Wednesday, August 05, 2015

Where Did the GDP "Growth" Go? Not into Wages

How can the economy grow by roughly one-third in real dollars while real median household income drops like a rock?
Based on gross domestic product (GDP), the U.S. economy has grown smartly since 2000: GDP rose from 10,031 in 2000 to 17,840 in mid-2015. That's an increase of 77.8%.
If we adjust GDP for inflation, we get what's known as real GDP, which increased 31.6%: from 12,360 in 2000 to 16,270 in mid-2015. This works out to a real annual increase of about 1.9% annually.
It would be natural to expect full-time employees' wages and salaries to rise at about this same rate as the economy expanded. But real median weekly earnings (wages and salaries) increased a grand total of $7 in the past 15 years: from $334 per week to $341 per week.
If wages and salaries had risen at the same 1.9% annual rate of real GDP growth, median weekly earnings would be $443, not $341. That's $102 more per week. But weekly median earnings for full-time workers rose only $7 per week, not $102 per week.
In other words, the growth in real GDP hasn't trickled down to wages and salaries.
Real household income--which includes both earned income and unearned income such as dividends and interest--has plummeted 8.5% since 2000. This is a striking contrast with real GDP growth of 31.6%: the economy has expanded 31.6% after adjusting for inflation, while real median household income has declined 8.5%.
If real median household income had grown at the same 1.9% annual rate of GDP, it would now be $75,000 a year, rather than $52,000.
So where did all this growth of the economy end up? How can the economy grow by roughly one-third in real dollars while real median household income drops like a rock and real wages/salaries are essentially unchanged for 15 years?
You can check these projections based on 1.9% annual growth for yourself with a simple Excel spreadsheet.

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