Thomas Piketty in his classical book on “capital in the 21st century” stated that the income in the globalized economic environment has been completely warped. The income gaps in most of the developed countries looks abominable and if there are no changes, future consumption as a driver of the economy will suffer a lot. Already according to IMF the global GDP will amount to 74.5 trillion nominal dollars, lower by 3 to 4% as compared to last year due to the dollar appreciation. New evidences are coming which confirms Piketty’s observation.
A new data from the US Social Security Administration (SSA) shows that nearly 51% of the Americans are making less than $ 30000 a year, that’s $ 2500 a month before taxes and just over a poverty level for a family of five. The new numbers come from the National wage index which SSA updates each year based on reported wages subjected to the federal income tax. In 2014, half of working Americans reported an income at or below $ 28851 (the median wage) and 51% reported an income less than $ 30000. 40% are making less than $ 20000. The federal government considers a family of four living on an income of less than $ 24250 to be impoverished.
The average income is currently around $ 45000, a big yawning gap between the mean and median. This reconfirms Pikettys observation that the rich are getting richer and the poor are getting poorer. The wage index doesn’t take into account the eight million Americans who are unemployed or tens of millions of working age Americans who are not participating in the job market. Nearly 40% of the Americans are not working which is the lowest participation rate since 1977.
Although the unemployment rate has dropped from double digits in the height of the 2008 recession to about 5% in the latest jobs report, wages have remained largely stagnant. Infact wages and share of income for the bottom 90% of American wage earners declined over the past 40 years. What does this data suggest? Wages in the US will remain stagnant for years to come. When the interest rates start moving and finally when the QE monies are sucked out of the market, the recession that will come about will be prolonged and painful. The total American cumulative debt level is currently at 56 trillion dollars and is not small change. Further growth just by creating additional liquidity is not going to be possible and therefore the US economy will never grow beyond 2% for many years to come.
In India the younger generation is desiring to have a higher income, just because they have better college degrees. They will need to be warned that unless their productivity increases, the salaries will not grow and that indeed is a painful reality.
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