The Outlook: Inequality May Grow for Lifetime Earnings

WASHINGTON

Any alert newspaper reader knows that real U.S. wages have grown markedly more unequal in recent decades. While the most lucrative jobs pay a good deal more than they did 25 years ago, the least lucrative ones pay less.

But a widening wage gap alone doesn't prove that the rich are getting forever richer and the poor forever poorer. Annual pay provides only a snapshot of worker well-being; those who earned less this year are of course worse off this year.

A more interesting issue is whether workers' lifetime earnings are growing more unequal as well. To answer that question, economists look at class mobility.

Do people who hit the skids one year move up the income ladder the next? Do the poor ascend easily enough to make up for the paltry wages they earn while still at the bottom? That is the real test of whether the U.S. is an increasingly caste-based society.

Unfortunately, economists find that, like annual wages, lifetime wages may be becoming more unequal. Rapid technological change is bringing increasing rewards to skill and education, and trade and immigration may also play a part. Workers will feel the effects of these developments for years or even decades to come. Why? Because the opportunities to climb the income ladder are the same as they ever were.

The issue touches on one of the most fabled attributes of American society: The chance it provides each citizen to get ahead through hard work and good schooling.

"It's part of the American credo that opportunities should be open to all, and we tend not to be too disturbed if there are inequalities out there ... as long as everybody has a shot at earning those rewards," says Isabel V. Sawhill, senior fellow at The Urban Institute in Washington. If the poor can reasonably expect to work their way up, the theory goes, it doesn't much matter that their wages today are shrinking compared to those on the ladder's top rung.

Economist Joseph Schumpeter's analogy for economic mobility is the hotel. At any given moment, all the beds, from those in suites overlooking the park to the cheap rooms overlooking the trash cans, may be full. But that doesn't mean the same people are in the same rooms every day. Like a guest moving from basement to penthouse, the poor may work up into the middle class. Or an executive may be laid off.

But how mobile is American society? The scholarly evidence suggests that workers are no less mobile than they were a quarter-century ago. In any 10-year period, roughly 60% of Americans change rungs on the ladder, some moving up and some moving down.

"There haven't been dramatic changes in mobility in the 1970s or 1980s, and I have no reason to think there will be dramatic changes in mobility over the next 15 to 20 years," says economist Richard V. Burkhauser of Syracuse University's Maxwell School of Citizenship and Public Affairs.

To a degree, that is good news, and conservatives of the when-I-was-young school see it as evidence that Americans shouldn't be troubled by growing wage inequality. Those who don't make it out of poverty, they argue, simply aren't trying hard enough.

"Between opportunity and equality, it's opportunity that matters most," write W. Michael Cox and Richard Alm in a Federal Reserve Bank of Dallas publication. "The prospect of upward income mobility is what individuals seek; indeed, that's what powers the whole economic system."

But while mobility rates haven't shrunk, they haven't grown, either. And unless mobility rises along with wage inequality, workers on average can expect their lifetime earnings to become more unequal as well. If the hotel's lousy rooms are getting worse, guests would need a better chance of moving to a good room to balance matters out.

To get an idea of how workers are faring over the long term, Steven J. Haider, a doctoral candidate at the University of Michigan's Population Studies Center, compared individual workers' total inflation-adjusted earnings in the 1970s with similarly placed workers' total earnings in the 1980s, when wage inequality increased. He found that those with low-wage jobs are worse off over the long term, not only relative to those at the top, but also compared to similarly situated workers in previous decades.

During the 1970s, for example, a male aged 30 to 44 at the 10th percentile -- the bottom 10% of wage earners -- earned a 10-year total of $131,850 in 1983 dollars. During the decade of the 1980s, however, a worker whose pay was in the 10th percentile would have earned only $108,690 in 1983 dollars. He had suffered a 17.6% drop in inflation-adjusted income.

By contrast, those at the top did 4.7% better in the 1980s than in the 1970s. A worker in the 90th percentile earned a total of $485,780 in 1983 dollars in the 1970s and $508,730 in the 1980s.

"What's basically happened is the [hotel] penthouse has become extremely nice, the bottom floor has become incredibly shabby, and the middle floors have stayed about the same," says Harvard economist Lawrence F. Katz. The middle class did hold its own: According to the Bureau of the Census, the average annual income of middle fifth of American families, adjusted for inflation, increased slightly in the 20 years between 1973 and 1994.

But, Mr. Katz adds, "People who tend to be in the penthouse spend 80% of their lives in the penthouse. Those on the bottom floors spend 80% of their lives at the bottom."

So, despite America's enduring ability to provide many citizens the opportunity to get ahead, the rich really are getting richer, and the poor really are getting poorer.

--MICHAEL M. PHILLIPS