Chairman Ben Bernanke Delivers Remarks Before the Greater Omaha Chamber of Commerce
BERNANKE: A bedrock American principle is the idea that all individuals should have the opportunity to succeed on the basis of their own effort, skill, and ingenuity. Equality of economic opportunity appeals to our sense of fairness, certainly, but it also strengthens our economy. If each person is free to develop and apply his or her talents to the greatest extent possible, then both the individual and the economy benefit.
Although we Americans strive to provide equality of economic opportunity, we do not guarantee equality of economic outcomes, nor should we. Indeed, without the possibility of unequal outcomes tied to differences in effort and skill, the economic incentive for productive behavior would be eliminated, and our market-based economy -- which encourages productive activity primarily through the promise of financial reward -- would function far less effectively.
That said, we also believe that no one should be allowed to slip too far down the economic ladder, especially for reasons beyond his or her control. Like equality of opportunity, this general principle is grounded in economic practicality as well as our sense of fairness. To a significant extent, American economic success has resulted from the flexibility and adaptability of our dynamic market economy. Indeed, the ability of our labor and capital markets to accommodate and adapt to economic change has helped make possible the strong productivity performance of the U.S. economy over the post-World War II era, including the past decade. But this very dynamism sometimes creates painful dislocations, as when a shift in consumer demand, the advent of new technology, or new competition leads to the closing of a factory or causes a worker's skills to become obsolete. If we did not place some limits on the downside risks to individuals affected by economic change, the public at large might become less willing to accept the dynamism that is so essential to economic progress.
Thus, these three principles seem to be broadly accepted in our society: that economic opportunity should be as widely distributed and as equal as possible; that economic outcomes need not be equal but should be linked to the contributions each person makes to the economy; and that people should receive some insurance against the most adverse economic outcomes, especially those arising from events largely outside the person's control. Even when we accept these principles, however, important questions remain. For example, what is meant in practice by equality of economic opportunity? Some might limit the concept to the absence of overt discrimination against particular individuals or groups, while others might extend the term to encompass universal access to adequate housing, education, and health care. Another difficult question is how to balance the need for maintaining strong market-based incentives, which support economic growth and efficiency but may be associated with greater inequality of results, against the goal of insuring individuals against the most adverse outcomes, which may reduce inequality but also tends to diminish the strength of incentives. No objective means of answering these questions exists. One can only try to understand the various issues and tradeoffs involved and then come to a normative judgment based on that understanding.
I raise these questions of ethics and values because they are inextricably linked with the topic of my talk today, which is the level and distribution of economic well-being in the United States. As I will discuss, the average standard of living in this country has improved considerably over time. However, by many measures, inequality in economic outcomes has increased over time as well, albeit at varying rates. In the remainder of my remarks I will review these trends. I will discuss what economic research has to say about the sources of rising inequality and briefly consider some implications for economic policy. I will not draw any firm conclusions about the extent to which policy should attempt to offset inequality in economic outcomes; that determination inherently depends on values and social tradeoffs and is thus properly left to the political process.
On average, and by almost any measure, Americans have gained ground economically over time. For example, since 1947, the real (that is, inflation adjusted) hourly compensation of workers in the U.S. nonfarm business sector (a measure that includes both earnings and benefits) has increased more than 200 percent. In other words, the real reward for an hour of work has more than tripled over the past sixty years. Over the same period, real disposable income per capita has increased almost 270 percent, real consumption per capita has increased almost 280 percent, and real wealth per capita has risen 310 percent. We have also seen significant gains in other indicators of living standards, such as health and educational attainment. Thus, in absolute terms, the well-being of most Americans compares quite favorably with that of earlier generations and, indeed, with the well- being of most people in the world today.
Although average economic well-being has increased considerably over time, the degree of inequality in economic outcomes has increased as well. Importantly, rising inequality is not a recent development but has been evident for at least three decades, if not longer. The data on the real weekly earnings of full-time wage and salary workers illustrate this pattern. In real terms, the earnings at the 50th percentile of the distribution (which I will refer to as the median wage) rose about 11-1/2 percent between 1979 and 2006. Over the same period, the wage at the 10th percentile, near the bottom of the wage distribution, rose just 4 percent, while the wage at the 90th percentile, close to the top of the distribution, rose 34 percent. In 1979, a full-time worker at the 90th percentile of the wage distribution earned about 3.7 times as much as a full-time worker at the 10th percentile. Reflecting the relatively faster growth of wages of higher-paid workers, that ratio is 4.7 today. The gap between the 90th and 10th percentiles of the wage distribution rose particularly rapidly through most of the 1980s; since then, it has continued to trend up, albeit at a slower pace and with occasional reversals.
The long-term trend toward greater inequality seen in real wages is also evident in broader measures of financial well-being, such as real household income. For example, the share of income received by households in the top fifth of the income distribution, after taxes have been paid and government transfers have been received, rose from 42 percent in 1979 to 50 percent in 2004, while the share of income received by those in the bottom fifth of the distribution declined from 7 percent to 5 percent. The share of after-tax income garnered by the households in the top 1 percent of the income distribution increased from 8 percent in 1979 to 14 percent in 2004. Even within the top 1 percent, the distribution of income has widened during recent decades.
The measures of inequality I have cited reflect "snapshots" of a single time period, usually a year. Consequently, they may not tell a complete story about the extent of inequality or its trend. For example, the fact that an older, more-experienced worker earns more than a newly hired employee will appear as wage inequality when measured at a given time; but as long as the new employee can expect to gain experience and someday earn a higher wage, inequality arising for this reason should not particularly concern us. Studies that track individuals' positions in the earnings distribution over time suggest that, in a given five-year period, almost half the population moves from one quintile of the distribution to another, and the percentage moving between quintiles increases over longer periods. However, economists disagree about whether income mobility has changed significantly over time. If it has not, then factors related to mobility cannot go far in helping to explain the upward trend in measures of short-term inequality.
What are the underlying sources of these long-term trends in wages, incomes, and other measures of economic well-being? Economists have established that, over longer periods, increases in average living standards are closely linked to the growth rate of productivity -- the quantity of goods and services that can be produced per worker or per hour of work. Since 1947, hourly labor productivity in the U.S. nonfarm business sector has increased a robust 2-1/4 percent per year, and productivity growth has been close to or above that figure in most of the past ten years. This sustained productivity growth has resulted in large and broad-based improvements in the standard of living. When discussing inequality, we should not lose sight of the fact that the great majority of Americans today enjoy a level of material abundance -- including the benefits of many technological advances, from air conditioning to computers to advanced medical treatments -- that earlier generations would envy.
That being said, understanding the sources of the long-term tendency toward greater inequality remains a major challenge for economists and policymakers. A key observation is that, over the past few decades, the real wages of workers with more years of formal education have increased more quickly than those of workers with fewer years of formal education. For example, in 1979, median weekly earnings for workers with a bachelor's (or higher) degree were 38 percent more than those of high-school graduates with no college experience; last year, that differential was 75 percent. Similarly, over the same period, the gap in median earnings between those completing high school and those with less than a high-school education increased from 19 percent to 42 percent. To a significant extent, to explain increasing inequality we must explain why the economic return to education and to the development of skills more generally has continued to rise.
Economists have hypothesized that technological advances, such as improvements in information and communications technologies, have raised the productivity of high-skilled workers much more than that of low-skilled workers. High-skilled workers may have enjoyed this advantage because, for example, they may have been better able to make more effective use of computer applications, to operate sophisticated machinery, or to adapt to changes in workplace organization driven by new technologies. If new technologies tend to increase the productivity of highly skilled workers relatively more than that of less-skilled workers -- a phenomenon that economists have dubbed "skill-biased technical change" -- then market forces will tend to cause the real wages of skilled workers to increase relatively faster. Considerable evidence supports the view that worker skills and advanced technology are complementary. For example, economists have found that industries and firms that spend more on research and development or invest more in information technologies hire relatively more high-skilled workers and spend a relatively larger share of their payrolls on them.