MONEY The Economy

The Shrinking Role of Wages

Senior woman looking at Social Security check
A social security check arrives in the mail Donald Higgs—Getty Images

As the population ages and workers get displaced, a smaller portion of income is derived from actual work.

For Americans, work is becoming less and less important.

Today, wages and salaries make up only 50.5% of overall personal income, according to a new Wells Fargo Securities report. That’s down from almost 60% in 1980.

You can blame some of this on changing demographics, including the aging of the population and government programs that direct transfer payments to certain groups.

Take Medicare and Social Security. In the beginning of 2007, 80% of people between the prime working ages of 25 to 54 was employed. Today that number is down to 76%.

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Source: St. Louis Federal Reserve and the Labor Department

While the Great Recession lowered demand for workers, “the aging of the baby boomers and longer life expectancies have pushed the share of the population age 65 and older to a record high,” writes Wells Fargo economists John Silvia and Sarah House.

Almost one in seven Americans is 65, according to the U.S. Census, compared to 12.4% in 2000. More Americans over the age of 65 means more Americans receiving Social Security and Medicare.

Then there’s help for the disabled and poor. “Increased eligibility and use of social insurance programs such as disability insurance and food stamps have also prompted the rise in transfer payments,” note Silvia and House.

Right now there are more than 14 million Americans who are deemed disabled by the Social Security Administration.

Consider this from NPR’s Planet Money’s excellent series on disability:

Part of the rise in the number of people on disability is simply driven by the fact that the workforce is getting older, and older people tend to have more health problems.

But disability has also become a de facto welfare program for people without a lot of education or job skills. But it wasn’t supposed to serve this purpose; it’s not a retraining program designed to get people back onto their feet. Once people go onto disability, they almost never go back to work. Fewer than 1 percent of those who were on the federal program for disabled workers at the beginning of 2011 have returned to the workforce since then, one economist told me.

Or take food stamps. Since 1969, the number of people on food stamps has increased by a factor of 16.

The share of income derived from transfers has increased from 12.5% in 2000 to 17.3% today, according to Wells Fargo Securities.

A lousy job market in the aftermath of the recession has left millions without work — 36% of today’s unemployed have been without a job for over 27 weeks, compared to 12.1% in 2000. And that abundance of available labor, writes Silvia and House, “has kept wage growth muted, restraining labor income even as hiring has improved.”

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Sources: St. Louis Federal Reserve and the Labor Department

For the overall economy, “the general diversification of income sources adds to the stability of consumer spending over time,” House says. “In particular, transfer payments have becoming an increasingly important share of income and have helped to smooth income/spending throughout the business cycle and Americans’ life cycle.”

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