Lambert here: Everything’s going according to plan!
Margherita Borella, Assistant Professor, University of Torino, Mariacristina De Nardi, Senior Scholar in the Opportunity and Inclusive Growth Institute at the Federal Reserve Bank of Minneapolis; Professor, University College London; and CEPR and NBER, Fang Yang, Associate Professor, Louisiana State University, and Douglas Clement, Editor, Federal Reserve Bank of Minneapolis. Originally published at VoxEU.
Behind the headline economic growth in the US over the last five decades lie clear patterns of widening wealth inequality. This column shows that white, less-educated Americans born in the 1960s are worse off than the generation born 20 years previously, based on wage changes, increased medical costs, and shorter life expectancy. This disparity could be worth as much as $132,000.
Although the US economy has grown substantially over the last half century, there is no disputing that the benefits of this growth have been unevenly distributed. There is also solid evidence that some segments of the population are actually worse off than their counterparts of earlier generations. One recent study (Guvenen et al. 2017) finds that the median lifetime income of men born in the 1960s is 12–19% lower than that of men born in the 1940s. Another highlights that the share of medical expenses to consumption has approximately doubled every 25 years since the 1950s (Hall and Jones 2007). And Case and Deaton (2015, 2017) have started an important debate by showing that the mortality rate of white, less-educated, middle-aged men has been increasing since 1999.
While very suggestive, changes in lifetime income tell us little about what has happened to wages. And differences in how medical expenses and mortality have changed for married and single men and women can also influence the strength of their ultimate impact on couples, and on singles of both genders.
In recent research (Borella et al. 2019), we compare life outcomes of two cohorts born 20 years apart to explore these issues, and we find that, indeed, the American dream – the idea that regardless of background, every child can prosper as an adult – has undeniably vanished for the more recent generation of white, less-educated Americans.
Deterioration in Lifetime Opportunities
We compare wages, medical expenses, and life expectancy for white, non-college-educated single and married men and women born in the decade around 1940 with those of their counterparts born 20 years later – a cohort 49 to 58 years old as of 2014. We then analyse how those differences have affected these two cohorts’ labour market outcomes and how they will affect their lives in retirement. Our goal is to better measure these important changes in lifetime opportunities and uncover their effects on the labour supply, savings, and welfare of a relatively recent birth cohort using a structural model.
In brief, we find a profound deterioration in lifetime opportunities. Inflation-adjusted wages declined for non-college-educated white men. And while wages increased for women, it is only because their human capital (education and labour market experience) drastically increased over this time period. These men and women – who make up 60% of their age group – are also expected to face much higher out-of-pocket medical expenses in retirement and large decreases in life expectancy compared with their earlier counterparts. They would have been much better off if they had faced the corresponding lifetime opportunities of the 1940s birth cohort.
We focus on whites for methodological reasons – the need for a sufficiently large and homogeneous data set – not from a sense that they alone suffer bad times. White, non-college-educated Americans are hardly the only disadvantaged population losing ground. A substantial body of research (Neal 2011, Neal and Rick 2016, Bayer and Charles 2018) has confirmed stagnant wages and dramatic declines in employment rates for less-skilled black men, along with rising incarceration rates and persistent black-white skill gaps.
Generational Change, for the Worse
To arrive at these conclusions, we construct a sample of white, non-college-educated Americans from the Panel Study of Income Dynamics (PSID) and Health and Retirement Study (HRS), picking a cohort born in the 1940s because it is the oldest cohort with solid data for an entire life cycle. The data cover people who are white, have less than 16 years of education, and were born between 1936 and 1945. A comparison is made with the cohort of whites with the same educational achievements but born 20 years later, between 1956 and 1965.
We find that men’s average wages dropped by 9% (inflation adjusted). Women’s wages were 7% higher, but again, only because of higher human capital (Figure 1). Out-of-pocket medical expenses after age 66 increase by 82% (Figure 2). Life expectancy at middle age declines by 1.7 years for men and 1.1 years for women (Table 1). All of these changes are thus large, with the potential to substantially affect behaviour and welfare.
Figure 1 Potential wage profiles, comparing 1960s and 1940s for married people (top panel) and single people (bottom panel)
Figure 2 Average out-of-pocket medical expenses for cohorts born in the 1940s and 1960s
Table 1 Life expectancy for white, non-college-educated men and women born in the 1940s and 1960s cohorts
Source: HRS data
Impact of Change on Behaviour
To understand the impact of such changes on lifetime outcomes, we use a life-cycle model of labour supply and savings with single and married people who face possible change in marital status, which incorporates skill building on the job and includes medical spending and longevity risk. We gauge the impact that the later generation’s worse wage schedules, medical expenses, and life expectancy profiles have had on their labour supply, savings, and welfare by replacing values for each of these factors by that of the older generation. We first analyse one input at a time – wages, health costs, life spans – and then all three together.
The effects of these changes on labour supply and savings vary by demographic group (male, female, single, married), but in most cases, the impact is substantial. If wages had stayed at 1940s schedules, for example, while health expenses and life spans had changed to 1960s levels, married couples born in the 1960s would have had the most different labour market outcomes – husbands would have stayed in the labour force much longer, and wives would have had lower participation rates and working fewer hours because of the much higher wages for men in the 1940s.
Changing health expenses or life spans alone would have altered labour outcomes less significantly. The decrease in life expectancy mainly reduced retirement savings, but the expected increase in out-of-pocket medical expenses increased them even more.
Substantial Welfare :Losses
The final question is the impact on overall welfare. We estimate the lump-sum compensation that a 25-year-old individual born in the 1960s would require to be indifferent between the 1940s and 1960s wages, medical expenses, and health and survival dynamics. The sums are large – $126,000 for single men, $44,000 for single women and for couples. Lower wages account for most of the welfare loss – between 47% and 58% depending on demographic group. Shorter life expectancies explain 26% to 34% of the decrease in well-being, and higher medical expenses account for the rest.
These deep welfare losses, along with the associated effects on labour supply, health care spending, and asset accumulation, contrast starkly with the US economy’s strong aggregate growth, indicating that this large segment of the population has not enjoyed the fruits of that broad economic health. By illuminating that difference, this research can serve well in any effort to evaluate to what extent current government policies attenuate these kinds of shocks and whether policies should be redesigned to reduce their impact.
Biden is just the person to fix all this; he had nothing to do with any of it.
While we are at it, we can get involved in more wars with Venezuela, Iran, or North Korea. It isn’t like we have urgent domestic problems that must be fixed.
Born 1960, I am soooo looking forward to those higher out of pocket medical expenses. My PSA (prostate) just hit the ” monitor” level this year and what my general MD recommend as course of action (no hurry he said) sounds like neo liberal hell financial death by a thousand copays. It’s like when one of my previous dogs tested positive for Lyme… apparently he fought off on his own but you always test positive once you get it and each recommended test you’re told “we need to do another test to find out more” with each new test more expensive. Finally I asked “will this next test be conclusive and the last text?” ……”No.” So put a stop to that and he lived a normal life span until heart failure. Pet healthcare is getting just like our American healthcare.
You’re more likely to die with prostate cancer than die from it, as I’m sure you know. A friend’s MD husband contracted it in his 70s and absolutely refused any recommended treatment, to her consternation with his extremely high levels. This was 10 years ago, and he’s still alive.
timbers is only 59. That sort of advice is not good for younger men like him. I wouldn’t presume to give him advice, but I would definitely urge him not to listen to yours. Your example of a man in his 70s is not apt.
People in Europe get to experience American style healthcare when going to the vet:
No collective bargaining for better prices for medicines or treatments. Insurance companies selling insurance to enable consumers to be able to have funds for the resulting higher costs. Venture capitalists really like it:
A quote from the above linked to story:
If what is happening in animal healthcare was intended to show what would happen if healthcare for humans was to be privatised then it is an excellent (&scary) example.
> death by a thousand copays
You say that like it’s a bad thing.
like the bug said, “that’s me all over”.
i accept responsibility for where i’m at…just not to the insane and unhealthy degree that we’re supposed to.
I’ll be 50 this year, and i knew that things were fubar by the time i hit college.
one does what one can.
One does with what one can’t as well Amfortas .. as in can’t afford to even SEE a doctor, for fear factor of likely penury of ‘care’ … as in can’t start a small business because of .. well, bureaucratic hoops that I would have to abiden by, while the bigger ‘bidness’ baracuda … through $$$ revenue influences … can swing their big Johnsons, mostly getting what They want, and … as in having to annually cough up fees, assessment and taxes so that the local governing apparatus can continue to pay their employees sinecures that I can only dream of, and spend time and energy on superfluous proclamations, and issues that need dire attention, only to put forth another committee(s) to study the issue(s) … and projects that get contracted to out-of-area concerns, while there are perfectly good people in this town who could do the work. But Hey .. local gov. all still get THEIR goods, regardless !!!
> I’ll be 50 this year
Get offa my lawn!
I’ll do you one better, Lambert
‘Get offa my beneficial insectary plant beds … !’
Thanks for this post. And the Dem estab says nothing about wages or income or class. It’s id politics all the time. Talking about class and wages is considered rude and impertinent by that crowd, imo.
They apparently misunderstood MLK’s famous quote; they thought he said, “”I have a dream that my four little children will one day live in a nation where they will not be judged by the content of their character, but by the color of their skin.”
As Mark Fisher wrote:
” But, rather than seeking a world in which everyone achieves freedom from identitarian classification, the Vampires’ Castle seeks to corral people back into identi-camps, where they are forever defined in the terms set by dominant power, crippled by self-consciousness and isolated by a logic of solipsism which insists that we cannot understand one another unless we belong to the same identity group.”
Id pol keeps people divided against each other instead of uniting to fight for better wages and benefits. imo.
adding: The Brand – Paxman interview on BBC, October 2013.
All politics are “ID politics”. Satan is in charge of this system and he is the great divider.
The older I am the less shocked I become. Sadden yes, for this denial of reality, and worse the human of our fellow human beings, with the identity politics, is done to keep the comfortable, the wealthy, the powerful, the elites in control while dividing the weak, the poor into controllable and afflictable little herds.
I keep recalling MLK’s speech on the Washington Mall and the more I do, the more my mind just bounces off the Identity Politics of today; I have heard MLK’s speech on cashing the check at the beginning of the Poor People’s Campaign as well. All sent down the memory hole at the Ministry of Truth. The belief that all people are people and the same everywhere, deserving the same as anyone else is just too to maintain hard I guess.
I think on what MLK was doing in Memphis when he was shot. He was beginning to transcend race, which would have made him extremely dangerous to the Status Quo.
Idpol isn’t bad per se. It can be in tension with class politics but that depends on context. Even individualism has its appeal, at the same time as being despicable. Any attempt to build a moral philosophy on the primacy of one idea leads to nonsense.
shorter life expectancy. This disparity could be worth as much as $132,000.
I’m trying to remember what that construction was called at secondary school. Bathos?
Or was that The Three Musketeers?
> This disparity could be worth as much as $132,000
So, reparations for everybody….
Reparations to the ‘prematurely dead’ would be the essence of “sunk costs.”
Add at least one zero on the right to get closer to the real number. Then double that amount to leave room for negotiations on final deal. And tax the he** out of the rich.
“Women’s wages were 7% higher, but again, only because of higher human capital (Figure 1).”
As well as because they started so low – as in many not employed at all. It’s much easier to gain if you start with very little. White men, OTOH, were the best off to start with. Although apparently they lost ground, I wouldn’t be surprised to learn that black men had also gained, again just because they started out so low. But it was worse than that.
So evidently, instead of bringing everybody else up to their level, we brought the previously privileged DOWN. That’s an evil way to move toward equality – and of course, inequality with the upper class (of any sex or color) increased dramatically.
Bingo! When faced with demands (at the end of a pointy sticky) for equality, the elite realized they didn’t need to buy off a white “labor aristocracy” any more as their muscle — so they might as well turn everyone into a (choose-your-favorite-racist-term). Then everyone is equal, and the use of social discipline (sexual, class, etc) no longer needs to play a role in disciplining the labor force economically, they can do it directly.
Which explains a lot of the structure of confrontations in the ’60s.
In the long, long term, this may however have consequences, since it’s hard to keep people forever delusional about their condition when you’re not even hiding it under crucified gods and other methods, but say it directly in almost Marxian terms.
> we brought the previously privileged DOWN. That’s an evil way to move toward equality
Not an open borders fan, then, I take it. (I’ve actually seen people on the putative left treat this dynamic as a positive!)
It is sort of like if the AID had been given control of domestic labour relations.
my soul wants to be open borders/no borders(it’s good enough for Capital, after all)
but not until there’s a universal labor legal framework with teeth.
so, not any time soon.
remove the possibility of labor arbitrage, and I’ll go cut the fence, myself.
Yes, you framed it right. What my heart wants and what my mind knows are always fighting.
“Remove the possibility of labor arbitrage, and I’ll go cut the fence, myself.”
Well put, Amfortas.
For somebody that blasted into inner space when Yuri blasted into outer space, all of my life until well into my late 20’s, the communist world had neutered itself in terms of capitalism.
The only imported Soviet retail product for sale in the U.S. was vodka. The Chinese seemed content with making bitchin’ fireworks that somehow got into my fiery little fingers, ha ha.
I’d prefer to be named Generation Beatles, but you go with the moniker they supply you with, and i’m a Baby Boomer that didn’t make it to Woodstock man, as no way mom was going to let a 7 year old go by himself, what are you crazy!
I fit the particulars of the Lost Ones, just a semester of college, white, uneducated.
But it didn’t matter for me, as one of the talents of being a numismatist is to remember a plethora of information in regards to a miasma of minutia going back to the Lydians, little details that can make a big difference in value, information was KING.
Being quite nearsighted helped too, as the objects of my desire were seldom wider than the span of thumb & forefinger. The differences in condition went from 1-70 on the Sheldon scale, and you had to be able to discern one grade from another.
And most importantly, there was desire for these aged round metal discs on a widespread age basis. The coin club I went to when I was a teenager would get around 100 people for monthly meetings, ranging from 10 to 80. It was held @ Parnell Park in Whittier, Ca.
Now, the information is available on the internet, just type in a few key words and you’re off to the races, nothing to it. I had a library full of obscure books, some of them rare.
Nearsightedness would still be an asset when dealing with ‘smalls’ (anything of value you could hold in your hand, coins -diamonds-rolexes-antique silver, etc) although maybe laser surgery could give you Superman vision?
Dead. There’s no new young collectors, and the Boomers are pretty much all net sellers. High water marks for collector values were around the turn of the century and have fallen quite a bit since then, too much supply-not enough interest.
The 20 something year old vagabond of me today would have huge problems schlepping a 40 pound briefcase full of metal discs all over tarnation as I did then, ixnay on that.
And besides, where I made money was buying American coins @ a coin show in Munich and repatriating them back home, or vice versa, and the world back then was so loosely connected.
Rare coins & paper money are almost always worth the most in their home countries, so i’d buy a rare Korean banknote in Invercargil NZ, and it’d make it’s way back to Seoul, or buy a good Venezuelan coin here and sell it into the hot market in Caracas in the 1980’s.
Now the coin dealer in Munich puts his wares on eBay or the internet.
I stopped collecting when I was in my teens, and played arbitrage thereafter, as they mainly represented possible profits to me, and besides I was a ‘collector’ if only briefly. But this aint’ no museum, move em’ out, hand over fist, bay-bee!
What’s funny, is I could care less about them and much prefer a faraway panorama view vista or a goliath of a tree, polar opposites.
…and Parnell Park?
It’s where a horde of homeless live now…