What is fueling wage inequality in the US?

The economy has not been kind to low- and middle-wage workers in recent years. Their earnings fell considerably during the recession, and to date they haven’t bounced back much. Even beyond that, there’s a broader problem. More and more of the money people earn comes in the form of investment income, not wages. And lower-wage workers generally have less money to invest in things like stocks and real estate.

Wage inequality since 1979

Since the late 1970s, the earnings gap between high- and low-wage workers has grown substantially.*

Wages for high-wage earners in Massachusetts have increased 45 percent, adjusted for inflation. No other group can match that upward trajectory.

While the real earnings of middle-wage folks did go up 21 percent, most of that dates back to the 1980s. Since 1987, median wages have hovered between $18 and $22 per hour.

For low-wage workers in Massachusetts, the picture is even worse. They were earning $11.14 in 1979 and today they earn $11.17. That’s zero percent real growth.

Wages vs. income

Not everyone gets their money in the form of wages (which includes salaries). Some people make money through investments, whether in the stock market, in real estate, or elsewhere. And the importance of that investment income has been growing.

In the 1950s, about 67 percent of the money people earned in Massachusetts came in the form of wages. Today, it’s down to 55 percent, which means that investments and other, non-wage sources of income have become a bigger part of our state economy. This shift has tended to benefit the wealthy, because they’re the ones who have the funds necessary to make investments.

Bringing it together

You might think of low- and middle-wage workers as falling behind in not one but two different races. First, their wages aren’t growing as fast as the wages of higher-income workers. Second, even when the economy does grow, that growth is increasingly flowing to wealthier households that have capital to invest.

There is no simple explanation for this double decline in the earnings-power of lower-wage workers. The causes are deep and varied, and they include things like globalization and falling union membership. It may not be possible, or even desirable, to undo these kinds of big, structural changes, but if supporting lower-wage workers becomes a priority there are other ways to help. The state’s new $11-per-hour minimum wage is one approach, but perhaps the most effective would simply be getting the economy back to full employment.

*Note

I use “high-wage workers” to refer to those at the 80th percentile, which means workers who earn more money than 80% of their peers. Low-wage workers are those at the 20th percentile, which means they earn less money than 80% of their peers. Middle-wage workers are right in the middle. Half of folks earn more, and half earn less.