Mann for School Board | home
Middle Class Shrinkage and Pauperization | Support Fairview Nurses Fight for Safe Staffing! | Lessons of the 2001 Fairview Nurses Strike | Oppose U of MN Tuition Hikes! | Blaming the Victim | For a Labor Party Based on the Trade Unions! | Repeal the U of MN Tuition Hike! | Affordable Housing
Middle Class Shrinkage and Pauperization
Write-in "Doug Mann" for School Board
by Doug Mann, 29 Oct 2004, Submitted to the Star-Tribune for publication 28 Oct 2004
Two Views of American Capitalism in the Late 20th Century
Douglas Mann Minneapolis Community College 28 May 1994
Why is America's "middle class" shrinking, and downwardly mobile? One answer, given by Ralph Whitehead Jr. in his essay, "Class Acts: America's Changing Middle Class," is that a small upper class is setting the nation's political and economic agenda, and reaping the benefits.
Another view is presented by Robert Reich in his essay "Why the Rich Are Getting Richer and the Poor, Poorer," and his book, The Work of Nations: Preparing Ourselves for 21st Century Capitalism. According to Reich, the axis of political and economic power has been shifting away from both capital and organized labor to a caste of skilled workers, "symbolic analysts," whose economic functions have been growing in value. This, together with the increasing size of this caste has "put the squeeze" on everybody else.
Unlike Whitehead, Reich views America's political-economy in the context of changes in the world economy. I will briefly describe the changes in income distribution that Reich and Whitehead examine, and summarize their views. Then I will present Reich's views about global economics, national politics, and labor markets and offer counterpoints consistent with Whitehead's thesis. The evidence will show that owners of capital, rather than sellers of high-priced labor, play the central role in redistributing wealth and have reaped most of the benefits.
For a quarter century following World War II, wage-labor and capital in the United States operated under the terms of a social compact that lifted many wage earners above the official poverty line and into a broadly defined "middle class." From 1960 to 1970, the proportion of families with incomes under $10,000 (in 1980 dollars) declined from 27.5% to 17.8% and the proportion of families with incomes over $25,000 (in 1980 dollars) nearly doubled, increasing from 18.9% to 37.3% (Hacker 143).
However, after 1970, through government intervention and the invisible hand of the labor-market, the terms of this social compact were altered . By many estimates, median family income fell by more than 15% in purchasing power from 1970 to 1992. The federal minimum wage in 1992 represented less than 59% of its value in 1976, and the median wage-rate for non-supervisory workers declined in purchasing power by 9% in the period between 1984 and 1992 alone (Hacker 159; "United States" Data 1990 and 1993 eds.).
Reich explains that a redistribution of wealth has occurred due to the effects of global economic integration. Nation-states are losing their grip on the reins of economic activity in a fury of decentralized wheeling and dealing uninhibited by any national frontier. According to Reich, America is "ceasing to exist" as an economic entity in the global economy, where power has been shifting from capitalists and the industrial proletariat to a caste of highly skilled workers, "symbolic analysts," who usually possess a college degree, and constitute a segment of the American workforce that has grown rapidly, accounting for "no more than 8%" of the workforce in 1950 and "no more than 20%" by 1990 (Why 409-10; Work 177-80). This caste of symbolic analysts has grown and gotten fatter at the expense of relatively unskilled production and service workers, whose wages have declined in purchasing power, and at the expense of capitalists, whose profit margins have been falling (Work 75-77).
Whitehead confines his analysis to changes within American society. He notes the growth in size and wealth of an upper class consisting of the rich, and of an almost-rich "overclass" that includes at least 2 million of the nation's most highly compensated managers, professionals, technical workers and so forth. Whitehead divides the"middle-class" workforce into bright collar, blue collar, and new collar.
Bright collar workers are generally the best educated and are concentrated in the most highly-paid quintile of the workforce. The top quintile in earning power have prospered by comparison to the lowest paid quintile of the population, but not very much in terms of real income. New collar workers have been a growing segment of the workforce that includes some workers traditionally defined as blue collar, but whose job duties and level of autonomy have increased.
Class divisions within the "middle class," blurred during the thirty years that followed World War II, have re-emerged, with bright collars moving toward the upper class in their political alignment. The dwindling share of unionized blue-collar workers in the labor force, and a divided middle class, has given a small upper class more power to enrich itself by impoverishing the poorest 80% of the population.
The World Economy, Nation-states, and Capitalist Development
According to Reich,
"The American economy now exhibits a wider gap between rich and poor than it has at any time since World War II. The most basic reason, put simply, is that America itself is ceasing to exist as an economic system separate from the rest of the world. One can no more speak of an "American economy" than one can speak of a "Delaware Economy." We are becoming but a region, albeit still a relatively wealthy region - of a global economy. This is a new kind of economy whose technologies, savings, and investments move effortless across borders, making it harder for individual nations to control their economic destinies (Why 409)."
Certainly, the global economy has become a more closely integrated network of economic activity. But nowhere has economic activity within the borders of any nation-state been separated from a global network of economic activity, or unaffected by the intervention of other nation-states in the global economy. Although never in complete control of their own destinies, nation-states do play a big role in regulating economic activity.
The collection of English colonies that became the U.S.A. achieved some control of their destiny by kicking out the English colonial administration. Status as an independent nation-state, however, did not immediately alter its relationship to the outside world, fashioned under English rule, as an exporter of raw materials and importer of manufactured goods.
England went on to conquer other parts of the world, not so much by armed force as by the export of cheaply produced commodities. For example, A bolt of English cloth was very much like a bolt of Indian cloth in the 19th century, except in the amount of labor-power expended in the production process. Cloth made in England was sold at a low price, and for a high profit, because it represented a small fraction of the average amount of labor-power used to produce it in India.
Merchants traded English textiles for Indian-made goods of much higher value in terms of the labor-time, including substitutes for goods made in England by similarly labor-intensive methods of production. Once England's merchants got a foothold in the Indian market, there was no stopping the invasion of English goods. As a consequence of English exports of textiles and other goods to India in the 18th and 19th centuries, many crafts were rapidly eliminated, depriving millions in India of their livelihoods in the process.
What made England a great power was the disparity between the productivity of its workforce and that of other nations. England was among the first countries to organize its economy along capitalist lines, bringing about an increasingly complex division of social labor, specialization, and the large-scale introduction of machines to displace manual labor.
The share of wealth distributed to capital represented a surplus of goods beyond what was consumed in the production process, and beyond what workers obtained for personal consumption in exchange for their wages. Unequal exchange in international trade further increased this surplus wealth distributed to English capitalists.
In a capitalist economy, disparities in labor productivity and capital investment render goods that trade as equivalents, in terms of production costs, unequal in relation to the amount of labor-time expended in the production process. In other words, the production of one commodity yields as much value above its production costs as a commodity of the same market value that is produced with a greater expenditure of labor-time. The surplus value is expropriated by the capitalist. This was unlike the situation in localized markets dominated by independent producers, such as in 15th century England or 16th century India, where the value added by labor to products created and exchanged by most artisans tended to reflect the average amount of labor required to produce it.
The acquisition of colonies played a big role in spurring the development of the most advanced capitalist economies. For example, during the 18th century, armed with exclusive trading rights, the East India Company entered the Indian market with English-made goods on a large scale. Some of these goods were very much like the Indian versions, except in the amount of labor required to produce them. Even when sold below exchange values established in the Indian market, the value added to a commodity by of an hour of English labor traded for the value added to a commodity by several hours of Indian labor. Hence, English exports to India in the early phases of colonization yielded huge windfall profits. Some of these profits went to buy up land in India, and to hire, as low-paid laborers, some of the Indians who suddenly found themselves without a means to survive (Marx 557-58).
Profits on investments repatriated from colony to imperial center, and low wage-rates, siphoned-off resources needed for capital accumulation in the colony, slowing advances in labor productivity that accompany capital accumulation, and accelerating these processes in the imperial state. The financial burdens involved in running an empire were a small price to pay to assure that the property rights of investors were respected, and to keep other advanced capitalist countries from getting a piece of the action.
Although colony-poor, the U.S. had the advantage of a huge protected market within its borders, and of a large disparity between its level of economic development and that of other nations in the Western Hemisphere. Between 1870 and 1950, labor productivity, real gross domestic product per hour worked, expressed as average annual compound growth-rate, was about 2.2% in the U.S., and 1.6% on average for France, Germany, Japan, The Netherlands, and The United Kingdom (R.W.E. 894).
By the end of World War II, the U.S. had greatly surpassed the imperial states of Europe as an economic power. The relative strength of the U.S. economy was suggested by the real gross domestic product per employed person of the U.S. and several other countries in 1950, assigning values according to an index which puts U.S. at 100.0: The Netherlands, 56.7; United Kingdom, 53.8; France, 36.9; West Germany, 32.2; Italy, 30.9; and Japan, 15.2. The average value for 11 of the most advanced capitalist countries (other than the U.S.) was 44.3% (R.W.E. 894).
By the time that the U.S. was in a position to consider building a colonial empire, it had developed a relationship with most countries in Latin America not unlike the relation between an imperial state and its colonies in terms of trade and investment. U.S. statesmen demonstrated their colonial ambitions in the Spanish-American war, but there was more to be lost than gained by attempting to re-colonize the Western Hemisphere. Imperial ambitions were also tempered by the fact that European empires had already carved up nearly all of the Eastern Hemisphere among themselves.
Following World War II, however, the territorial expansion of the Soviet Union, its occupation of Eastern Europe, and the Chinese Revolution dimmed the outlook for Europe's imperial states. In the face of the Soviet Union's growing influence, the loss of China's market, revolts taking place in the colonies, and pressure from the U.S. to open-up their markets, Europe's empires began to disintegrate.
The Long Economic Boom After World War II
Although the acquisition of colonies had played a big role in spurring the development of advanced capitalist economies, the colonial system had become more of an obstacle to economic development well before the Second World War. World-wide decolonization offered possibilities for a more complex division of labor, greater specialization, and greater economies of scale in industries with high overhead costs.
The U.S. profited from decolonization by gaining better access to markets in the so-called third world, increasing its share of trade and investment compared with other advanced capitalist countries. U.S. investments in Europe also grew rapidly in the early post-war era, creating a dollar economy within Europe that enhanced the position of the U.S. as a financial super-power.
By the early 1960s, the U.S. had gained the lion's share of the market for capital-intensive producer goods in the third world, and high-technology products world-wide. In 1965, the U.S. exports of high-tech goods accounted for 27% of world exports (Rosecrance 75). This was accomplished in part by state interventions in economic development such as appropriations for production of military hardware. Contracts for military hardware have included stipulations that a company and its subcontractors exclude foreign nationals from ownership, have guaranteed a healthy profit that could be channeled into other fields of investment, allowed a transfer of technology and elements of the production process created for military projects to production of goods in the civilian market, and have generally restricted the selection of sites for critical phases in the development of high technology goods, and for facilities essential to their production, to locations within the U.S.
The U.S. government has not been alone in taking steps to foster development of industries, or components of industries, where labor costs represent a relatively low proportion of capital investment. Even with minimal state intervention, however, conditions for such investments in the U.S. have been very favorable due to a large internal market, a pre-existing network of suppliers of diverse producer goods, stable prices for producer goods, and a large pool of skilled labor.
But disparities in economic development between the U.S., other advanced capitalist countries, and many third world countries, narrowed considerably from 1950 to 1980. Gross domestic product per employed person for 11 other advanced capitalist countries (using the U.S. as a reference with a constant value of 100.0) rose from 44.3 in 1950 to 51.7 in 1960, 66.3 in 1970, and 76.2 in 1980. From 1950 to 1980, the value for Japan increased from 15.2 to 62.7, the value for West Germany increased from 32.2 to 77.4, and Italy went from 30.9 to 81.0.
Though less dramatically, several other industrial powers had moved closer to parity with the U.S. in the same measure of labor productivity by 1980 as follows: Canada 92.8, The Netherlands 90.7, France 80.2, and Belgium 79.7. From 1973 to 1984, another measure of labor productivity (real gross product per hour worked) registered an increase of only 1.0% per year in the U.S., and 2.8% on average for France, Germany, Japan, The Netherlands, and The United Kingdom. (R.W.E. 894)
Another sign of the closing development gap has been a steady decline of the U.S. in its share of global high-technology exports, dropping steadily from about 27% in 1965, to about 21% in 1986. Japan's share of this export trade rose from about 7% in 1965 to about 20% in 1986. West Germany, the United Kingdom, and France, respectively, accounted for 17%, 12%, and 7% of world high-tech exports in 1965, and 16%, 9%, and 8% in 1986 (Rosecrance 75). However, figures on world exports are not figures on total output. Exports in this sector probably account for a much smaller share of total output in the U.S. than in the above-mentioned countries.
In the world economy as a whole, increases in labor productivity, profit-rates, and rates of capital accumulation began to decline early in the post-war era. Reich notes: "From a peak of nearly 10% in 1965, the average net after-tax profit rate of America's nonfinancial corporations dropped to less than 7% in 1980...bounced back between 1982 and 1985...but [average profit rates] then continued their downward slide." (Work 76). These tendencies have been pronounced in the U.S. due to the narrowing development gap between it and other advanced capitalist countries. From 1950 to 1973, labor productivity grew by 2.5% per year in the U.S., and 5.3% on average for France, Germany, Japan, The Netherlands, and the United Kingdom (R.W.E. 894). Moreover, nation-states formed in the third world after World War II had some power to regulate their own economic development and curb exploitation by the great powers.
The leading edge of economic development, the manufacturing sector, had been primed for rapid growth in the early post-war years by the possibilities for economic specialization, and the expanded economies of scale that went with it. Fixed investment costs spread out over larger volumes of goods was a major factor in quickly raising labor productivity. The average age of productive facilities fell, accompanied by a more concentrated application of the latest word in labor-saving technology. Some resources were shifted from other fields of investment to fuel the growth in this sector.
But the possibilities for productivity gains through specialization diminished to the degree this process moved forward. Moreover, due to a leveling out of profit rates through capital markets, the lagging edges of the economy, such as the service sector, shared in the distribution of surplus value on the same basis as the leading edges, but without corresponding increases in labor productivity.
Production of goods and services also slowed as a growing part of the social product was going into the productive process to cover capital costs other than wages. This situation required that an increasing share of profits be set aside for capital accumulation to maintain growth rates. But some of what was gained by the increase in labor productivity in real terms was distributed to wages rather than to capital. Some of this money was saved by wage earners and went into capital funds, but tended to represent a fund for deferred personal consumption, or was earmarked as a source of income upon retirement. A part of the increased wealth brought about by advances in labor productivity that went to bourgeois and semi-bourgeois households also represented a source of income for personal consumption.
By the early 1970s there were clear signs that an economic policy that banked on a continuation of robust growth in the output of goods and services, and that facilitated such growth, wasn't suited to the interests of American capitalists. Economic growth was slowing in spite of growth-oriented strategies, profit margins were falling, and the cost of goods and services were rising at an accelerating pace. To make matters worse, workers had gotten used to pay increases that matched or bettered generalized increases in the cost of living.
The New Economic Policy
In 1971, the Nixon Administration unveiled the "New Economic Policy." Its purpose was the same as the old economic policy: enriching the rich. But the short-term objectives were quite different. The new policy included huge tax breaks for the rich, financed with record breaking budget deficits, and a 5% limit on yearly wage increases. Nixon also imposed higher tariffs on imported goods, effectively raising the ceiling on prices for consumer goods made in the U.S. by forcing up prices on imported goods.
The "New Economic Policy" was akin to the "beggar thy neighbor" policy of the 1920s, the aim being to create a less favorable situation for economic growth and development in other countries. For example, the so-called third world suffered from measures adopted by the U.S. government as part of the New Economic Policy in the early 1970s, and similar measures taken in the early 1980s. Huge budget deficits, and equally huge tax breaks for the rich, pulled investments into the U.S. from third world countries, accelerating capital flight, and pushing up interest rates on bank loans. Raising import duties on goods entering the U.S. had a role in cutting demand for third world exports, pushing down their value while the cost of servicing the debt to U.S. banks increased. Holding the lion's share of the development loan portfolio, direct investments, and markets for essential producer goods, the U.S. fared better than most other industrialized countries as an exporter of goods to this segment of the world market.
Within the U.S., unionized workers in many industries were locked into contracts that limited their annual pay increases to 5% from 1973 to 1975, while consumer prices rose at an annual rate of over 10%. When labor unions began to push real wages back up to 1970 levels during 1974, the Ford Administration, together with Congress and the Federal Reserve Board, responded with economy-cooling measures, which continued even after a deep economic recession in 1975 had put millions out of work. The threat of layoffs under these circumstances helped employers bid down wages and exact other concessions.
Forcing down real wages has been on the agenda of every government administration since 1971. Consider the history of legislation on the federal minimum wage. It was untied from the Consumer Price Index (CPI) in 1977 by the Carter Administration. Rising from $2.85 per hour in 1976 to $3.50 in 1980, the Federal Minimum Wage increased by 23%, while the CPI increased by 45%. Then the minimum wage was frozen in place from 1980 to 1991 under Reagan and Bush. It remains at the 1991 rate "for the time being" under Clinton. Today the Federal Minimum Wage, at $4.25, is only 49% above the 1976 rate. If adjusted to reflect increases in the CPI since 1976, the Federal Minimum Wage would have reached $7.20 in 1992 (Hacker 159; "United States," Data 1990 and 1993 eds.).
Minimum wages set by union contracts have also risen more slowly than the cost of living, since 1976. During this time, labor unions have generally followed what top officials of the AFL-CIO proposed as the "strategy of gradual retrenchment." It boiled down to yielding some ground to employers on minimum wages and other issues in collective bargaining agreements without a fight. It has been a strategy of reliance on the Democratic Party, and the invisible hand of the market, to improve labor's bargaining position at some future date.
Unemployment rates well above 5% have persisted since 1975 inspite of fairly robust job growth during the 1980s. Job growth has simply lagged behind the growing supply of job seekers. Falling wages have compelled working class households to increase their participation in the workforce. Work speed-up, which also accompanies the privilege of having a job, has put a damper on job growth.
Reich views the effects of such things as government economic policies, high unemployment rates, and the political orientation of labor unions as factors of secondary importance in determining income distribution in the U.S. For example:
"In those days [most of the post world War II era until the mid-1970s], poverty was the consequence of not having a job. The major postwar economic challenge was to create enough jobs for all Americans able to work. Full employment was the battle cry of American liberals, arrayed against conservatives who worried about the inflationary tendencies of a full-employment economy.
Unemployment is less of a problem now, however. In the 1970s and 1980s, over 25 million new jobs were created in the United States, 18.2 million of them in the 1980s alone. There is often a mismatch between where the jobs are and where people are, of course. Many suburban fast-food jobs go unfilled while inner-city kids cannot easily commute to them. And the Federal Reserve Board periodically cools the economy in an effort to fight inflation, thus drafting into the inflation fight many of those Americans who can least afford it. But these impediments not-withstanding, the truth is that by the last decade of the twentieth century, almost all Americans who wanted to work could find a job. And because population growth has been slowing (more on this later), the demand for people to fill jobs is likely to be higher still in the years to come. State governors and city mayors continue to worry every time a factory closes and to congradulate themselves every time they lure new jobs to their jurisdictions. Yet the more important issue over the long term is the quality of jobs, not the number." (Work 203)
Reich's contention that unemployment is not much of a problem is supported by the assertion that "almost all Americans who wanted to work could find a job." Full employment has been achieved, as evidenced by the ever-present help wanted sign at many suburban fast-food restaurants. Never mind official unemployment statistics, and the many unemployed who don't get counted in those statistics. Reich adds that slowing population growth will likely raise the relative demand for people to fill jobs even higher in the years to come. There are plenty of jobs to go around if you count some that don't exist! However, the proportion of able-bodied adults who will be motivated to join the workforce, and to work longer hours, might also increase if pay rates continue to fall in real terms. Reich also downplays the jobs issue by declaring that, "over the longer term, the important issue is the quality of jobs, not the quantity of jobs." (Work 203)
However, qualities of a job that job-seekers and job-holders generally regard as important include the rate of pay and other forms of compensation. It is a widely held view among economists that an overabundance of job seekers in relation to available jobs tends to depress wage levels. But Mr. Reich has a different job quality in mind, its "functional" role in the world economy. Of course, a really good job is a job as a symbolic analyst. Quantity is no doubt important when it comes to high quality jobs, the more the better. That's what Mr. Reich is selling as the ticket that will admit a greater quantity of Americans into the middle class.
The Middle Class
Middle class noun : a class occupying a position between the upper class and the lower class; esp : a fluid heterogeneous socioeconomic grouping composed principally of business and professional people, bureaucrats, and some farmers and skilled workers sharing common social characteristics and values. (Webster's Seventh New Collegiate Dictionary, 1965 edition)
Reich gives a reasonable portrayal of what is happening to the paychecks of most American workers, but he gives a rather over-inflated estimate of the earning power of for all but a very small share of those he labels as symbolic analysts. The evidence does not support the claim the plight of the middle class has been the result of symbolic analysts getting fat paychecks for their services. Their labor just hasn't had enough money-absorbing power to accomplish such a feat.
Duncan defines membership in the middle class as membership in a household with an income between 2 and 6 times the official poverty threshold. The official poverty threshold for a family of 4 in 1991 was about $13,500. By this definition the proportion of all adults aged 25 to 55 in the U.S. who belonged to the middle class had climbed to about 75% in 1970, fell and rebounded to 75% between 1974 and 1978, dropped steadily to 65% in 1983, then rose to only 67% in 1985-86 (36).
A study of income distribution based on 1989 Census bureau figures revealed that 46% of all households had annual incomes less than $25,000. Households consisting of one person represented 39.5% of this group, married couples 36.6%, female-headed families 17.5%. Households with children under 18 represented 29.2% of these households. The breakdown of income for these households shows (as a rounded percentage of all households) that 6% had incomes under $5,000; then proceeding upward in $5,000 increments: 11%, 10%, 10%, and 9% in the $20,000 to $24,999 bracket (Waldrop 26-7).
At the other end of the income spectrum, 20.8% of households had incomes greater than $50,000 per year in 1988. Half of this group had incomes less than $66,000, and 15% (3 million households) topped $100,000 (Waldrop 30).
There was some upward mobility out of the middle class between 1970 and 1980 according to census bureau data. The number of family units with incomes over $50,000 (in 1980 dollars) represented 5.5% of all family units in 1970 and 6.7% of all family units in 1980, a 22% increase in the proportional size of this group (Hacker 143). Rising wages and salaries in some occupations could account for part of this upward mobility. Some family incomes rose above $50,000 per year by the addition of income from a second or third wage-earner. Women have dramatically increased their participation in the workforce since 1970. It has also become less uncommon for children over 18 with jobs to remain in their parents' household for an extended time because they don't earn enough money to be self-sufficient.
According to Wallich and Corcoran, the middle class, defined as adults earning $18,000-$55,000 in 1987 dollars, shrank from 75% of the population during the 1970s to about 65% during the 1980s. Noting that for more than a decade prior to 1980 there was little net out-migration from the ranks of the middle class, they point out that:
"Since 1980, however, rates of departure from the middle class have increased significantly: 2 percent more people have risen to the upper income bracket, and 30 percent more have slid into the lower economic tier."
The direction of middle class migration can be explained by the income differential between the upper and lower ends of the pay scale nationwide. The top 10% of wage earners earned 2.6 times more than the bottom 20% in 1968 compared with at least 3.8 in 1992 (Wallich and Corcoran). This widening gap between rich and poor workers, however, is much less in magnitude than changes in the inflation-adjusted value of the federal minimum wage. This widening pay gap between rich and poor wage earners can be attributed almost entirely, if not entirely, to the fallen value of wage-rates paid to workers at the bottom of the pay ladder.
It is no secret that capitalists did very well in the 1980s. Interest income, historically a low yield investment, offered a profit margin far higher than the rate of price inflation. In real terms, capital investments generated income far more prolifically than economic activity generated an equivalent in goods and services. The share of total income already absorbed by capital investments on the eve of the 1980s can solve the mystery of what happened to most of the money fleeced from wage earners.
1979 Federal tax returns showed that unearned income derived from dividends, interest and sale of capital assets represented 9.1% of all declared Adjusted Gross Income. Income from these sources is understated in two major areas: interest income from tax-free bonds is excluded from AGI; profits realized from the sale of capital assets greatly understates the value added to investment portfolios. Selling low-yield assets reduces tax liability (Hacker 172).
Federal Income Tax returns for 1980 reveal that tax filers who declared Adjusted Gross Income greater than $50,000 accounted for 3.3% of 93,616,278 tax filers. AGI for this group accounted for 16.4% of all AGI. The following table gives a breakdown by income bracket and shows wages and salaries as a percent of AGI (Hacker 171):
% of % AGI % of AGI from
Annual Income (AGI) returns all returns Wages and Salaries
Over $1,000,000 0.004% 0.5% 17.9%
$500,000-$1,000,000 0.01% 0.5% 34.7%
$200,000-$500,000 0.1% 1.7% 49.5%
$100,000-$200,000 0.5% 3.6% 59.7%
$75,000-$100,000 0.6% 2.8% 64.9%
$50,000-$75,000 2.1% 7.4% 73.6%
Aside from wages and salaries, sources of "earned income" declared in tax returns also fall into the categories "business and professional earnings" and "partnerships." Income from these sources is compensation for ownership of an enterprise that doesn't necessarily entail doing any work. The non-working owner of a business with a working partner or a hired hand to run it still "earns" business income. In some cases, the working owner of a business earns far more than anyone who might be hired to do the same work (Hacker 172).
The following table shows major sources of income declared in 1979 tax returns in three income ranges as a percentage of Adjusted Gross Income (Hacker 172):
Wages/ Professions/ Asset
Salaries Business Partnerships Dividends Interest Sales
Over $1,000,000 13.7% 7.2% 1.8% 22.5% 6.4% 44.2%
$50,000-$100,000 67.2% 10.5% 3.8% 5.1% 6.9% 3.5%
$20,000-$25,000 90.2% 2.6% 0.4% 0.9% 3.4% 0.6%
The composite middle class household of 1979 in the $20,000 to $25,000 range has a decidedly proletarian quality to it. Even lower upper class households in the $50,000 to $100,000 income bracket that year were, on average, heavily dependent on at least one member bringing home a paycheck. However, the size of one's investment portfolio strongly correlated with income in a positive direction. Clearly, the major factor that gives highly compensated employees a boost in income is unearned income. Accumulated capital, rather than accumulated job skills, has been the big wealth absorber that accounts for the shrinking of the proletarian middle class and for its descent into poverty. The Value of Education and Job Experience
The growth in high-quality jobs hasn't produced the results one might expect in terms of salary levels, given the assumptions of Reichian economics. Competition for jobs has reduced the pay for unskilled and semi-skilled jobs, pushing it toward minimal subsistence levels by unemployment of the magnitude seen in the U.S. since the mid-1970s. To some degree, the amount of educational preparation, and skills learned on the job by highly skilled workers insulates them from the effects of general unemployment, but these factors do not confer immunity. Falling pay-rates up and down the pay ladder in business and professional occupations have simply been less drastic and less generalized than in relatively unskilled occupations.
By one definition, skilled labor requires at least a combination of one year of training and work experience to learn basic job skills. These job skills are also unlearned with disuse. An oversupply of experienced skilled workers is therefore unlikely to exist for a very long time in occupations where there is some job growth. However, persons who go through extended training for a skilled trade or profession are often willing to accept less than the prevailing pay rate to get their foot in the door.
Starting salaries in some professions that require a college degree fell in real terms during the 1980s because the supply of college graduates exceeded the supply of jobs for college graduates. In 1988, the share of American householders who had completed at least four years of college was 22.3%. Among this group, 25.5% were in households with incomes less than $25,000, 29.6% in the $25,000-$50,000 income bracket, and 44.9% in the over $50,000 income bracket (Waldrop 30).
Work experience may be a valuable commodity, but many who started out in occupations with advanced educational requirements more than 20 years ago are finding that they are at the top of a pay ladder that is being chopped off below them. In recent years, unemployment lines have been littered with mid-level managers over 40 years of age whose jobs have been downsized out of existence. Comparable jobs are available, but often at a much lower salary. What had been a point of prime earnings in some careers is now retirement age.
The small net migration of highly compensated workers from middle class to upper class in the 1980s was more likely the result of income generated through accumulated savings and investments than rising salaries. Although the economic boom of the 1980s created shortages of skilled workers in many occupations, pay-rates in skilled trades and professions generally changed very little in real terms.
The U.S. economy is directed by the rich to help the rich get richer, and is hot-wired into a global economy that operates on the same principle. Prosperity for workers in the U.S. during the 1960s was part of a global phenomenon. A new division of labor and specialization in the world economy was possible after World War II. Gone were the colonial empires, along with their captive markets and overhead costs. The U.S. captured markets for high-tech and capital intensive goods that had previously been off limits. Although the rich enjoyed a bigger and bigger share of the wealth, enough was left over that the poor could be a little more prosperous.
But the well of possibilities for rapid growth of productivity tapped into by the integration of the world market after World War II ran dry. The capitalist solution has been to expropriate some wealth from working people to make up the difference.
The massive transfer of wealth from poor to rich accomplished since the 1970s has given American capital plenty of ammunition to engage in battles for dominance in the world market. American politicians and business leaders have been issuing the call for greater sacrifices by workers, frequently sounding off alarms about the expanding influence of Germany and Japan in the world economy. However, robust economic growth that accompanied this expanding influence did not give German and Japanese capitalists much leverage to hold down wages. That's why economic expansion in these countries recently hit the wall.
Driving down labor costs has given the U.S. a competitive edge in the global economy. The result could be a period of robust economic growth, prompting Congress and the Federal Reserve Board to consider regulatory antidotes. It is feared that the economy might create a demand for jobs that would bid up wages.
Yet, putting the brakes on economic growth in the U.S. could overly retard growth in the world economy. A faster rate of growth would be desirable for the transition of China, Eastern Europe, and the former Soviet Union to states with stable capitalist regimes. The integration of these countries into a capitalist world economy could be a stimulus for growth, for the same reasons as the merging of colonial empires after World War II had that effect. However, it seems unlikely that this integration will be as potent a stimulant because it represents a merger of smaller proportions, and because the road to capitalism for these countries has been a bumpy one. Some detours, and perhaps the route to a socialist revolution still lie ahead.
There is no capitalist solution to the current crisis that in any way coincides with the interests of the American working class. The working class solution must be to expropriate the wealth of capitalists and use it to meet the needs of people who have to work for a living.
Duncan, Greg G., et al. "The Incredible Shrinking Middle Class"
American Demographics. May 1992: 34-38.
Hacker, Andrew. U/S: A Statistical Portrate of the American People.
Viking Press and Penguin Books, 1983.
Kennedy, X. J., Dorothy M. Kennedy, and Jane E. Aaron, eds.
The Bedford Reader. Boston: St. Martins Press, 1991.
Marx, Karl. Capital: A Critique of Political Economy. Vol 1.
New York: Vintage Books-Random House, 1977. 3 vols.
Reich, Robert. Why the Rich are Getting Richer and the Poor, Poorer.
Kennedy, Kennedy, and Aaron 407-416.
---. The Work of Nations: Preparing Ourselves for 21st Century Capitalism.
New York: A. A. Knopf, 1991.
Rosecrance, Richard. "Must America Decline?"
The Wilson Quarterly. Autumn 1990: 67+.
R.W.E. "Economic Growth and Planning."
The New Encyclopaedia Britannica. Vol. 17. 1993 ed.
"United States." Britannica World Data.
Chicago: Encyclopaedia Britannica, Inc. 1990 ed.
--- Britannica World Data. 1993 ed.
Waldrop, Judith. "Up and Down the Income Scale."
American Demographics. July 1990: 24-30.
Wallich, Paul and Elizabeth Corcoran. "The Discreet Disappearance of the Bourgeoisie:"
Scientific American. Feb 1992: 111.
Whitehead, Ralph. Class Acts: America's Changing Middle Class.
Kennedy, Kennedy, and Aaron 419-425.