Oh no! The Social Security Administration recently released it’s Wage Statistics for 2010 to little (official) fanfare. To read a little financial press, it’s the end of the American Dream (buy guns and gold!), however. Here’s a little secret: the problem isn’t that employers are colluding to ratchet down the income of the United States. The true reason for the reduction in median income is the shifting demographics of employed workers. You can break it down in many ways, but I’ll break it down into age brackets… and you should be convinced that while unemployment is a problem, the falling wage is just a symptom of everything else, and not something you should spend too much time worrying about (let DQYDJ do it for you!). If reading by email or rss, click through for dynamic data.
Median vs. Average Incomes
The math I do here is with average incomes. Surely, you ask, you could do it with medians? Yes, I could, but to be honest I can write this article a lot faster than busting out CPS data to approximate a median. If enough people complain, I’ll obviously reconsider that decision! That said, let’s get the introduction graph out of the way (St. Louis Fed Data/Graph):
See that dip that started during the ‘Great Recession’? That’s what has everyone really worked up about the decline of the American Dream – if this graph doesn’t go up and to the right, has our culture and economy stalled?
Not so fast: if we (the royal ‘we’, the country) can get unemployment under control and the expectations of the population are prosperity this graph will work itself out. However, this graph isn’t as important is it seems.
The Baby Boomers
A primary driver of the decline in income in the graph is the Baby Boomers. Before grabbing a pitchfork and blaming Boomers for the decline in income, note that a lot of the reason for the decline is because Boomers are moving out of prime earning years (Late 30s to early 50s), retiring, and generally making way for new generations in the workforce. Note that the Baby Boom is a large generation, as is Generation Y. With Generation X moving into the top-erarning career years, there just aren’t as many employees to make up for the huge number of Generation Yers at the lower end of the curve. Additionally (and this is actually a huge deal), retirees are coming back into the workforce and earning less money than the high 30s to early 50s crowd. This demographic shift is obvious even in a 10 year graph:
The Problem in One Graph
Here’s a super basic graph of average incomes per age group (Census data here). As you can see, having less workers in the center ranges (with the highest average salaries) would tend to skew the data. If more retirees and folks from the younger generations enter the workforce, with their lower incomes, it will tend to bring down the aggregate data.
There are some other problems with this analysis – (Perhaps only people who can earn higher incomes are remaining in the workforce? Perhaps employers are eliminating certain jobs?) but I hope my reasoning makes sense, even though it’s shallow and this article is a bit rushed. A lot of the fall in incomes is related to the ‘changing of the generational guard.’ Of course, the other problem is all of this changeover in employment demographics is coupled with high unemployment. If people with high earning potential are out of work – it will tend to bring down the average as well. Averages aren’t everything.
Even if I’ve convinced you, try to act surprised when Generation Y hits their peak earning years and we see a huge economic expansion. Comments please!