https://home.treasury.gov/system/files/226/The_Economic_Security_of_American_Households_Issue_Brief_1-The_Evolution_of_Earnings_and_Income_APR2016.pdf

International Affairs Academy, Document of the Day, Free Professional Development

This report is the first in a series investigating the current economic situations of Americans. What are areas of strength and weakness? What factors contribute to household-level economic insecurity, and what are sources of resilience?


The first issue brief will motivate and set the stage for the following briefs by providing an overview of the long-run trends in the economic situation and outlook for American households over the past forty years. There will be two contributions of this brief. First, we will examine how earnings have changed at over time at each age for American workers.


Second, we will describe the evolution of income levels and the income distribution of American households. We will specifically look at the experience of different generations as their income evolves over their lives. And we will look at differences across educational groups and different parts of the income distribution. Future briefs will examine issues such as perceptions of economic security, household income volatility, the transition into the labor market for young adults, assets and debts, retirement security, and the role of the safety net.


Key Findings

 Recent cohorts of men who work full-time (those born in the 1960s and 1970s) have lower real earnings in early ages than men in the past, and it appears that the age of peak earnings is later.

 Compared to prior generations, men with a high school degree have seen substantial earnings declines across the life cycle. Men with advanced degrees, on the other hand, have seen substantial earnings gains.

 The earnings of full-time women are higher in more recent generations at every level of education. Despite these gains over time, women still earn less than men.

 For both women and men, there is more inequality across the wage distribution than in the past.

 A declining fraction of households are led by married couples, and this especially true among less educated Americans. As a result, despite the expansion in women’s labor force participation, there are fewer adult earners in a typical household than in the past.

 Households headed by individuals without a college degree have seen the biggest decline in the number of earners and total hours worked.

 The combination of rising wage inequality and changing household structure has produced higher levels of household income inequality in recent generations. Economic gains over the past four decades have not been broadly shared.


The Economic Security of American Households Issue Brief One What is Economic Security? The term “economic security” is used in a variety of ways. Here, we think of economic security to mean one’s current and prospective material well-being, assessed both objectively and subjectively. Thus, economic security is related to both actual and perceived current economic status, expectations about the future, and future risks. In past studies, the term has been sometimes used to mean household volatility in income or economic well-being. We will devote a future brief to the exploration of volatility, but we view it as just one component of economic security, albeit an important one.



For young adults, economic security is determined by employment prospects, income, and possibly debt accumulated from higher education and other investments like a first car or home. As people age and approach retirement, concerns are likely to shift towards assets and retirement income adequacy. Future issue briefs will look more closely at debt and wealth at different stages in the life cycle, as these are key underpinnings of economic security. We now start by describing the earnings of American workers, as labor income is the main source of income for most households and thus a primary determinant of economic well-being and security. We will examine hourly wages, hours worked, and overall earnings inequality for both men and women. Because individual well-being is strongly affected by household-level income, we then turn our attention to changing household structures. We then consider how trends in male earnings, female earnings, and household composition combine to affect household-level income and income inequality. How have earnings evolved over time? We look at the evolution of earnings over the life-cycle for different generations.


In particular, we examine hourly wages of full time workers ages 25 to 64 for different birth cohorts, highlighting the differences in trends for men and women over the last few decades. Here we use the Current Population Survey and focus exclusively on the non-institutionalized population. Male Earnings To compare how different generations fare over the life cycle, we plot the hourly earnings of each generation at different ages. Typically workers experience steadily increasing earnings early in their careers, a gradual flattening, and eventually a decline at older ages, even for those who remain in the labor force full time.


For example, the light green line in Figure 1 below shows the median earnings of full-time workers born in the 1950s, shown at different ages and adjusted for inflation. By comparing different lines – each representing a certain generation’s path over the life cycle – one can learn how earnings patterns for more recent generations The Economic Security of American Households Issue Brief One compare to those in the past. (The lines span different ages for different cohorts because of limited data availability.) First, we see a striking pattern in Figure 1: men born in the 1960s and 1970s (shown with the yellow and gray lines in the figure) earn substantially less in real terms at young ages than they did in earlier generations Men born in the 1970s (gray line) earned significantly less than men born in the 1950s (light green line) at age 30. As men approach middle age, however, they gradually approach the earnings of men in their fathers’ generations. For example, the earnings of men born in the 1940s (dark green line) exceeded their counterparts born in the 1950s (light green line) by 7 percent at age 40, but both groups had similar earnings at age 50. In addition, it appears that age-related declines in earnings are occurring later (or perhaps not at all) for newer cohorts. The decline in earnings around age 55 observed in the 1930s birth cohort (dark blue line) is not evident in the 1940s birth cohort (dark green line). In other words, men seem to maintain their peak wages into older ages, perhaps because of health improvements or the changing nature of work.


Source: Current Population Survey and Treasury calculations. The sample is restricted to full-time workers aged 25-64. Figure 1: Median Real Wages by Birth Cohort, All Full-Time Men Median Real Hourly Wage ($2014) Age Younger men working full time earn less than they did in the past after adjusting for inflation, and the age of peak earnings is reached later than in the past. 4 The Economic Security of American Households Issue Brief One The graphs below demonstrate stark differences between the fortunes of high-school-educated men and college-educated men.


Young men with only a high school education have earnings that are substantially lower than those in their fathers’ generations earned at the same age (Figure 2). For instance, the generation born in the 1960s (yellow line) earned roughly 13 percent less in real terms at age 40 than the generation born in the 1940s (dark green line). A similar gap is apparent comparing those born in the 1950s (light green) to those born in the 1930s (dark blue line) at age 50, or those born in the 1920s (light blue line) to those born in the 1940s (dark green line) at age 60. This pattern of declining wages for high-school graduates likely represents a combination of weakening labor demand for this group, changes in the characteristics of the typical high school graduate, and institutional factors like declines in unionization and the real value of the minimum wage.


There are several silver linings to an otherwise discouraging picture. First, the downtrend in earnings for high-school-educated men may have abated. The full-time workers in the 1970s birth cohort have had similar or slightly better early-career earnings than the 1960s birth cohort. Second, as in the population overall, the age of earnings decline may be occurring later, if at all. Unlike in the past, high-school-educated men who were born in the 1960s and have stayed in the labor force appear to have been able to maintain their peak earnings into their 50s (the last point at which we can observe them). In addition, as men become more educated, fewer will be part of this hard-hit group in the future.

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