Income and wages in the United States in the 2000s

The money that an individual earns on a regular basis from an employer or through investments in items such as real estate, stocks, or bonds

During the 2000s, the vast majority of Americans saw their paycheck wages either stagnate or shrink when adjusted for inflation. This financial difficulty came at a time when investment incomes also underperformed. US income stagnation in the 2000s was driven by growing income inequality and weak economic growth. Income inequality occurs when top earners receive a greater share of the nation’s total income than lower and middle-class earners.

Stagnation has been the chief defining characteristic of income and wages in the United States during the first decade of the twenty-first century. The root causes of this phenomenon are poor economic conditions and growing income inequality. The US economy endured two economic recessions during the 2000s, the first coming in 2001 and lasting about eight months; the second in December 2007 and ending in September 2009. Economic growth in the US has remained anemic. The 2001 recession resulted from the collapse of stock values in the information technology market. This collapse is also referred to as the bursting of the Internet or dot-com bubble. The US economy suffered further as a result of the September 11, 2001, terrorist attacks.

The late-2000s recession occurred after the collapse of the US housing market, which was overinflated by loose lending practices on the part of the banking industry, and by customers seeking to purchase homes on easy credit. Both recessions, as well as the impact of globalization on the US economy, kept American wages and incomes stagnant throughout the 2000s.

Poor Economic Conditions

Although economists considered the 2001 recession relatively mild, the recovery that followed it was very weak. Between the end of the first recession and the beginning of the second, the US economy grew at an annual rate of 2.7 percent. During the preceding two decades, US economic growth exceeded 3.5 percent annually. The weak recovery that followed the 2001 recession was met with a severe second recession in 2008 that not only wiped out the economic gains of that recovery, but caused the income of the average US family to decrease to 1996 levels, when adjusted for inflation. Even before the recession of the late 2000s, also known as the Great Recession, the US economy was growing at the slowest rate of any decade since World War II (1939–45).

Many economists consider the Great Recession to be the worst economic downturn in more than fifty years. In its wake, poor and middle-class Americans have been unable to make up lost ground, a phenomenon last seen in the Great Depression of the 1930s. By the end of 2000s, many Americans feared that they and their children would not do as well as their parents and grandparents had. Economic data bore their fears out. Households that supported themselves on wages from one or more salaried positions did not keep up with inflation. In 2000, the median family income, adjusted for inflation, peaked at $64,232. For the first time since the Great Depression, income declined in every tax bracket. Wealthier households, which generally have investment portfolios comprised of stocks, bonds, and real estate, also saw their earnings dwindle.

A Generational Problem

The Great Recession caused average US household incomes to fall for three consecutive years between 2009 and 2011. This declining income highlighted a growing trend of income inequality in the United States. In addition to declining wages, lower-income and middle-class Americans were squeezed by rising expenses and stagnant wages during the 2000s. US families felt the strain of higher prices for health insurance, schooling, childcare, transportation, housing and other expenses against their inflation-adjusted stagnant wages and incomes.

In 1980, the top 1 percent of earners made 8 percent of national income; by 2011, they were earning 16 percent of it. Households in the top 1/1000 of income (earning $1.5 million in 2010) have seen a 100 percent (inflation-adjusted) increase in income since 1980. By comparison, households in the middle of the income spectrum saw just an 11 percent increase in their income over the same period. The bottom 99 percent of US incomes grew by just 6.8 percent between 2002 and 2007. That same group had seen an income increase of 20 percent between 1993 and 2000.

The last time such large disparity existed between the income of wealthy Americans and everyone else was 1929, the year of the stock market crash that sparked the Great Depression. During the Depression, reforms enacted to protect investments, restrict financial speculation, and stabilize banks helped to shrink income inequality. Following World War II, the US economy boomed, further shrinking the gap between rich and poor during the 1950s and 1960s. Beginning in the 1970s, however, income inequality began to reemerge, due in large part to globalization and establishment of the finance, insurance, and real estate (“FIRE”) economy; and government policies that allowed for growth in the financial sector.

Globalization—the process by which goods and services are bought, sold, manufactured, and distributed internationally—has changed the US economy tremendously. Capitalism has always sought to produce the best products at the lowest costs, but in a globalized economy, the drive toward lower costs sent production activity overseas, to less expensive, non-unionized workforces. US manufacturing jobs with good wages and benefits could not compete with cheaper labor overseas that could produce the same products at much lower costs. The result was fewer competitive-wage jobs in the United States.

As manufacturing moved overseas, the US econ­­omy came to rely more on its service industry, including its finance, insurance, and real estate sectors. The FIRE economy’s growth was aided by the easing of financial regulations in the 1970s. As the finance-based aspects of the US economy earned more profit, investors began pulling their money out manufacturing and putting it into services. For example, auto manufacturers were beginning to make more money selling loans to customers than what they actually made in building their vehicles. In 2006, just before the housing bubble burst, the finance and banking sector was making 45 percent of all US corporate profits. In earlier decades, this sector represented just 6 percent of corporate profits.

As the US economy shifted from being manufacturing based to being oriented toward the service sector, changes in US government regulations facilitated and encouraged riskier financial speculation in order to increase profits and tax revenues. This riskier investment activity—which included everything from hedge funds, to the dot-com boom, to the housing market—was deemed safe enough for the middle class to invest in, which they did in great numbers. Therefore, when the bubbles in these markets burst, the losses were felt across America by those who used these riskier investments to increase household incomes suppressed by flat wages and rising expenses. The collapse of the housing market was devastating for the average American. Historically, most US wealth accumulation and investment has been based in home mortgages. By comparison, the vast majority of Americans have far less invested in stocks, bonds, or retirement accounts.

Impact

Declining economic mobility and growing income inequality remain significant problems in the United States. One of the bedrock principles of American life is that anyone—whether native-born or naturalized citizen—has the opportunity to succeed, regardless of background or economic status. In the 2000s, the toll the weak economy had on average income and wages in the nation threatened this ideal. Weaker earnings led to higher poverty rates, and an inability for younger and less affluent Americans to get ahead.

Many younger Americans, unable to earn a living wage, have come to realize that they will not be able to afford the same standard of living that their parents enjoyed. Moreover, weaker wages for Americans of all ages means less disposable income for the purchase of goods and services—a particularly dire problem for the US economy going forward. This is a vicious cycle. If weaker wages and incomes lead to less spending, as most economists believe it does, then it will take even longer for the US economy to begin creating the kinds of jobs that will end income stagnation, improve income inequality, and create a robust American economy.

Average Weekly Earnings by Industry, 2000 and 2010

Source: United States Department of Labor Bureau of Labor Statistics

Bibliography

Barlett, Donald L., and James B. Steele. The Betrayal of the American Dream. New York: PublicAffairs, 2012. Print. Argues that policies benefiting the wealthy have hurt the American middle class. Covers the impact of tax policy, pension elimination, free trade, and deregulation.

Johnston, David Cay. Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill). New York: Penguin, 2007. Print. Looks at regulations implemented during the 2000s and their impact on American taxpayers.

Kelly, Nathan J. The Politics of Income Inequality in the United States. Cambridge; New York: Cambridge UP, 2009. Print. Analyzes data from income surveys and other sources to see whether and how political dynamics influence the distribution of incomes in the United States.

Noah, Timothy. The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It. New York: Bloomsbury, 2012. Print. A nonpartisan investigation of the causes of the income gap in the United States.

Stiglitz, Joseph E. Freefall: America, Free Markets, and the Sinking of the World Economy. New York: Norton, 2010. Print. A comprehensive look at the Great Recession by a leading expert on market failure.