Income inequality is one of the biggest barriers to sustained growth today. You can’t have a consumer economy without income reasonably well distributed, and such an economy is going to have more sustained, reliable growth. But as we’ve shown before, income inequality has grown since 1968, threatening long term growth.
Here is another way to look at that rising inequality as part of a long-term trend that defined 1968-2000 – the expansion of the workforce and subsequent collapse of that expansion that will solidify when the Baby Boom hits retirement. Economic changes are often demographic at heart, and we are due for some major upheaval that we need to be ready for.
Let’s start with a graph from our old friends at the St Louis Federal Reserve. This is a chart where the blue line shows the percent of the population over 16 years old that has a job of some kind – part or full time. The red line is the GINI index as discussed earlier, rising to show the income inequality over that same period of time.
The percent of the working age population with a job in 1968 was about 60%, which then climbed rather steadily to about 64% through the difficult 1970s before taking a pause. From there, it inched up to 67% in the late 1980s, peaking at 67.3% in 1999. From there, it’s been only down – finding a plateau of 66% again before taking a dive in 2008. It’s now at 63.5%.
On the right scale the left line shows that inequality continued to rise with a brief pause in the 1990s. They seem unrelated. But are they?
The tremendous increase in the percent of the population working seen from 1968-1990 is the result of women entering the workforce. This is not talked about much because it’s hard to point to this achievement without calling some undue attention to the changes that took place as a result. But at this point we have to take it as a historical fact – something that was inevitable and is now irreversible. The available pool of labor is much larger than it was in 1968.
During this time, the percent of adults officially “retired” varied little, from 19-22%. There was a cap of no more than about 79% of adults employed as a possible maximum. At the 1999 peak, no more than 12% of the population was either a full-time student, stay at home parent, or not physically or mentally capable of working. That’s full employment by any measure.
Starting in 2011, the very oldest Baby Boomers became eligible for retirement. That will accelerate through the next 20 years, eventually raising the retired percent of the population to as high as 36% by 2035. Today’s apparent “crash” in workforce participation will soon be the maximum at about 64% –likely to be more on the order of 52%, using the same 12% not participating.
Why is this important? Let’s get back to income inequality, which occurs when labor is less valuable than investment. As women entered the workforce there was a larger pool of labor to draw from, putting downward pressure on wages. It’s simply a matter of supply and demand – more people looking for work means you can pay less, as everyone knows they can be replaced by someone hungry on the outside. That ended in the 1990s, the time when it was almost possible to imagine income inequality leveling off and maybe one day retreating. But then this Depression hit.
We can be sure that the workforce is going to start contracting, meaning that while there are fewer jobs to go around the relative number of people who can fill them must contract. At some point, we can see a logical equilibrium – and upward pressure on wages. That might be what it takes to reverse the inequality out by around 2020 or later, after this Depression eases around 2017 or so.
There’s a catch, however. Whereas half of each household was often voluntarily out of the workforce in 1968, the next economy will have retirees to support. Will each family take care of their own? Or will it mean that higher wages will be met with higher taxes for Social Security?
That’s the situation that we can reasonably expect as the demographic trends continue to work their way through. What we do know is that workforce participation will continue to pull back from an all-time high as retirees become a larger share of the population. In the past, Barataria has called for an acceleration of this trend as a way of ending the Depression.
In any case, we can expect upward pressure on wages in the future and, as a result, an improvement in income inequality. The decision today is how we set ourselves up to manage this developing trend.