Ari Goldfarb is communications director with Buffalo-based Goldfarb Financial, and published novelist whose works include Just Under the Sky. His series with Buffalo Rising comments on the intersection between finance, economics and pop culture.
It is nearly a unanimous agreement that true economic equality cannot exist in a healthy economy. Without incentive, usually in the form of better wages and a more comfortable lifestyle, we as a whole would suffer. The question to ask though, is have we not separated our top earners and bottom earners enough? Few would argue a CEO should earn the same (or close to the same) as their workforce, but over 200 times the median wage is excessive.[1] In Joseph Stiglitz’ book The Price of Inequality, he states how top tier earners save anywhere from 15-25% annually while a growing number of Americans live pay check to pay check, unable to accumulate any savings.[2]
The economic policy institute shows wage stagnation dating back to the early 1970’s, meanwhile the cost of living (education, home ownership, and even groceries) have all increased. Hourly compensation has only increased 9.2% since 1973. The median cost of a house in 1973 was $32,500.[3] According to the census bureau the median cost of a house as of April 2016 is $321,100.[4] Day to day expenses have increased too (at a much faster rate than wages). A loaf of bread has gone from 25 cents in 1970 to around $2.00 today. Who can forget gas prices hitting $4 per gallon back in 2008? All this contributes to the difficulties many families have in building a sufficient savings.
The two lines on the graph below represent annual income. The dotted line represents the median income in 1979 and how much that would have fluctuated over the years adjusting for inflation. The solid line below represents the actual average income. As one can see in 2007, the annual income in 1979, when adjusted for inflation, was $17,867 more than the actual average income.
Wage stagnation did not come from a less productive or less skilled workforce. Since 1973 output productivity has gone up 73%.[5] There are a number of causes for slow and stagnant wages; some of the reasons are innocuous like new innovations making certain skills obsolete; some are more explicit like Walmart CEO earning over $25.5 million annually while many of their employees earn so little they qualify for food stamps[6]; and some reasons are inevitable, like a more accessible global market. But the point of this article is not to demonize capitalism. It is an efficient system when properly regulated. But the fact remains that when the workforce is largely not compensated enough for their productivity, a growing number of families are unable to save much of their paychecks; and when families are unable to accumulate wealth, the middle class shrinks.
According to PEW Research, the middle class shrunk by 11% from 1971-2015. Not all of that 11% fell to the lower end of the spectrum. In fact, one can see the percentage of highest earners more than doubled in that time period. The problem is when combining lower middle and lowest earners, which according to PEW is an individual earning around $24,173 per year or less, the overall percentage is nearly a third of our population.[7]
This creates a problem because once a family falls into the lower tiers, class mobility becomes nearly impossible. The families in these lower income tiers are usually working minimum wage (or close to) jobs. They are unable to accumulate any savings, in some cases spending their entire paychecks on food, rent and utilities. Without the ability to properly save, an unexpected medical emergency, a car accident, a fire, a flood, or any other unforeseen crisis can financially ruin a family. The Atlantic wrote a story on this, looking at a PEW Charitable Trusts report on household savings. They found that over half of American households (55%) did not have enough liquid savings to replace a month of income if they needed to—for example a medical emergency.[8] This was not due to families spending their money on non-important luxury items or waste. 71% of those households worried about having enough money to cover their day-to-day needs.[9]
Wage stagnation has damaged a large portion of the population’s ability to properly save and accumulate wealth. When the cost of necessities increases at a faster rate than median annual income, a growing number of families are unable to take the necessary steps in moving to the middle class, such as affording college tuition or purchasing a home. The shrinking middle class is an issue we need to start a conscious effort towards countering. Annual compensation is an important starting point.
This article is courtesy of Goldfarb Financial www.goldfarbfinancial.com, a Buffalo boutique independent financial firm.
Ari Goldfarb is not affiliated with Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Views expressed are the opinions of Ari Goldfarb and the Financial Advisors at Goldfarb Financial and not necessarily those of Raymond James.
Goldfarb Financial is an independent firm. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Goldfarb Financial, 295 Main St Suite 914, Buffalo, NY 14203 716-842-0145
[1] http://www.cbsnews.com/news/ceos-earn-more-than-200-times-their-workers/
[2] Stiglitz, Joseph The Price of Inequality
[3] https://www.census.gov/const/uspriceann.pdf
[4] https://www.census.gov/construction/nrs/pdf/uspricemon.pdf
[5] http://www.epi.org/publication/charting-wage-stagnation/
[6] https://www.washingtonpost.com/news/on-leadership/wp/2015/08/25/the-average-sp-500-ceo-makes-more-than-200-times-the-median-worker/
[7] http://www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/
[8] https://www.census.gov/construction/nrs/pdf/uspricemon.pdf