The article below is from the January 29, 2016, edition of The Wall Street Journal."
By EDWARD
P. LAZEAR
Jan. 28, 2016 6:06 p.m. ET
Speaking about the
economy a half-century ago, President John F. Kennedy told Americans
that “a rising tide lifts all boats.” Today many disagree, including those in
his party who want to be the next Democratic president.
Hillary Clinton is one. She has
repeatedly claimed, most recently in Omaha, Neb., last month, that “the deck is
stacked,” with “the wealthy getting wealthier at the expense of hard-working
families.”
Bernie Sanders also
complains that the system “has been rigged by Wall Street.” At the Democratic
debate on Jan. 17, he said that “ordinary Americans are working longer hours
for lower wages, 47 million people living in poverty, and almost all of the new
income and wealth going to the top 1%.”
Nevertheless, what
Kennedy said is as true today as it was in the early 1960s.
Most economists who have
examined income data believe that the gulf between top and bottom earners in
the U.S. has widened. Yet data from the Bureau of Labor Statistics’ Current
Population Survey (CPS) from 1980-2014 reveal that the periods when low-income
workers do best are generally the same as those when high-income workers
prosper.
From 1980-2000, the
earnings of the 90th-percentile earner (the person whose earnings are higher
than the bottom 90% of earners and lower than the top 10% of earners) grew
three times as fast as they did from 2000 on. The same was true of the earnings
of the 20th-percentile earner, which also grew three times as fast between 1980
and 2000 as they did between 2000 and 2014. The average annual GDP grew about
twice as rapidly in the earlier period as it did during the latter period.
This linkage appears in
bad times as well. The 90th percentile, the 20th percentile and the median
earner (defined as the earner at the 50th percentile) saw actual declines in
real earnings from 2008-14.
A more detailed analysis
of CPS earnings data (posted on the
Hoover Institution website) reinforces the point. There is a statistically
strong correlation between the growth in earnings of the 90th-percentile
earner, the median earner and the earner at the 20th percentile. The middle and
bottom tend to grow when the top grows. The connection between the groups is
quite strong with the exception of the highest 1%, where the correlation is
still positive but statistically weaker in recent years. But there is no
evidence that the success among top earners is at the expense of lower earners.
The “rising tide lifts
all boats” metaphor is off in one respect. When a tide rises, all boats move up
by the same amount. Earnings growth doesn’t follow that pattern; sometimes the
bottom moves up by more than the top. In the mid-1980s, earnings of the 20th
percentile grew about 40% more rapidly than earnings of the 90th percentile.
Over recent years, top
earners have enjoyed more wage growth than those at the bottom. This is the
source of the complaint that the rich have taken all the spoils of growth. But
the bottom is not strugglingbecause the top
is thriving—and reducing earnings growth at the top wouldn’t increase earnings
growth at the bottom.
All groups’ earnings grow
when the economy is prospering, and high growth is especially important for
lower-income earners. Additionally, the lagging earnings among the
least-skilled workers reflect deficiencies in demand for those workers—and this
deficiency, crucially, is a result of low productivity.
In a 2012 study published
by the Kansas City Federal Reserve Bank,James Spletzer and I found that there
are chronically high job-vacancy rates and low unemployment rates in the most
skilled occupations, but the opposite in the least skilled occupations. In good
times and bad, there are many more service workers unemployed than there are
job vacancies for those types of workers.
But job vacancies for
managers and professional workers usually outnumber the unemployed. Even in the
housing boom year of 2006, while there were about two professional vacancies
for every unemployed professional worker, there were more than seven unemployed
construction workers for every construction job vacancy.
Wages move with demand.
Just as high wages for skilled labor reflect strong demand for those who can do
the jobs required in our advanced economy, low wages at the bottom reflect poor
demand for those without the requisite skills.
To raise wages at the
bottom, the productivity of the least-skilled workers has to improve. Better
education is at least part of the answer. Redistribution through the tax system
won’t improve those skills; if anything, it will work in the wrong direction by
making skill acquisition less rewarding.
The earnings of
individuals with low incomes are most likely to grow when the incomes of top
earners also grow—and the best way to make the poor prosperous is by improving
their skills and growing the overall economy. Some boats are bigger than
others, but draining the ocean won’t help boats of any size.
Mr. Lazear, chairman of the
President’s Council of Economic Advisers (2006-09), is a professor at Stanford
University’s Graduate School of Business and a Hoover Institution fellow.
