We are living in a country with increasing income inequality and politically dividing in a bitter debate. Is the growing wealth gap in America a race to the bottom with wages? Can we blame China or India for this ongoing shrinkage of middle class? Is it a multicultural or immigration issue – or is the American Dream dying? Everyone is frustrated, but what do American leaders need to do?
Let’s start with some sobering facts recently published:
- The top 1% of Americans control nearly a quarter of all the country’s income, the highest since 1928 (The Stanford Center for the Study of Poverty and Inequality.)
- The US ranks #3 among all the advanced economies in income inequality.
- In 2007, the top 10% of American earners pulled in 49.7% of total wages, the highest since 1917.
- The share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010.
- Middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment.
- Wages and salaries have fallen from 60% of personal income in 1980 to 51% in 2010.
- On Tuesday, the Census Bureau reported the U.S. poverty rate rose to 15.1% in 2010, up from 14.3% in 2009 and its highest level since 1993.
- 22-million, or 19% of, people have wages below poverty line. That’s $20k/yr for a family of four.
We can’t blame China or India for this. The low wage jobs are in service sectors not going overseas: healthcare, hospitality, restaurants, entertainment…not just agriculture. Is multiculturalism and immigration growth a part of this? Yes. That’s the labor force who is willing to do the jobs no one else wants to do for less pay and degrading quality. American businesses are heavily dependant on consumption dollars of the less affluent consumers. So cut spending, cut more labor, raise prices….you are only declining your own revenues and market share by increasing hollowness in the middle.
It’s true that the rich got richer, the poor got poorer. Professor G. William Domhoff at University of California reports that although overall income had grown by 27% since 1979, 33% of the gain went to the top 1%. Meanwhile, the bottom 60% were making less: about 95 cents for each dollar. 20% made $1.02 for each dollar, but top 5% made $1.53 for each 1979 dollar. Norton & Ariely reported in 2010 that about 85% of all wealth is concentrated among 20% of the population, and over 95% of all wealth among 40% of the population. The lowest two quintils (bottom 20% & second-lowest 20%) hold just 0.3% of the wealth.
The reality is that this type of income polarization is leading to retail changes. Proctor & Gamble is adopting an “Hour Glass” marketing strategy, designing and selling products aimed at high-and-low consumers, with not much in the middle. Of course, that is easy to do for a brand that owns at least one product in 98% of US households. Heinz is following P&G, but high end brands like Saks and Mercedes continue with their focus on high end ‘aspirational’ shoppers, they never targeted the middle class to being with. More affluent customers are likely to continue at their consumption levels, but they will not make up any slack caused by declines among less affluent. Marketers must seek new ways to increase product sales among the more affluent, or find successful new offerings for their existing patronage.
There is something to be said about engineering low price products for the low-end consumers, but that’s at the risk of trading down the middle class even more and compromising quality. As long as all operating cost increases are passed on to consumers for the benefit of the top 1% with short term margin focus, there will be no shifts to the disaster we are facing.
We are living in a debt-valued country, and the poor owe more. This is partially reflected in the movie Too Big To Fail on HBO, but we didn’t hear that the bottom 80% of Americans account for 73% of all debt with only 15% of net worth and 7% of all financial wealth (source: Edward N. Wolff, Economist, 2010). The burden of debt will limit the purchase decisions of goods and services….or foregoing purchases altogether.
I think we all can agree that we are still looking at a homogeneous business leadership in majority of the big US companies that can not possibly relate emotionally on how their decisions are impacting customer’s lives, and ultimately their profits long term. They loathe quotas for gender and racial equality because that means they have to forsake their own biases and prejudices. And I am not suggesting to put the money in the hands of the unqualified. But maybe it is time to redefine the qualifications of business leaders.
I always believed that American Dream is far beyond owning a new car or very first home. It is about grabbing life by the bootstraps and lifting up, out, and beyond whatever class, cast, gender, race, role, economic and lifestyle existence that we have or were born into. It is all about the spirit’s deep desire for freedom, self-determination, and self-expressed achievements. Then why can’t we start by having a better representation in Corporate leadership of the society we live in, for better checks and balances. Putting more emphasis on Character than just IQ. Truly understanding the multicultural shared values. Lead by examples, and be the leaders people want to follow. Exchange our short-term EBITDA obsession for the long-term success of our companies…or at least have a better balance. Think profit sharing, and maybe then, and only then, we will gain talents and customers that will help our companies and economy succeed, and keep the American Dream alive!