current cycle is five years old and employment is up 1.9% since the last cyclical peak. Comparatively, employment growth for the five year period of the 1990s cycle was 7.1% and the historical average for cycles of this length was 10%.

This record of historically weak job creation is costly for the economy and for workers. Lackluster job creation is partially responsible for the ongoing disjuncture between overall economic growth and the wages and incomes of working families, as shown in earlier chapters. The resulting lower rates of employment and lack of wage pressures translate into lost output and forgone increases in living standards.

Depressed employment rates are usually a sign of weak labor demand. Since the 2001 peak, employment rates are down 1.4 percentage points for men and 1.3 percentage points for women. However, there have been debates as to whether employment rate declines have been a cyclical response to weak demand or if they represented a structural change. Since young college graduates are a group with high attachment to the job market, they make a good test case for whether the low employment rates are related to weak demand as opposed to a voluntary decline in employment (i.e., cyclical vs. structural).

The employment rate of young college graduates fell 3.5 percentage points from 2001 to mid-2003—in step with the recession and jobless recovery. In 2003, when employment started to pick up, this rate also increased significantly. Young college graduates (ages 25 to 35) who had at least a bachelor’s degree, and in some cases, an advanced degree, would have been highly motivated to secure employment. Now that employment rates are rebounding, it seems the cyclical responses may have dominated structural ones.

The unemployment rate is, in a historical sense, relatively low—4.8% as of this writing. Unemployment rates that prevailed during the expansion of the late 1990s into 2000— when the annual unemployment rate was 4.0%—were considerably lower. For most of the current recovery, the relatively low unemployment rates have not been particularly good indicators of the actual slack that existed throughout the labor market, particularly in the first several years.

Persistent long-term unemployment has been another problem over this cycle. Shares of those unemployed 27 weeks or longer, as a share of total unemployment, were unusually high, especially given the relatively low unemployment rates that prevailed throughout the 2001 recession and recovery. As of this writing, the unemployment rate varied over the past year between 4.6 and 5.0%, and the average share of long-term unemployment was 18.4%. By comparison, the historical share of long-termers associated with this range of unemployment was just 10.8%.

It is still the case that those with less education disproportionately bear the brunt of economic downturns, but it is also the case that higher levels of education no longer provide the same protection against cyclical forces as in prior downturns. This was evident with depressed employment rates of young college graduates, and it is also evident in long-term unemployment woes associated with this latest cycle. The share of educated long-termers increased 2.8 percentage points from 2000 to 2005, while the share decreased by 5.4 percentage points for those with less than a high school degree.

Job growth has been too tepid to boost living standards for most workers—even as the economy expanded and labor productivity had posted some impressive gains over this recovery. Hopefully the economy is poised to generate robust job creation and tight labor markets akin to those in the late 1990s, finally transforming output growth and strong worker productivity into broadly shared prosperity. Other trends of note regarding jobs:

Wealth: Unrelenting disparities

Wealth and its accumulation are very important to a family’s financial stability. Wealth, for example, enables a family to invest in a home, education, and retirement. In the short term, wealth reserves can help a family through difficult times, such as job loss. Wealth accumulation and debt often go hand-in-hand—for example, wealth, as well as, debt is generated by home ownership. The ability of families to accumulate wealth and manage their debts is critical. This chapter dissects the two components that make up wealth or net worth—assets and liabilities.

The distribution of wealth is unequally distributed, more so than wages or incomes. Moreover, wealth has become more concentrated at the top of the distribution over time. In 2004, those in the top 1% of the wealth scale held over one-third of all wealth. The top-fifth controlled 84.7% of all wealth in the United States, while the bottom 80% could claim only 15.3% of the country’s total wealth in 2004. Over the 1962-2004 period, the wealth share held by the bottom 80% shrunk by 3.8 percentage points, and that 3.8% share of wealth shifted to the top 5% of households. Over time wealth inequality has increased—as measured by the ratio of the wealthiest 1% to median wealth. In the early 1960s, the wealthiest Americans held 125 times that of the median wealth holder; in 2004 the wealthiest held 190 times more. As the wealthiest continue to thrive, many households are left behind with little or nothing in the way of assets and often have significant debt. Approximately one in six households had zero or negative net wealth.

Second, the notion that a vast majority of American households are greatly invested in the stock market is erroneous. Less than half of all households hold stock in any form, including mutual funds and 401(k)–style pension plans. From 2001 to 2004, the share of households holding stock declined—for the first time since 1989—from 51.9% to 48.6%.

Moreover, of those households that held stock, just 34.9% had stock holdings of $5,000 or more.

Furthermore, the ownership of stocks was particularly unequal. In 2004, the top 1% of stockowner's held 36.9% of all stocks, by value, while the bottom 80% of stockholders owned less than 10%. Additionally, stocks are a bigger part of the asset portfolio for wealthier households. For those in the top 1% of the wealth distribution, stock assets made up over 21% of their total assets, while stocks consisted of just 4.8% of all assets for households in the middle fifth of the wealth distribution. While stock performance is very important, on a daily basis it does not significantly affect average households.

Another key observation is that household debt has consistently trended upward, and it was over 130% of disposable personal income in 2005. As expected, debt-ser-vice burdens continued to plague lower-income families disproportionately and they increased from 2001 to 2004. By 2004, it took about a fifth of income from a middle-income family to service their debt. Approximately one in four low-income house-holds had debt-service obligations that exceeded 40% of their income, as did 13.7% of middle-income households.

The opportunity to start anew through fair and reasonable bankruptcy laws is crucial for those who are faced with insurmountable debt. Personal bankruptcy filings soared at the end of 2005 just before new, stricter laws went into effect. For the year, nine out of every 1,000 adults declared personal bankruptcy. Only time will tell how the new laws will affect the number of bankruptcy filings, and ultimately how families will cope with large debt burdens often caused by the loss of employment, unmanageable medical bills, or divorce.

That wealth differs considerably by race is another primary observation of this analysis. Median wealth of white households is 10 times that of black households. Home owner-ship rates also vary considerably by race. Less than half of black and Hispanic households own their homes, when 72.7% of white households do. While approximately one-in-six households had zero or negative net wealth, broken down by race the numbers diverge considerably—13.0% of white households compared to 29.4% of black households have zero or negative net wealth.

Other key finding from this chapter include:

Poverty: Rising over the recovery as the job market stalls

We next move to the other end of the wealth spectrum and examine the problem of poverty in America.

One of the most important challenges in discussing poverty in America is definitional. What, precisely, characterizes poverty in the U.S. economy? The government has an official definition, but it is widely considered to be an outdated benchmark (the 2005 threshold for a family of four was $19,961). The official thresholds have fallen well behind income growth among middle and higher income families, creating a situation wherein the poor are by definition more economically isolated. For example, the poverty line for a family of four was 48% of median family income in 1960; now it is 29%.

That said, trends in poverty are still revealing of changes in the living standards of our most economically vulnerable families. After falling steeply throughout the latter 1990s, poverty rates increased not only in the recessionary year of 2001, but in each year through 2004 (most recent data available), from 11.3% in 2000 to 12.7% in 2004, when 37 million persons, including 13 million children, were in poverty. This is the first time that poverty rose through each of the first three years of a recovery, another indicator of the narrow distribution of growth over this recovery. If we use a threshold of twice poverty, then the increase over the 2000-04 period went from 29.3% to 31.2% (about 91 million persons were below twice poverty in 2004).

Given their lower incomes, poverty rates for minorities are consistently higher than those of whites. The rate for African Americans, for example, was at least three times that of whites through 1989. However, poverty among blacks and Hispanics was much more responsive than for whites to the faster and more broadly distributed income growth during the 1990s, and by 2000 the poverty rate for blacks was the lowest on record, though even then, more than a fifth of blacks were poor (22.5%).

Tight job markets played a critically important role in poverty reduction in the latter 1990s, as overall poverty fell by 2.5 percentage points, with much larger declines for minorities: 6.8 points for blacks and 8.8 points for Hispanics. Yet, even under the best macroeconomic conditions, many poor families will need extra help to escape poverty. In the latter 1990s, for example, the push of welfare reform and the pull of strong labor demand drew many single mothers into the job market. And for many of these women, full employment conditions helped generate significant wage gains in percentage terms. But even hourly wage gains of about a third, from around $6 to around $8 dollars an hour, do not provide enough income for these families to meet their basic consumption needs. Fortunately, significant work supports—public benefits tied to work—were added or expanded over the 1990s. In the early 1990s, the highest benefit level under the Earned Income Tax Credit for a family with at least two children rose from about $1,700 to about $4,000 in 1995 dollars. The minimum wage was also increased, and more resources were devoted to health and child care subsidies.

The last point is an important one in thinking about the steps policy makers need to take to diminish poverty amid the plenty in the U.S. economy. With both the economy and social policy pushing hard in the same direction, poverty was significantly reduced in the 1990s. The 2000s, by contrast, reveal a different picture. The policy levers from the earlier period were largely still in place, but the absence of full employment meant that a critical piece of the puzzle was missing, and poverty rose over these years.

The more market-driven U.S. economic model is often deemed superior to European economic models. The evidence of U.S. supremacy is often made by the singular assertion that the United States is the richest country in the world. While it is true that, in per capita terms, the United States is quite wealthy, a comparative analysis as to how the U.S. economy stacks up to other advanced economies must take into consideration a broader set of criteria.

International comparisons are made between 20 countries all belonging to the Organization for Economic Cooperation and Development (OECD). Comparing the U.S. economy to similar economies facing the same global conditions with respect to trade, investment, technology, and the environment provides an independent yardstick for gauging economic outcomes derived from different economic models. It is important to note that what is commonly referred to as the “European model” is actually many different economic models. Not only is each country unique, but unique occurrences—like the integration of East Germany—need to be taken into account. Many of the countries evaluated here are less market driven and more “interventionist” than the U.S. economic system, and much insight can be drawn from a general comparative analysis.

A main determinant of an economy’s standard of living is its productivity, which can be relatively measured by the amount of gross domestic product (GDP) per hour worked. In terms of GDP per hour worked, in 2004 several European countries caught up to or surpassed U.S. levels of productivity. For example looking at productivity relative to the United States (U.S.=100), five countries are above or equal to U.S. levels—Norway (125), Belgium (113), France (107), Ireland (104), and the Netherlands (100).

The growth rate of productivity is also important, and the United States is currently enjoying an extremely productive economy. In the current cycle (2000-05), U.S. productivity grew at 2.5%, and the United Kingdom came in second at 2.0%. However, as this book’s discussion of family income and wages shows, the workforce responsible for this high level of productivity has not been able to enjoy the fruits of their very productive labor. Simply put, earnings have been stagnant for the majority of workers throughout this cycle.

The United States is one of the richest countries in the world. Per capita income in the U.S. was $39,728, but, perhaps surprisingly, that posting was second to Norway’s $42,832. Many other economies have very respectable—all above $30,000— per capita incomes, such as Ireland, Switzerland, Austria, Canada, Australia, Denmark, Sweden, Netherlands, Finland, Belgium, and the United Kingdom. Many Europeans and Canadians view their social protections as factors that raise their living standards and as such are unmeasured and not captured in income measures. A main reason why per capita incomes in Europe are below U.S. levels is because Europeans, relative to those in the U.S., seem to value leisure over the consumption of more goods.

While the United States is one of the wealthiest countries, it also has the highest degree of inequality of the OECD countries analyzed. The gap between richest and poorest is largest in the United States—whether measured in terms of Gini coefficients or the ratio of high earners (90th percentile) to low earners (10th percentile), the United States’ inequality stands out. Low-income earners in the United States not only earn relatively lower incomes than their OECD counterparts, but they also are worse off because of limited social policy and safety nets. Access to health care is a good example.

The United States spends more on health care (whether measured as a percentage of gross domestic product or per capita spending) than any of these other countries. The United States spent 15% of its GDP on health care in 2003—30% more than the next highest spender (Switzerland at 11.6%). Ireland (7.4%), Austria (7.5%), and Finland (7.5%) spent the lowest percentages of GDP on health care. Even with such high spending, 46 million people in the United States do not have health insurance, and access to health care is much more limited than in the countries of its economic peers. In Canada, Japan, and Europe there is essentially universal health care coverage.

Perhaps surprisingly, the income advantages and high health spending in the United States do not produce better outcomes relative to other developed countries regarding life expectancy, infant mortality, and poverty. The United States has the lowest life expectancy, the highest infant mortality rates, and the highest overall and child poverty rates of all the countries studied. The relatively poor performance of the United States in these categories is symptomatic of the high degree of economic inequality and unequal access to health care in the United States.

Other important insights to come out of this chapter:

Conclusion

America’s working families continue to work hard to make ends meet, improve their living standards, and create better opportunities for their children. New economy or old, this remains the case today much as it was a century ago.

Yet there are clearly aspects of today’s economy that make it historically unique. Some of these tilt against the bargaining power of American workers: increased global trade, less union membership, and more low-skilled and high-skilled immigration. There are fewer favorable social norms that guide employer behavior or support policies that provide adequate safety nets, pensions, and health care arrangements.

Other new forces in play have the potential to lift the living standards of working families in ways hardly seen in this country for 30 years. Most important of these is a new, stronger productivity growth regime and a brief encounter with full employment in the latter 1990s that showed that, once workers’ bargaining power gets a boost, the benefits of this regime shift in productivity growth can be broadly shared.

In other words, the biggest challenge in what many have called the new economy is not growth per se, but rather how growth is distributed. Of course, economists and policy makers will be concerned with whether the economy is growing as fast and efficiently as it can, and they might turn to greater investments in public and private capital stock, more research and development, monetary policy that stresses full employment, and the educational upgrading of the workforce.

Yet, if the findings in the hundreds of tables and figures that follow can be reduced to one observation, it would be that, when it comes to an economy that is working for working families, growth in and of itself is a necessary but not a sufficient condition. The growth has to reach the people: the bakers need to benefit from bread they create each day of their working lives.

The benchmarks by which we judge the economy must reflect these distributional concerns, and we must construct policies and institutions to address them. If we do not—if our enhanced productive capacity continues to benefit mostly the wealthiest Americans—we risk sacrificing bedrock principles that have historically defined the American economic experience.

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