Middle Class Incomes and the Economic Productivity Conundrum

Median household incomes would have been double: Roughly $100,000 rather than $50,000


Middle Class

Washington Post economics columnist Robert Samuelson has a fascinating op-ed in today's paper. Samuelson cites a thought experiment found in the latest annual report of the president's Council of Economic Advisers. The CEA considers what would have happened to middle class incomes had the growth in economic productivity remained at the high rates experienced in the 1950s and 1960s, inequality had stayed at lower levels, and labor force participation had remained steady.  Broadly speaking economic productivity is the rate at which goods or services are produced, especially the output per unit of labor.

Samuelson asks:

What happens then to middle-class incomes?

Answer: They double. The income of the median household goes from roughly $50,000 to $100,000 after inflation. The biggest increase, about $30,000, would stem from faster productivity growth. Less economic inequality would account for $9,000 and higher labor-force participation — more workers — for $3,000. (Yes, that's only $42,000; the rest reflects the favorable interaction of the three trends.)

Just why this didn't happen is a central economic story of our time. The CEA doesn't offer a comprehensive theory. It merely divides the postwar era into three subperiods based on the economy's changed performance. For example, the years from 1948 to 1973 are labeled "The Age of Shared Growth," because the economy grew rapidly and gains were widely distributed.

Samuelson does not solve the mystery of why productivity growth slowed. But is it just a coincidence that it began to fall off just as the Great Society programs began to take hold; the accumulation of U.S. government debt increased; and regulations started to multiply rapidly?

The whole Samuelson column is worth reading.