Dear Mr. Econ… What happened to the American Dream?

What happened to the American Dream of a college education and home ownership?

– Anonymous Iguana Reader

Dear Reader,

Another great question from one of our readers. There is no one reason why the American Dream of a college education or home ownership is beyond the grasp of middle class U.S. citizens. Instead, a number of factors combined to push most Americans out of the marketplace for these two elements of the ideal middle class life style. In general these factors are the drastic decrease of primary sector jobs that were filled by the middle class, new jobs that not only require major pay cuts, but benefit cuts as well, wage erosion due to prices rising faster than wages, and discrimination in wages.

However, each issue has its own unique and specific additional factors.

Since the 1970s, the amount of income earned by a middle class family, and what that income can purchase has decreased like no other time in U.S. history with the exception of the Great Depression. From 1970 to 2010, the median household income in the U.S. went from about $43,800 to $49,500 in constant dollars, an increase of just over 13 percent (U.S. Bureau of Labor Statistics).

What these numbers don’t show, however, is that much of that increase went to people at the upper end of the scale. Hence, folks in the middle either found their real earnings staying constant or actually decreasing while incomes for the top 20 percent of households were rising very quickly.

At the same time, the consumer price index, which measures whether prices of goods and services are rising or falling, rose approximately 450 percent in this period.

Incomes stagnated for a number of reasons. What labor market economists call “Primary Sector” jobs have been disappearing. Primary sector jobs are jobs that pay a wage comparable to the average wage of all Americans, provide benefits like health insurance, paid vacations and sick leave, and have some form of pension or retirement plan. Also, these types of jobs have a degree of mobility, so if you lose a primary sector job, you can find a similar job at another company or in another city.

The loss of these jobs can be attributed to many factors. Outsourcing jobs to countries were wages are much lower than the U.S., or contracting jobs out to “independent contractors,” is a major reason. Many older production technologies have become obsolete. New technologies and productivity improvements have caused there to be less demand for workers.

Newer jobs in the economy are characterized by being at lower wages than previous “primary sector jobs” and also tend to have fewer benefits. And if benefits are available, like health insurance, they may require an employee contribution or higher contribution, higher co-pays and deductibles, and decreased coverage. Many of the jobs are not categorized as jobs at all. They are contracted out to independent contractors that are not counted as employees, and therefore not entitled to “employee benefits.”

In terms of pay rates not keeping pace with increasing prices or wage erosion, a major reason is the lack of unionized labor and regulatory policies that give employers far more power over employees than ever before. In the 1960s, the U.S. private sector workforce had a unionization rate approaching 60 percent. Today that figure is below 10 percent.

Another factor that has driven down wages is discrimination in terms of equal pay for equal work. The courts have been loath to enforce anti-discrimination laws. In the case of Lilly Ledbetter, Ledbetter found out after many years she was getting paid far less than her male counterparts. The U.S. Supreme Court ruled she had no recourse. The court held that if the company could keep wages secret such that workers did not discover the pay discrepancies within 180 days of taking the job, the company could legally discriminate.

Given that at least 50 percent of the workforce are women, their lower wages prevent them from becoming homeowners in their own right, or being able to sufficiently contribute income to a family unit so that it can purchase a home.
In short, the middle class has less economic power with which to purchase a home of finance a college education.

In the next issue of the Iguana, I’ll take a look at the specific factors that have developed recently, which make the American Dream so difficult to obtain.

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