This is the third post in my mini series on employment.  Part 1 illustrated how agriculture and manufacturing, the two historically large areas of employment, have collapsed over time.  Part 2 drilled into the services sector which today accounts for the bulk of employment to show that many categories there have stopped to grow and are under pressure from the twin forces of automation and globalization. Why does all of this matter? My overriding argument is that we have not found a new source of jobs. The result is an unprecedented pressure on wages that is the primary driver of the astounding growth in inequality in the United States.

Much has been written recently about inequality but still the numbers are so extraordinary that it is worth calling some of them out.  Maybe the most radical summary came in the form of a tweet by Senator Bernie Sanders in which he claimed that the Walton family owns more wealth than the bottom 30% of Americans.  Subsequent fact checking showed that he was off with the real number being above 40%.  For some more similar examples see this post.  How is such an extreme situation possible? Of course on one end it is the exceptional fortunes at the top of the pyramid.  But these wouldn’t be so much a problem in isolation.  

The real issue, as fas as I am concerned, is just how tough things have gotten for a large and growing part of the population.  A recent report by the Census Bureau showed a further decline in median household income (image taken from the full PDF report which is worth studying)

When looking at this chart it is critical to keep in mind that these are median household incomes.  That means half of all households make *less* than that and in some cases by a lot, with almost 10 million households living in poverty.

To see how inequality is driven by what is happening in the labor market consider first the following chart from a terrific blog post titled “Is Decoupling Real?” that investigates the relationship between GDP and income growth:

The chart shows average household income tracking GDP growth but median and Q3 (middle quintile) income detaching around 1980 and slowing down substantially.  The only way for the average to grow faster than the median (for any measure) is for the high end of the distribution to grow faster.  Translation: incomes at the top have been rising while incomes at and below the media have been stagnant or declining.

But what is behind that decoupling?  The next chart shows what has happened to labor’s share of national income.  It is from a great post from two researchers at the Federal Reserve in Cleveland titled “Labor’s Declining Share of Income and Rising Inequality”

The two obvious questions are: why is labor’s share declining and what is growing in its stead?  Let’s start with the second question as it is covered by the same set of statistics: income from capital has been rising rapidly. The answer to the first question are the forces I have described in part 1 and part 2 of this series: globalization and automation.  Both of these will make capital more important than labor.  And that is exactly what the statistics show!

The rising importance of capital is a double whammy for inequality.  First, wealth is already highly unevenly distributed which means that the returns to capital are highly concentrated among a small part of the population.  Second, the shift is responsible for the decoupling between average and media wages shown above.  For those with jobs that are complementary with capital (eg, investors, CEOs) incomes have been rising with the increased importance of capital.  The latter effect is made even more pronounced as automation is driving increasing returns to scale with winner-take-all (or nearly all) effects in many markets.

And to tie all of this back to the basic premise of my series of posts: traditional remedies simply won’t do.  We are experiencing a fundamental restructuring of economic activity on par with the shift from agrarian to industrial society.  Pressure on labor will only rise from here on out. We need to think beyond fiscal stimulus and even beyond a simplistic and unreflected mantra of “more education” as the following chart shows (taken from a post title “It’s the distribution, stupid”): 

The red and blue lines indicate that a growing percentage of the population has at least completed high school (blue) and even more gains have been achieved in the percentage of the population with a college degree (red).  Over that time period productivity (yellow, measured here in change in GDP per capita) has also grown substantially due to automation. All the while median wages (green) have stagnated as we have already seen.

What is the answer then?  I don’t know either but in the next post I will take some stabs in what I think is the right direction.  It should come as no surprise to regular readers of this blog that much of it will involve the peer progressive agenda.