Growing Apart

It's official: Though the economy is clearly expanding and jobs are coming back, the benefits of growth are once again accruing to the wealthy. After a brief hiatus during the late 1990s, economic inequality is reasserting itself.

No less than the nation's chief economist, Federal Reserve Chairman Alan Greenspan, noted this in recent testimony, stating that “most of the recent increases in productivity have been reflected in a sharp rise in the pretax profits…” This trend stands in sharp contrast to the way growth was apportioned just a few years ago, when the benefits of workers' increased efficiency were broadly shared.

The difference between then and now -- and the key determinant as to how the benefits of growth are distributed -- is the tautness of the labor market.

Back in the late '1990s, we recognized the unique nature of the first full-employment economy in decades and wrote a book to document the phenomenon. One of our observations was that fast productivity growth is a necessary condition for raising the living standards of working families, but not a sufficient condition. You also need very low unemployment to ensure that the gains are evenly distributed.

The latest data confirm our findings with a vengeance. Productivity, which accelerated in the second half of the 1990s, has sped up once again since 2000. At the same time, the unemployment rate has remained stubbornly high. The official rate, measured last month at 5.6 percent, doesn't capture the full picture because millions of job seekers, who had given up the search due to lack of prospects, are just starting to get back in the game. If they were officially considered to be looking for work, unemployment would be over 7 percent.

This combination of strong productivity growth and weak labor markets translates into wage stagnation for most, along with increased inequality. Full-time workers' weekly earnings, adjusted for inflation, show a widening gap between the highest and lowest wages. For workers below the 75th percentile -- those earning less than the top 25 percent are earning-- real earnings grew by less than one percent. Only those at the top of the wage scale have benefited from the economic recovery, as real earnings at the 90th percentile grew 2.5 percent for men and 4.5 percent for women. These findings suggest that at least three-quarters of adult, full-time workers currently lack the bargaining power to press for a fair slice of the expanding pie. They are contributing impressively to this economy, but it is not returning the favor.

This concentration of earnings growth could actually threaten the strength of the recovery. If most workers continue to see the buying power of their wages decline, they will either have to consume less or borrow more. Since 2001, growth has been fueled largely by tax cuts and a mortgage refinancing boom. But the stimulus from tax cuts is fading and workers were reaching the limits on borrowing against their homes even before the recent rise in interest rates.

It's not a just outcome when the productivity of the American workforce is driving the economy forward, yet most workers cannot share in the gains. But unless the job market improves markedly and quickly, it's a situation we may well be stuck with for some time to come.

Jared Bernstein and Dean Baker are economists and authors of The Benefits of Full Employment, published by the Economic Policy Institute in 2003.

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