The level of human capital and whether talent is encouraged to boost the economy’s productivity.The economy grows when technological improvements or investments in human or physical capital boost productivity, when the labor force increases, or when investment in physical capital adds to the economy’s productive stock-and thus total output expands.īut this begs the question: What boosts productivity or creates incentives to invest? Economists differ in their specific answers to these questions, but the different theories point to five primary factors:
If you ask an economist “what makes an economy grow?”, they will almost certainly begin their answer by pointing to an economy’s level of knowledge about how to produce goods and services (knowledge and technology), the skills of the potential labor force (human capital) and the number of workers, and the stock of physical capital (factories, office buildings, infrastructure). Theories of economic growth, however, do not typically include models for investigating the implications of changes in the strength of the middle class.
Between 19 the Gini coefficient including capital gains, in the United States climbed from 48 to 59, ranking the United States in the top quarter of the most unequal countries in the world. Evolution of the Gini coefficient, which measures how much a distribution deviates from complete equality, also shows a similar pattern of rising inequality. But by 2007 the income share of those in the middle shrank to just 43 percent. In 1979 the middle three household income quintiles in the United States-that is, the population between the 21st and 80th percentiles on the income scale- earned 50 percent of all national income. (see Figure 1) Families in the middle class have also pulled away from those at the bottom, but achieved these modest income gains only by working longer hours, increasing their labor supply-particularly among wives and mothers-and increasing household debts to maintain consumption as wages failed to keep pace with inflation. Between 19, the last year before the Great Recession, median family income rose by 35 percent, while incomes for those at the 99th percentile rose by 278 percent. Over the past several decades, the United States has undergone a remarkable transformation, with income growth stalling for the middle class while the incomes of those at the top continued to rise dramatically compared to the rest of the working population.
The interaction and concurrence of rising inequality with the financial collapse and the Great Recession have, in particular, raised new issues about whether a weakened middle class and rising inequality should be part of our thinking about the drivers of economic growth. One reason for the change is that the levels of inequality and the financial stress on the middle class have risen dramatically and have reached levels that motivate a closer investigation. And as growing income inequality has risen in the nation’s consciousness, the plight of the middle class has become a common topic in the press and policy circles.įor most economists, however, the concepts of “middle class” or even inequality have not had a prominent place in our thinking about how an economy grows. After all, most of us self-identify as middle class, and members of the middle class observe every day how their work contributes to the economy, hear weekly how their spending is a leading indicator for economic prognosticators, and see every month how jobs numbers, which primarily reflect middle-class jobs, are taken as the key measure of how the economy is faring. To say that the middle class is important to our economy may seem noncontroversial to most Americans.