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Economy Lab

How to revive the American Dream Add to ...

Has the American Dream lost its mojo?



In the aftermath of the Great Recession, with its factory shutdowns and mass layoffs, the potential for upward mobility through ingenuity and elbow grease certainly seems to have diminished.



In truth, the heart of the American Dream, in which every generation lives better than the last, has been at risk for some time, according to Thomas Kochan and Frank Levy of the Massachusetts Institute of Technology (MIT).



“Right now it’s going to be very difficult for young people to maintain the standard of living that they experienced unless they are very highly educated,” said Mr. Kochan, a professor of management at MIT’s Sloan School of Business. “Everyone else is experiencing declining or stagnant wages and increased risk as regards pension.”



The earnings data paints a stark picture: the average 40-year-old American man with a high school diploma earned more in 1980, adjusted for inflation, than a similar man earned in 2009. Meanwhile, the richest Americans are getting richer. The highest-earning one per cent of households -- those who earn more than $370,000 annually -- now take home about 21 per cent of the nation’s total income, up from 10.2 per cent in 1980.



How to revive the American middle class? Re-establish a connection between workers’ wages and productivity, Profs. Levy and Kochan argue in a recent paper for the Employment Policy Research Network. They point to the 30 years after the Second World War, a heyday for the American Dream, when upward mobility was a central feature of the economy and workers’ wages rose for most of their careers. Back then there existed a “Social Compact” or set of norms for productivity and cost of living were achieved through collective bargaining and sustained through government support for the minimum wage and other labour legislation. Company earnings were shared among stakeholders and the distribution of wealth was monitored through intra-industry wage comparisons.



The momentum was such that in the late 1960s, 40 year-old blue-collar workers earned more than most managers earned in the 1940s.



But it didn’t last. After the inflationary 1970s, technology eliminated many of the jobs held by high school graduates, forcing workers to fight for lower paying service jobs. Foreign competition from Germany, Japan and later China combined with trade imbalances to exacerbate the problem. The deregulation of markets and the “financialization” of the American economy that came to focus attention on shareholder value above all else were also to blame, Profs. Kochan and Levy say.



Today, a majority of new workers begin at lower real wages and face a flatter earnings trajectory than those who began their careers in the 1970s.



A new Social Compact would involve rebalancing power so that employees can bargain for a fair share of the gains they produce, Profs. Kochan and Levy say. The U.S. government should encourage post-secondary education and play a more significant role in regulating the labour market, holding employees and companies accountable for meeting their legal responsibilities. The current “financial capitalism” should be replaced with “shared capitalism,” a model that would extend incentive compensation programs such as profit sharing and stock options to blue-collar workers.



“In general we need to put less emphasis on finance and investment in financial instruments and more in real investments in new products and services that contribute to the overall economy not just Wall Street,” Prof. Kochan said.



How might American business respond to more unionization of the work force. Prof. Kochan believes it would be pragmatic, and realize the opportunity for innovation that can come from better labour-management relations.



“We need to transform labour relations so unions are contributing to make workplace more competitive and flexible so that it drives innovation,” he said. “What’s the level? Certainly higher than it is today.



“It can’t be changed over night. It has to be a long-term effort to get us back on track.”



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