Don’t just blame Wall Street: The American Dream has been eroding for years
FORTUNE – Since the bust of the U.S. housing market and the subsequent financial crisis, many people in this country have jumped on the view that the American Dream is somehow deteriorating. Hope of living behind a white picket fence was dashed with the mortgage crisis, but the dream is about much more than homeownership. Look no further than the recent Occupy Wall Street movements for proof — college students and young people are angry about everything from joblessness to student loan debt.
The American Dream is the broader notion that the current generation will be able to outdo their parents’ – whether by earning more or being more educated or other ways of moving up in the world no matter where you started. The concept has been eroding for years, and it appears much of the problems go beyond Wall Street.
Here’s why it’s getting harder to get ahead:
Stagnant pay, higher productivity
The American Dream of upward mobility is tied to the idea that those who work hard get to enjoy the fruits of their labor. But that’s become true less frequently in recent years.
In a Bloomberg op-ed last week, former Congressional Budget Office director Peter Orszag wrote that U.S. workers are effectively missing out on hundreds of billions of dollars a year in wages as less of what businesses earn are going to worker wages and other compensation. He blames the trend primarily on technological change and machines reducing demand for workers, as well as globalization that has widened the supply of labor globally.
The declines are striking: In 1990, about 63% of private business income went to worker pay and benefits. By 2005, that fell to 61% and has continued to decline, falling to 58% by the middle of this year. If the decline hadn’t happened, Orszag notes, workers would have earned $500 billion more this year. The decrease comes even as the U.S. is increasingly productive. For decades, wages have lagged productivity. Between 1989 and 2010, U.S. productivity grew by 62.5% — far outpacing real hourly wages, which grew by only 12% during the same period, according to a March 2011 study by the Economic Policy Institute.
Education under siege
Education has long been the gateway to the American Dream. Nearly a century ago, the U.S. made high school nearly universal, and the crop of graduates led the nation to economic prosperity, economists Claudia Goldin and Lawrence Katz have written. Between 1947 to 1973, mean real family income rose by an average of 2.64% annually. Incomes of the poorest grew faster than those of the richest.
But that trend reversed during the subsequent three decades – around the time when education attainment slowed sharply. Once the leader in high school graduation, the U.S. in recent years has fallen behind even other advanced countries. Though the U.S. high school graduation rate trended up recently, it had been declining during the latter part of the 20th century – spelling trouble for economic growth and economic inequality.
“The bottom line is that the future of inequality and this nation depend on increasing the supply of highly educated workers,” the economists write. “Too many youth drop out of high school; too many high school graduates are not college-ready. Tuition levels for college are high and have risen relative to family incomes and student financial aid.”
Young and jobless
It used to be that a paper route or an after-school job at the local grocer was viewed as a rite of passage for young people. Whatever the job, it’s often a learning experience that even the most high-profile CEOs today recall. At 12 years old, Dell (DELL) CEO Michael Dell started working as a dishwasher at a Chinese restaurant for $2.30 an hour; Wal-Mart (WMT) International CEO Doug McMillon got his first job at one of the big box retail chain’s warehouses when he was 17 for $6 an hour; at 16, Google (GOOG) vice president of search products and user experience Marissa Mayer got her start as a checkout clerk in the County Market in Wausau, WI.
But those invaluable experiences are increasingly harder to come by. For the first time last year, grandpa was more likely to have a job than his grandson. Since 2000, employment among 16 to19-year olds has been declining, while that of 60 to 64-year olds has steadily risen. This is partly attributable to seniors living longer and voluntarily wanting to work longer. However, the Great Recession accelerated the trend. Older workers seeing their wealth decline with the plunge of the stock market and collapse of the housing market stayed at their jobs longer or took lower-skilled jobs ordinarily filled by younger workers.
And among young adults 18 to 29, the share of unemployed or out of the work force in 2010 – 38% — was the highest in nearly four decades, according to the Pew Research Center.
True, college grads are more likely to earn more than those without a four-year degree, and that piece of paper returns more over the long-term than the stock market and other investments. But the early years of a career are also essential and could influence pay down the road. And with some economists predicting that today’s high unemployment won’t fall back to normal until 2017, this certainly is uncharted territory for today’s generation.
Loss of wealth
Up until the crash of the U.S. housing market, most considered their homes their biggest source of wealth. Needless to say, with the slump in prices as foreclosures and defaults continue to plague the market, younger people today have a very different view of homeownership. While those older than 58 think owning is an even better idea today, younger owners have lost confidence, according to a study by Federal Reserve Bank of Boston released this month.
It’s anyone’s guess how long the view will hold, or for that matter, when the real estate market will rebound. But it has diminished much of Americans’ wealth, which has seen a mixed recovery. After having risen for three straight quarters, household net worth this spring fell for the first time in a year, dropping 0.3 % to $58.5 trillion from the previous quarter, according to the Federal Reserve’s Flow of Funds report.
To be sure, the decline has also been incredibly tough not just on younger households, but also for seniors who have seen their retirement funds fall in tandem with not just housing but also the volatile stock market. But for the current generation, heavy in debt, the start of building wealth looks to be coming much later than in the previous generation.
Update: An earlier version of this story misidentified Doug McMillon as CEO of Wal-Mart. He is CEO of Wal-Mart International.