Since the recovery’s start in November 2001, cumulative corporate profits are up a whopping 40 percent, with 69 percent of this increase occurring after the first quarter of 2003, the recovery’s sixth quarter.
This rebound of corporate profits sharply contrasts with the experiences of many Americans. Since the start of the recovery, wage growth adjusted for inflation has stagnated. Cumulative growth in wages and salary has been only 2 percent, compared to 10 percent in the previous five recoveries. The average masks the fact that the wages of the country’s lowest paid workers have not kept up with inflation.
When compared to other segments of the income distribution, inflation-adjusted income among households in the lowest fifth of the distribution fell the most. From 2001 to 2003, the drop was 5.1 percent, compared to a 1.6 percent drop for the typical household. The 5.1 percent drop in income is greater than during the previous two recoveries. From 1991 to 1993, the decline was 2.7 percent and from 1982 to 1984, household income in the lowest fifth of households actually rose by 3.5 percent.
Low-income African-American households have also seen their real incomes fail to keep up with inflation during the current recovery. Income for the bottom 40 percent of African-American households fell by 5.9 and 5.7 percent from 2001 to 2003.
Most recently, the U.S. Census Bureau reported that from 2002 to 2003 the number of Americans in poverty increased by 1.3 million people to 35.9 million. This caused the official poverty rate to rise from 12.1 to 12.5 percent. Although the poverty rates of African-Americans and Hispanics did not change from 2002 to 2003, they both exceed 20 percent. One of the most disturbing aspects of the Census Bureau’s release was the increase in child poverty from 16.7 percent in 2002 to 17.6 percent. About 800,000 more children now live in poverty.
The White House’s response to the poverty data was to treat them as old news, as the economy supposedly has improved since 2003. Yes, after over 30 months, albeit at a meager rate, the economy has started to add jobs. But if we look at several of the key labor statistics that are correlated with poverty, we will find that the prospects for Americans who have no more than a high school degree, who are single parents or are African-American have not improved since the Census Bureau collected the data. Specifically, from August 2003 to August 2004, the employed share of high school dropouts fell from 41.3 to 40.9 percent, of high school graduates dropped from 60.4 to 60.1 percent, of African-Americans remained at 57.4 percent, and of single mothers did not improve.
On the wage front, inflation-adjusted earnings fell for the lowest paid workers. Usual weekly earnings in the first decile of the distribution fell by 1.9 percent from the second quarter of 2003 to the second quarter of 2004. Over the same 12-month period, earnings for the bottom 10 percent of the African-American distribution fell by 3.2 percent. So, when the poverty and income numbers come out next year, my prediction is that they will show little if any improvement.
What can immediately be done to help America’s lowest paid workers? Simply put, modest increases in the federal minimum wage. The first criticism of this policy response is that increased joblessness will occur. This criticism has little merit. The balance of statistical research over the past decade consistently shows that the job loss due to a moderate minimum wage increase is negligible. The second criticism is that the minimum wage is poorly targeted. This is another critisicm that has little merit. A recent analysis of a proposal to increase the federal minimum wage in steps to $7.00 per hour by 2006 by nine leading labor economists concluded that 76 percent of women who would benefit directly from the increase are over the age of 20. Minority women would disproportionatately benefit from the increase: 33 percent of female beneficiaries would be African-American or Hispanic, even though these groups comprise only 24 percent of the female workforce.
This study also identified the additional purchasing power that an increase would provide to families: 10 months of groceries, eight months of rent, an entire year of community college, and almost an entire year of healthcare expenses.
In fact, increasing the minimum wage does provide greater purchasing power. My joint work with Bruce Klein (Institute for Economic Well-Being) and Hanley Chiang (Harvard University), estimated the extent to which the increases in the minimum wage from $4.25 to $5.15 per hour in 1996 and 1997 improved the ability of households to achieve food security (e.g., the ability to purchase for their members foods that have adequate nutrition) and reduce hunger.
The two increases significantly improved the hourly wage distribution of householders (principal persons in a household), with the improvements being greatest in minority and single parent households, and households where the head has no more than a high school diploma. Specifically, we show that the increases in the minimum wage raised wages for the bottom 15 percent of hourly wage earners and did not have an adverse impact on the employment of household heads. These results are consistent with a variety of past studies.
Even after controlling for the link between the 1990s’ economic expansion and food security, increases in the federal minimum wage in October 1996 and September 1997 raised food security and reduced hunger, particularly in low-income households where householders had completed no more than a high school degree or were single parents. Modest increases in the federal minimum wage can help to reduce hunger.
A higher federal minimum wage can immediately begin to reduce poverty and hunger, unlike the “trickle down” approach of using tax cuts to the wealthy, which have fallen well short of their predicted effect of generating jobs, opportunity and reducing poverty and hunger.
Even without the 6 percent erosion in its real value during the current recovery, the real value of the minimum wage is at the lowest level during any of the previous five recoveries. Let’s stop the delay and attack hunger directly by increasing the federal minimum wage.
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Change in Household Income During the Recovery
In the past recession, incomes for everybody fell. However, in the recovery, incomes for the bottom 60 percent of income earners continued to decline, whereas they grew again for the top 40 percent. Moreover, total losses were largest for the bottom 20 percent of income earners.
Source: U.S. Census Bureau, www.census.gov
- Change in Mean Income of Lowest Fifth of U.S. Households: A Comparison to Past Recoveries
In this recovery, the average (mean) income of the 20 percent of households with the lowest incomes declined by 5.1 percent. In the early 1990s, the decline was only 2.7 percent and in the early 1980s, their average income actually grew by 3.5 percent. .
Source: U.S. Census Bureau, www.census.gov
- Change in Usual Weekly Earnings: 2003:Q2 to 2004:Q2
From the middle of 2003 to the middle of 2004, incomes for the 40 percent of households with the lowest incomes fell. This decline was even more pronounced for African-American households than for all households.
Source: U.S. Census Bureau, www.census.gov
- Erosion in Real Value of Minimum Wage by Recovery
In each recovery, the federal minimum wage lost ground due to inflation. However, in this recovery, the inflation-adjusted minimum wage had its second lowest starting point and was never adjusted upwards.
Notes: Author's calculations are based on information on federal minimum wages from www.dol.gov and CPI-U data from www.bls.gov
William Rodgers III is a professor and chief economist of the Heldrich Center for Workforce Development at Rutgers University and a member of American Progress’ academic advisory committee for economic policy.