THE END OF THE AMERICAN DREAM?
Americans used to be able to assume that each generation would have higher incomes than their parents. A new study says those days are gone, but the “why?” behind this is a tough question.
In a recent issue of the journal Science, published by the American Association for the Advancement of Science, the article “The Fading American Dream: Trends in Absolute Income Mobility Since 1940” looked at just what has happened to American incomes since the 1940s. The article was co-authored by Raj Chetty of the Department of Economics at Stanford University, David Grusky and Maximilian Hell of the Department of Sociology at Stanford University, Nathaniel Hendren of Harvard University’s Department of Economics, Robert Manduca of Harvard University’s Department of Sociology and Jimmy Narang of the Department of Economics at the University of California, Berkeley.
As background, the writers accessed publicly-available data from the U.S. Census and the Current Population Survey plus federal income tax records (with all identifying information redacted). The authors then looked at “absolute income mobility,” which they defined as the fraction of children who are making more money than their parents, as reflected by this data.
What the researchers discovered was that while 94% of children born in 1940 met that criterion, only 50% of children born in the 1980s would end up making more money than their parents.
Another significant result concerned the impact of how high the income was of one’s parents on absolute income mobility.
Regardless of how much the parents made, the trend of those born in the 1980s having less chance of making more money than their parents (compared to those born in the 1940s) was valid for all income levels surveyed. For specific levels, however, the absolute percentages with absolute income mobility were very different.
For those with parents in the top 10% of all income levels, those born in 1940 had a 94% probability of making more than their parents, for example. Those born in the 1980s of equally (top 10% income) wealthy parents still lagged behind their parents in income, but this time the percentage with absolute income mobility was 70%, as opposed to 50% for all born in the 1980s. For those with parents making considerably less money, at the 50th percentile of all income, the absolute mobility rates dropped from 93% (still a very high number) to only 45% for those born in the 1980s. The situation is even more drastic for those with parents in the bottom 10% of all income levels. At those levels of parental income, while 88% of children born in 1940 still made more than their parents, only 33% of those born in the 1980s made more.
There is also a suggestion in the research about what those involved in the study saw as an anomalous period in the 1990s and early 2000s, when the first “digital business bubble” expanded and then burst. The implication was if that were treated as a “lucky break” rather than a real indication of earnings trends for this generation, the real absolute income mobility number for those born in the 1980s might be even lower than 50%.
Based on this research, something awful is clearly happening to the American dream on two levels. The first is absolute and is happening regardless of the income levels of the parents. The second shows that the wealthier the parents are, the more “able” the children of those parents are to make more than those parents, regardless of the decade of birth.
At the heart of both issues is an assumption that Americans have been holding for many decades, at least since the end of World War II. That assumption is that as the economy grows, there will be benefits for all. Those benefits – call them “sharing the wealth,” “trickle-down economics” or perhaps some other more modern phrase – have for decades reliably delivered increased financial security and absolute income levels for Americans everywhere.
That assumption, for as long as it has existed, was assumed to be almost absolute. Part of the reason for this was that, thanks to the G.I. Bill and other factors, starting with the baby boom generation, more people than ever were seeking and getting college and even postgraduate degrees. Advances in fields such as health care, engineering and manufacturing were also creating types of jobs in large enough numbers that the so-called “knowledge industries” were exploding in both numbers and the amount of pay being offered. The economy responded, with the money earned by those in these new jobs driving demand in many industries while also helping support the creation of entirely new kinds of jobs than in the past.
But something changed, and the once “golden goose” of the American economic engine seemed to have stopped laying the same kinds of eggs. That was also despite the wealth at the top continuing to reach higher numbers than ever before.
The Impact of Redistribution of Wealth
One major part of the decline, according to what the researchers in this analysis suggested, was how wealth had moved from being more uniformly distributed to one where the top 10% are richer – as a percentage of the whole – than ever before.
As an example of how this works, the analysts behind the paper created a complex financial model linking together GDP estimates and economic projections, income levels, investment and other factors. They did so both to test the accuracy of their high-level conclusions under various scenarios and to make some predictions.
Using that model, a first analytical experiment looked at what happens to the absolute mobility index if all levels of the parents in the studies could enjoy a broadly-shared rate of economic growth. In one such calculation, which the writers called the “more broadly shared growth scenario,” they assume the incomes of those born in 1980 “would have had in 2010 if the GDP in 2010 were allocated across households in the same proportions as in 1970.”
With that higher-growth analysis, the average absolute mobility rate goes up to 62% versus the original 50% number. That is better but still represents a steep decline versus the 90%+ absolute mobility rates the children born of parents in 1940 had.
A second analysis the researchers looked at, given real income level distributions in the United States, was to find out how much the GDP would have to grow overall to increase absolute mobility to at least 80% versus today’s 50%. What they found was that this “would require sustained real per-family growth greater than 5% per year (or real GDP growth above 6.4%), well above the historical experience of the United States during the Second World War.”
So, barring some miracle to drive the economy to higher levels – levels that are highly unlikely – it is clear that the redistribution of wealth is a major factor for what has happened to absolute income mobility. Contributing Factors to the Redistribution of Wealth
For those attempting to understand why this redistribution of wealth is occurring, one of the common complaints is a lack of jobs.
The blame behind that complaint comes in many forms. Some say manufacturing jobs have been “shipped
overseas” over the past decades, effectively eliminating many of the higher-value jobs that used to be present in North America back in the mid-20th century. Some blame the rise of automation, which is probably closer to the truth in many industries, especially in previously high-paid fields such as auto production. These and other reasons do have some truth.
But the reality, according to economists such as Paul Krugman and companies like Manpowergroup, who survey countries and the world to help plan their own manpower-needs planning, is that there are in fact many jobs available that end up not being filled at all. The reason is simple: a lack of available talent.
According to Manpowergroup’s latest (2016/2017) survey of job needs across the world, for example, 46% of U.S. employers report difficulties in filling jobs. And to dispel any thoughts that perhaps the country is far different than everywhere else, the global average for this figure is 40% for all 43 countries and 42,300 employers that Manpowergroup contacted in this 11th annual Talent Shortage Survey.
Some might wonder if those unfilled jobs are ones that pay poorly or are otherwise undesirable. It is a nice story – and one that some politicians would love to grab onto for campaign purposes – but the facts do not back it up. In fact, as listed in the same survey, the top 10 categories of jobs that employers report having problems filling in the Americas are
skilled trades technicians sales representatives production operators/machine operators
secretaries, personal assistants, receptionists, administrative assistants and office support staff
management/executive (management/ corporate)
accounting and finance staff drivers IT personnel With few exceptions, most of these represent solid, good-paying jobs. It is true that some of them may suffer from a real lack of talent in each geographical area and others may require training that is scarce. But for the most part these are jobs that should be able to be filled – at least far more substantially than they are now. When the jobs are not filled, not only do the individuals who could have earned the income from those jobs suffer but the companies do too, because without the people, they are often unable to take on the new work or bid for the available opportunities out there for their products or services as well.
So, despite the public outcry on the issue and even though if many of these jobs were filled it is unclear exactly what would happen to absolute income mobility, there is clearly a more complex story than people not having access to good jobs.
One major factor operating behind the scenes in all of this is the continuing rapid decline in basic skills that younger Americans have.
Lack of Basic Skills
In a report published two years ago by Educational Testing Service, the testing company many of us remember from our childhood, data collected by the Programme for the International Assessment of Adult Competencies (PIAAC) was reviewed. It specifically looked at and compared American millennials (those at the time between the ages of 16 and 34) with others of the same age across the world. What it found was devastating – that more than half of that group lacks basic proficiency when it comes to making use of basic reading and math skills in the workplace.
In a review of this report, published by The Atlantic on February 17, 2015 (“The Skills Gap: America’s Young Workers Are Lagging Behind” by Mikhail Zinshteyn), the detailed results are quite damning. When the study looked at literacy skills, the U.S. millennials group scored only 274 out of 500 total points available, compared to an average of all participating countries of 282. A full 50% of all U.S. millennials measured at “below the threshold that indicates proficiency in literacy.” And on numeracy, the term now often used to describe basic skills and knowledge of mathematical/financial problem solving, the U.S. millennials’ score was 255 out of a similar 500-point scale. That group was tied with Spain and Italy for dead last on the list, and a full
one-third of millennials missed the cutoff point for minimum basic skill requirements in numeracy. The same report also closed with the comment that these literacy and numeracy skills have declined substantially when compared to the same values analyzed just two decades earlier.
Blame whatever one wishes, whether it be bad public educational programs, where basic literacy and numeracy are taught; a lack of willingness to learn; families not reinforcing literacy and numeracy in the home; and some declines related to modern technology replacing the needs for such skills. But the result is the same: Americans are getting dumber in the core areas they need to take on even the most basic jobs.
No wonder so many jobs reported in the Manpowergroup survey remain unfilled.
The Need to Pivot and Learn New Skills
Another area that affects the inability for today’s workers to get jobs is simply the pace by which the old jobs decline in value and new ones surface.
During the mid-20th century, the skills one learned in vocational school and/or college and postgraduate work would often stay equally valuable over time. Those days, like those of the absolute income mobility assumption, are over.
Experience in the workplace, project management, social skills and the need for basic numeracy and literacy still matter over time, of course. Now more than ever, however, there is a need for constant career reinvention, formal and informal retraining as needs change and the ability to adapt to the changing business environment. Many of the most high-paying jobs today did not even exist as recently as 10 to 15 years ago.
One important skill that is rarely taught in school that would help with this is what some refer to as “learning how to learn.” Public and private school classrooms, vocational and otherwise, offer and formalize various ways of teaching to help one learn new things. But what is missing for many is how to take on learning for oneself.
The sad truth of this important kind of training is that, while it does exist in some private school curriculums, public schools simply have no time for things like this, which are seen as educational luxuries. And yet “learning how to learn” may be one of the most important skills any of us should know and practice, all the time.
What It Means
From a raw economic perspective, with the 1980s generation making less money, that means – under the old law of supply and demand – that the concentration of buying power will out of necessity shift to those making the most money period. It also has an overall result, though the numbers are still to kick in fully, of having a deflation effect on the economy.
The United States and capitalism more generally have, for much of their days, depended on a cycle of consumption and the use of credit to drive markets for everything from consumer products to things like cars, appliances and real estate. With less money overall for the children of parents with incomes at the middle to lower levels, those children will have a smaller percentage of their income available for little more than just necessities. That could mean even fewer jobs for those employed in producing discretionary items as the economy shifts focus to accommodate the economic changes. It also means less buying overall.
Stalling or reversing that process will take a lot of heavy lifting by governments, private industry, educational institutions and the public at large. As the Manpowergroup survey shows, there are jobs out there waiting to be filled but without proper skilled applicants available to fill them. There will need to be stopgap programs to help build part of necessary skills for workers that are available but not yet ready. There will also need to be longer-term, more visionary programs to help transform the next generation of youth so that they are on a better track than are, apparently, the millennials.
Meanwhile, however, as the current children of poorer parents are becoming poorer still, the wealthy and children of the wealthy are getting richer by the minute. Something, too, must be done about that income wage gap before it is too late. That is something that must start with organized public outcry, followed by some radical legislative action and a generation of new business prototypes to lead the American – and global – economy into a brighter future.