The Shrinking Middle and Shrinking Wages

My husband likes to tell a story about his father, Joseph Virchick, who was a pipefitter for the Standard Oil refinery in Bayonne, New Jersey, starting in the 1950s. It was a union job – the Teamsters – paying solid middle-class wages that supported his family in an upscale Levitt development with its own swimming pool.

The point here is that this pipefitter with a high school degree lived about as well as his college-educated neighbors who commuted into nearby Manhattan. Virchick and his wife, Henrietta, who also worked, sent all three kids to college. When he retired in the 1980s, they had a pipefitter’s pension to supplement their Social Security.

Today, only 6 percent of private-sector workers are unionized. Something else is going by the wayside along with unions and company pensions: a thriving middle class.

Boston College economist Geoffrey Sanzenbacher argues in his new book that while the U.S. economy, on a per capita basis, has more than doubled in size since 1975, the typical middle-class man’s income, adjusted for inflation, has shrunk by about $2,500, to $60,375 in 2020. (He tracked men’s wages, because the story about women, who flooded into colleges and into the labor force more recently than men, is messier.)

“During a four-decade stretch, middle-class workers lost ground,” Sanzenbacher writes in “The Six Facts that Matter: Understanding Inequality in the United States.”

The same powerful forces that have caused regular workers’ wages to decline also fueled the widening disparities between middle- and lower-paid workers and the people at the top, whose pay has increased since the 1970s. To be sure, lower-paid workers have gained back some of that ground since the pandemic began, and their wages have risen faster than higher-income workers’ pay. But the large inequities persist.

Sanzenbacher blames two things for the eroding middle class: globalization and technology.

Globalization is now a familiar issue. Why pay a pipefitter, garment worker, or autoworker a livable wage when a lower-paid worker in a less developed country will do the same work for much less? The United States has lost millions of solid manufacturing jobs since the 1970s to places like China and Brazil, depressing U.S. wages, especially in manufacturing. At the same time this has been happening, the pay of so-called knowledge workers in this country has risen in industries like financial services and biotechnology to meet the demand for their products and services in overseas markets.

Technology’s impact is more nuanced. As companies adopt sophisticated robots, computers and other technologies, they need more well-paid, well-educated engineers, systems analysts, and mechanics who can interpret the data or operate the equipment on the factory floor. As the economy grows, companies also need more low-skilled workers who can do the jobs that computers can’t, like mopping floors. But there’s less need for the types of jobs that support the middle class.

To explain how this works, Sanzenbacher relies on another economist’s well-known example of a bank that processes checks for its retail customers. In the past, one middle-class worker did all five steps necessary to process the checks, from removing staples and stacking the checks in the same way so a machine could read them and add up the amounts to inspecting problem checks or checks written in very large amounts.

Technology entered the picture when banks purchased optical character recognition software for complex tasks like reconciling the amount on a check with the deposit slip, totaling the checks, and flagging discrepancies. And these computers made the high-paid bank executives more productive, which increased their pay even more. As the economy grew, banks also had to hire more low-paid workers for the simplest jobs – removing the staples and mopping the lobby.

The losers were the middle-class workers who used to do all five, fairly routine steps in check processing before the computers took over, Sanzenbacher explains. “These routine jobs – which were often middle-class – were often replaced with a combination of lower and higher paying jobs,” he said.

“In other words, technology has led to a “Polarization” of the job market, with the result being a decline in demand [for workers] in the middle of the income distribution.”

Rising U.S. inequality, political divisions along class lines, and talk of the fading American Dream – it can be argued that the backstory to these intractable issues is the shrinking middle class and the disappearance of jobs like bank clerks.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  This blog is supported by the Center for Retirement Research at Boston College.