As DailyFinance recently reported, a new study found that the recession's blows have fallen most heavily on lower-wage households. The study's subtitle says it all: "A Truly Great Depression Among the Nation's Low Income Workers Amidst Full Employment Among the Most Affluent."

On the opposite end of the spectrum, a new analysis of Internal Revenue Service data shows that over the last two decades, the wealthiest households in America experienced exploding income even as their tax burdens fell dramatically. And the recession has barely touched these lucky few.The reasons behind this imbalance aren't hard to find. Mainstream economists have long noted that automation and offshoring have resulted in massive job losses for the less educated, while government workers and the highly educated have secured high-paying employment that's largely protected from the effects of globalization.

Corporate Strategies Reduce Costs

Apple (AAPL) offers a classic example of the globalization phenomenon known as "wage arbitrage." Back in 1985, the company assembled its Macintosh computers in the northern reaches of Silicon Valley. Indeed, a photo of the assembled factory workers was included in the computer's box along with the manuals.

Now Apple's iPods and iPhones are manufactured overseas, while the software development, management and design are centered in Cupertino, Calif. The wage differential (arbitrage) between manufacturing wages in the U.S. and China has led the company to offshore low-value manufacturing while retaining high-value software, design and marketing functions in the high-wage U.S.

As many have noted, it's Apple's edge in design and software, not its manufacturing capabilities, that have vaulted the company to its elite status as a global powerhouse. Only a sliver of the revenues generated by iPod and iPhone sales goes to the factories in China. This strategy of offshoring low-skill work and paying a premium for high-skill labor has enabled Apple to both increase revenues and generate high profit margins.

Though many decry the decline of manufacturing in the U.S., it's really low-value manufacturing that has been squeezed out. High-value manufacturing (semiconductors, telecom equipment and energy equipment, for example) is actually on the rise.

Manufacturing Shifts, Incomes Follow

The consequences of these long-term trends favoring the financially secure, well-educated (and well-connected) top 20% can be seen in the U.S. Census Bureau's table "Average Income Received by Each Fifth and Top 5 Percent of Families."

The Census Bureau divides household income into quintiles -- 20% each, from the lowest to the highest, with an added column that breaks out the top 5% of households. To assess how well each household quintile has done financially since 1975, I took the raw data for 1975 and 2001 (the last year available in this series) and calculated how much each quintile gained in income, both as a dollar amount and as a percentage of their 1975 income.

The results are striking. The vast majority of income increases has accrued to the top 20% and especially the top 5%. Here are some of the numbers, adjusted into 2001 dollars. (Note that this is an "apples to apples" analysis that is adjusted for inflation.)

Bottom 20%
• 1975 household income: $12,664
• 2001 household income: $14,021
• increase: $1,357
• percentage increase from 1975: 10.7%

Middle 20% (a.k.a. "the middle class")
• 1975 household income: $39,807
• 2001 household income: $51,538
• increase: $11,731
• percentage increase from 1975: 29.4%

Top 20%
• 1975 household income: $91,848
• 2001 household income: $159,644
• increase: $67,796
• percentage increase from 1975: 73.8%

Top 5% (a.k.a. "the wealthy")
• 1975: $134,735
• 2001: $280,312
• increase: $145,577
• percentage increase from 1975: 108%

The consequences of such massive income shifts are readily apparent. A 2009 survey found that 30% of American households earning $100,000 or more a year are living paycheck to paycheck, compared to about 60% of all U.S. households who are living without much of a financial cushion.

Perhaps it's a coincidence, but the fact that 60% of households are living paycheck to paycheck and the fact that the lower 3/5ths (60%) of U.S. households have not gained much ground in the past 35 years is noteworthy.

Not All Assets Are Equal

One factor in this financial decline that's rarely noted is that housing has risen greatly in cost, even when adjusted for inflation. The average home price in 1975 was $158,000 when calculated in 2008 dollars. The average (mean) house price in December 2008 was $301,200 -- almost twice the 1975 cost (90.7% higher).

Only the top 5% of households actually gained enough income to match the rise in housing costs. Even the "upper middle class" in the top 20% of households gained only 74% -- substantially less than the 90% rise in housing. The lower 60% of households' ability to afford a house was essentially destroyed by this asymmetric rise in the cost of housing.

Other data support the conclusion that the financial gains in the U.S. economy have largely accrued to the top 20% of households. Sociologist G. William Dumhoff has drawn an important distinction between the net worth held by households in "marketable assets," such as homes and vehicles, and "financial wealth." The key difference is that homes and other tangible assets are, in Dumhoff's words, "not as readily converted into cash and are more valuable to their owners for use purposes than they are for resale."

Financial wealth such as stocks, bonds and other securities are liquid, and therefore easily converted to cash. These assets are what Dumhoff describes as "non-home wealth" in "Wealth, Income, and Power in America" on his website. As of 2007, the bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7% and the top 20% held fully 93%.

If we look at these data together, it's clear that the majority of American households have little "non-home wealth" financial cushion, and thus it's no wonder that these same households are often living paycheck to paycheck. While many may be tempted to launch a partisan tirade to "explain" these statistics, trends that stretch back decades are structural in nature. Any comprehensive account must incorporate the complex economic history of the past 35 years.

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alsh2

This is an excellent reason to allow the tax cuts for the top 5% expire. Next let's make the tax on capital gains progressive. That is where the wealthiest get most of their earnings. We need to slow the flow of money and stop the "redistribution of wealth" from the poorest to the wealthiest that has gone on for years.

September 22 2010 at 6:47 PM Report abuse rate up rate down Reply