Wage Stagnation Is to Blame for America's Financial Problems

Editor’s Note: This article previously appeared in a different format as part of The Atlantic’s Notes section, retired in 2021.

We reached out to some of the leading scholars of the American middle class to ask what they make of Neal Gabler’s analysis in our new cover story on financial insecurity. Our first contributor is Edward Wolff, an NYU professor of economics, who points to wage stagnation as the central factor:

The ultimate culprit is wage stagnation, occurring now for over 40 years (average real wages peaked in 1973). This translates into income stagnation. For a while (until about 1990 or so) families compensated for stagnant wages by the increased participation of wives in the labor force. Once this opportunity was exhausted real incomes also stagnated. Indeed, according to Census data, median family income in 2013 was less than it was in 1997.

As a result, over the last 20 years families have been forced to borrow in order to maintain their usual consumption. This process was aided by a generous expansion of credit, particularly through the home mortgage market. Largely abetted by a huge Chinese trade surplus and their consequent purchase of U.S. Treasury bonds, U.S. banks and other financial institutions were awash in cash. Enabled by lax mortgage regulation and rising home prices, financial institutions allowed generous re-financing of existing mortgages, expanded home equity credit lines, and issued a host of new types of mortgages including sub-prime, no or little down payment, and even no documentation loans. The result was a huge leap in household debt, particularly among the middle class (the debt-income ratio more than doubled between 1983 and 2007).

The result has been a catastrophic collapse of the wealth of middle-income and lower-income households. Median net worth plummeted by 44 percent between 2007 and 2013 for middle income families, 61 percent for lower middle income families by, and by 70 percent for low income families. The collapse of wealth is one of the principal factors leading to rising economic insecurity.