According to a recent study led by Stanford economist Raj Chetty, when adjusted for inflation, approximately half of Americans born in 1984 earned more at age 30 than their parents did at the same age. This represents a stark decline from earlier generations, as Americans born in 1940 had a 90 percent chance of earning more than their parents. For many, the “American Dream” means climbing the economic ladder and making a better life for themselves and their families. However, over the past 30 years, this goal is becoming increasingly difficult to achieve. Though the study by the Stanford economists does not directly investigate reasons behind the decline in wage growth over the years, here are a few factors to examine that may shed some light on this alarming trend.

Reasons for the decline
Wage growth in the United States has slowed over the past few decades, and the wage growth that our economy has experienced is not being evenly distributed between classes. Approximately 30 years ago, the median net worth of an upper-income family was about 350 percent larger than that of an average middle-income family. However, in 2013, this disparity nearly doubled to 660 percent. Based on these findings, it seems that wage growth is primarily benefitting the 21 percent of Americans in the upper-income class, as opposed to the 50 percent of those in the middle-income class. Since wage growth isn’t aiding middle-income families proportionately, there is a correlating decrease in the likelihood of a 30-year-old out-earning his or her parents. Children whose parents are in the top 10 percentile of income have a 70 percent chance of out-earning their parents, while those whose parents fall in the top 50 percentile have just a 45 percent chance.

Regions impacted the most
Though the percentage of Americans earning more than their parents has been steadily declining nationwide, particular areas of the country are being negatively affected harder than others. 

Of all the regions in the United States, the Midwest has experienced the most concentrated decline in income mobility.

Half of a century ago, the Midwest was known for its prominence of manufacturing job opportunities. But since the manufacturing sector reached its job total peak in 1977, the amount of nonfarm manufacturing jobs in the U.S. has fallen by nearly 40 percent. Sixty years ago, about one in four Americans held a manufacturing job; now, just about one in eight Americans work in manufacturing. When considering these figures, there appears to be a strong correlation between manufacturing opportunities and income mobility. The likelihood of a child earning more than their parent was at an all-time high throughout the 1970s. 

However, when manufacturing jobs started to decrease, the likelihood of upward income mobility declined at a rate that was nearly equal. In fact, when manufacturing jobs slightly increased in the mid-to-late 1990s, the likelihood of upward income mobility for children born in the late 60s and early 70s experienced its steadiest growth in nearly 30 years. It can be deduced that income mobility in the Midwest has been similarly impacted by the loss of manufacturing jobs, mainly due to the emphasis of importing goods, as well as the automation of domestic manufacturing jobs.

What the future holds
Though the picture looks bleak, there may be brighter days ahead for the middle class. The U.S. Census Bureau recently reported that last year marked largest single-year gain for middle-class earnings in a half-century. Additionally, joblessness is among its lowest in decades, coming in well under the historical average. Even though the middle and lower classes may be struggling to out-earn their parents, they are able to find work and make a living for themselves— even if it may not be the idealistic version of the American Dream.

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This article was written by Advicent Solutions, an entity unrelated to Guidestream Financial, Inc.. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Guidestream Financial, Inc. does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2014-2017 Advicent Solutions. All rights reserved.

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