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Middle Income Workers Feeling the Crunch

By Andy Ewing, PayScale.com

It came up in the recent presidential debate several times, with Mitt Romney saying, “Middle-income Americans have seen their income come down by $4,300. This is a tax in and of itself. I'll call it the economy tax. It's been crushing.” Certainly, the Great Recession is to blame for a lot of the recent income decline for middle-class Americans, but a recent report by the Economic Policy Institute (EPI) suggests that this decline is part of a much larger trend toward increasing income inequality.

Income Inequality by the Numbers

The Washington Post analysis of the EPI report highlights the fact that, “Inflation-adjusted incomes for households in the top 1 percent have more than tripled since 1979, compared with an increase of 40.6 percent for those in the middle of the wage distribution.”

The EPI report also shows that over the same time period, the middle fifth of the income distribution saw a “0.6 percent annual growth rate,” but that this “does not come close to the income growth between 1947 and 1979, when middle-fifth family income grew 2.4 percent annually.” With numbers like these, it becomes difficult to attribute entirely the woes of the middle-class to the policies of the Obama Administration.

Is Policy to Blame?

In the overview, the report lays much of the blame on economic policies that have  “increasingly served the interests of those with the most wealth, income, and political power.” In particular, it highlights, “letting inflation consistently erode the purchasing power of the minimum wage, and allowing employer practices hostile to unionization efforts to tilt the playing field against workers.”

While some economists may quibble with exactly how much blame these policies deserve in terms of their effects on the middle-class, I think it is clear that given the current pace of the recovery, income growth for the middle-class will continue to be slow.

A Few More Thoughts

Why do most economists believe that the income growth will be slow in the coming years, regardless of who actually wins the election?

Labor market statistics tend to be what economists call lagging indicators. In other words, the economy takes a dive first into recession and then we see the unemployment rate rise. Only after some period of recovery do we see employers willing to hire a bigger workforce, pushing the unemployment rate back down.

The difference between this recession and others is that our unemployed workers have been out of work for so long that they have a greater willingness to accept lower wages for any type of job. On top of that, those lucky folks that have managed to keep their jobs through the Great Recession most likely haven’t been knocking down their bosses’ doors asking for raises.

So, it would seem that with the recent decline in middle-class wages, a general trend toward slower income growth in the long-run for the middle-class, and the expected slow recovery in employment and wages after the Great Recession, the middle-class may be in for two “lost decades” in a row when it comes to income growth. 

Andy Ewing is an economist and writer living on Bainbridge Island, Wash. He earned his Ph.D. in Economics from the University of Washington. He has taught economics at Eckerd College and conducted research in the economics of education.

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(photo credit: flickr/anyjazz65)

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