Occupy Wall Street has put a spotlight on the vast and growing economic inequality in the United States. It now takes its place as a top progressive priority — perhaps the highest priority it has experienced since the Great Depression.
Underlying this greater and greater inequality is a shift of wealth from manufacturing to the top 1 percent and the financial sector. Over the past 40 years, the sectors of the economy that grew in output share grew very little in employment share — making more money but paying it to a small group of people. The sectors of the economy that grew in employment share did not grow in output share, meaning that a growing number of workers had to share in a smaller pot of profits. From 1969 to 2007, the richest 1 percent has grabbed 15 percent more of the income of the United States, to a total of about 24 percent. Meanwhile, the manufacturing sector has lost a similar 15 percent of gross domestic product (GDP). This has led to a downward shift in income for the bottom 99 percent.
Let’s look at the shift among sectors of the economy in a bit more detail, because as finance has risen, so have other lower pay sectors. A good way of looking at the health of an economy is to see if there is a difference in how much income a particular sector, such as manufacturing or finance, pulls in — that is, how much of the economy (GDP) it constitutes versus how much employment it accounts for. You might think of this as what percentage of the economy each working person receives, viewing each sector as a whole. I will call this the “the ratio”: that is, the ratio of the GDP (value-added) share of the economy to the percentage of the employment share of the economy for a particular sector; I will always compare 1968 to 2009 (all data sourced from the Bureau of Economic Analysis).
Manufacturing has historically been the quintessential middle class sector because its share of GDP declined slightly, from 28 percent to 25 percent, between 1948 and 1968 in tandem with its share of employment (its ratio was 104 percent in 1968). Thus someone working in the manufacturing sector made an average income for the economy as a whole — that is, he or she was right smack in the middle of the middle class. Since 1968, the employment share of manufacturing has been heading down by .38 percent per year, so that it is now 8.7 percent, while its share of the economy is 11.2 percent. The average employee is making about 30 percent more than the average for the economy, most likely because so many of the low-skill jobs were outsourced (along with most high-skilled ones).
At the same time, the finance, insurance, and real estate, or FIRE, sector increased its share of the economy from 14.2 percent to 21.5 percent, while the employment share only rose from 4.4 percent in 1968 to 5.7 percent in 2009. So this sector went from a ratio of 322 percent to 376 percent; for finance alone, the ratio almost doubled from a fairly middle class 116 percent in 1968 to 197 percent in 2009. Real estate always had a ratio of about 1000 percent, which is one more reason, perhaps, that society should not encourage real estate bubbles. Overall, the pot of money has exploded without an increase in payrolls.
On the other hand, in what is called “accommodation and food services,” or basically hotels and restaurants, the share of the economy moved from 2.2 percent to 2.7 percent in the 41 years between 1968 and 2009, but its share of employment rose from 4.5 percent to 7.2 percent; the ratio fell from 49 percent to 33 percent. The “health care and social assistance” sector, dominated by the health care industry, saw its ratio decline from 73 percent to 63 percent; its share of GDP rose from 2.8 percent to 7.5 percent, but its employment soared from 3.8 percent to 11.9 percent. The other sector that saw a major decline was retail, which actually saw a decline in economic share from 7.9 percent to 5.8 percent at the same time that its employment share increased slightly from 9.9 percent to 10.8 percent. Call this the “Walmart” effect: driving out mom-and-pop stores, leading to a greater efficiency, but lowering the average wage from 79 percent to 54 percent of the economy-wide average.
If we combine these employment “growth” sectors, GDP share moves from 12.9 percent to 16 percent between 1968 and 2009 but the employment share grows from 18.2 percent to 29.9 percent. The ratio fell from about two-thirds of the average to less than half. More and more Americans are employed by sectors that aren’t bringing in a large share of the economy.
So where did the employment and economic output of the manufacturing sector go? When it declined, most of the income went into FIRE and the top 1 percent, and most of the employment — such as it is — went into lower paying service jobs or has ceased to exist.
Counter to conservative ideology, the economic role of the government has actually gone down — at least when measured, as I have been doing here, by value-added data, which eliminates the effect of transfer payments. From 1968 to 2009, the share of employment for the federal government decreased from 9.7 percent to 3.8 percent, and its GDP share went from 6.9 percent to 4.3 percent, while for the state and local governments the employment share rose from 11.7 percent to 14.4 percent and GDP share went from 7.6 percent to 9.3 percent. So much for “big government.” FIRE’s share of GDP is at 21.5 percent, while government at all levels is at 13.6 percent. Sounds like “big finance” to me!
All of these statistics point to the need to understand the “natural history” of the economy. The health of a particular sector of the economy is a relevant political issue, as is how we might change the relative importance of each. I have argued previously that manufacturing is at the center of the economy. If we were to move from a manufacturing sector with 9 percent of employment to 20 percent, the economy would add over 14 million jobs. To achieve a change like that, we need to redirect our resources from the “economic royalists” and top 1 percent to the bottom 99.
Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.