One recent trend that is particularly disturbing is stagnation in the formation of new firms. Statistics from the Bureau of Labor Statistics (BLS) show that the number of establishments in operation for less than one year rose between the mid-1990s, when the data start, and the early 2000s. But, smoothing through the ups and downs of the business cycle, new firm formation has been roughly flat since then. Moreover, the number of individuals working at such firms stands almost 2 million below its peak in 1999. Given the role of innovation by entrepreneurs and the well-documented importance of successful young firms in creating jobs, these trends are disheartening.
The lagging share of national income accruing to workers
A second adverse development in recent years has been the apparent reduction in the share of overall national income that accrues to workers. Here I will be brief and suggestive because the scholarship is far from settled. But the basic trends in the data are troubling. Labor's share of total income generated in the nonfarm business sector has been on a downtrend since the 1980s and has fallen sharply since the turn of the millennium. It stood at 56 percent at the end of 2013, the lowest level since the BLS began collecting data on the measure in 1948.
To be sure, various conceptual and measurement challenges make it difficult to compute labor's share of income with any degree of precision. However, taken at face value, these data have significant implications for the distribution of income in our society, given how skewed the holdings of capital are. Economists have focused less attention on the factors underlying the apparent decline in labor's share of income than they have on the rise in income inequality in general, but among the candidates are technological change, which has allowed for the substitution of capital for labor in the handling of routine tasks, an increase in firm bargaining power, and perhaps a decline in competition in product markets.
The increase in inequality
Of the trends I have identified, the one that has received the largest amount of press attention recently is the rise in income inequality. While income inequality has been increasing since the 1970s, over the past two decades the process has been characterized by what some have called polarization, with those at the top of the distribution accumulating a significantly larger share of income, those at the bottom of the distribution experiencing modest relative gains, and those in the middle of the income distribution falling further behind in relative terms.
Gauging by one fairly comprehensive measure of income used by the Congressional Budget Office, the share of income garnered by those in the top 1 percent of the distribution more than doubled between 1979 and 2007 to about 17 percent, while the share accruing to those in the 1st through 80th percentiles fell 9 percentage points. And while it is true that those at the upper end of the income distribution were disproportionately affected during the financial crisis, with the result that inequality actually fell a bit in the wake of the recession, high earners also appear to be benefiting disproportionately from the recovery. Thus, the crisis does not seem really to have changed the trajectory of inequality.
As interesting as these statistics on inequality are, they obscure a key part of the story -- one that has been an important part of our identity as Americans: whether a family has the ability, through hard work, to attain a better standard of living. And on that point, we find that households in the middle and lower parts of the earnings distribution have experienced, at best, only modest improvements in inflation-adjusted income. Between 1979 and 2007, households in the middle quintile of the income distribution — a functional definition of the middle class — saw their real labor income (adjusted for household size) rise only about 3 percent. Meanwhile, households in the bottom one-fifth of the distribution did a bit better, experiencing about a 24 percent rise, although this figure reflects an improvement of just 1 percent per year, and that from a very low base. In contrast, income rose more than 70 percent among households in the top one-fifth of the earnings distribution.
The polarization of the labor income distribution has been mirrored in the types of jobs we are creating. Since the 1990s, job gains have been concentrated at the upper and lower ends of the earnings distribution. There have been healthy gains in employment in highly paid occupations, such as computer and information systems managers, and a rise in low-paid jobs, such as home health-care workers, but growth has been much slower in occupations with earnings in the middle of the distribution, such as machinists. This trend accelerated during the Great Recession and the ensuing recovery. For example, food services, retail, and employment services, all low-wage industries, accounted for nearly 45 percent of net employment growth from the start of the recovery through early 2012, while employment in a number of industries that offer good jobs for mid-wage workers — including construction, manufacturing, and finance, insurance, and real estate — did not grow in those years or grew too slowly to make up for their job losses during the recession.
There is no single explanation for the rise in inequality and the decline in the share of jobs that provide a middle-class standard of living. Economists generally agree that technological change and globalization have played a role.Both of these forces have reduced the demand for workers whose jobs had involved routine work that can easily be mechanized or offshored while, at the same time, increasing the productivity of higher-skilled workers. However, it is less clear whether technology and globalization are sufficient explanations for the increased share of income going to those at the very top of the income distribution. It may be that by increasing the effective size of the markets for their skills, technological change and globalization can also explain some of the large increase in earnings of top athletes, musicians, and even chief executive officers. In the popular press, the phenomenon of the very few reaping enormous windfalls has become known as the winner-take-all economy. However, other researchers have noted that a large share of the top earners is found in industries such as finance and law, suggesting that deregulation, corporate governance, and tax policy may have also played a role in the trend toward rising inequality.
Economic mobility has not increased to mitigate higher inequality
Despite the fact that rising inequality has compounded the stakes associated with one's position in the income distribution, mobility up and down the economic ladder from one generation to the next in the United States has been stagnant. Work by Raj Chetty and his coauthors using income tax data has shown that a child who was born in the early 1990s had about the same chance of moving up in the income distribution as a child born in the 1970s. Combining these results with previous research suggests that mobility has not increased in the postwar era. And, despite the long-held view of the United States as the land of opportunity, we actually fall short of other advanced economies in terms of intergenerational mobility. In the United Kingdom, for example, about 30 percent of sons with low-income parents end up being low-income themselves, while in the United States the comparable figure is over 40 percent.
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