Household income for middle-class workers will rise in the next few years as the job market improves enough to spur wage growth, according to Goldman Sachs Group Inc.
The bank said pay gains will help to partly reverse a 40-year trend of paltry growth in inflation-adjusted household income and encourage consumers to spend more.
“In 2014-2015, real median household income seems to be on track for annualized growth of around 3 percent, which would be the fastest pace over a comparable period since the late 1990s,” Jan Hatzius, chief economist at Goldman,
said in a March 27 report obtained by Newsmax Finance. “Real consumer spending will grow at an average rate of around 3 percent over this period as well.”
Median household income was $51,939 in 2013, according to the
latest available data from the U.S. Bureau of the Census. Since 1973, income has grown 0.2 percent a year when adjusted for inflation.
Goldman estimated that real median household income will grow 1 percent to 1.5 percent a year in the longer term. Income distribution among U.S. workers will narrow as wages become a bigger component of household income instead of investment gains, Hatzius said.
“After a big widening in the 1980s and 1990s, the distribution of wages has been fairly stable in the last 10-15 years,” Hatzius said. “The distribution of wage income between higher- and middle-income workers seems to have stabilized in recent years. As the labor market tightens, the pendulum is likely to swing gradually away from profit-type income and toward wages.”
The biggest concern is whether worker productivity will improve with business investment in new equipment and technology, according to Goldman.
“If capital spending continues to grow at a pace moderately above that of the economy as a whole, as we expect, its contribution to productivity growth should increase in coming years,” Hatzius said. “We still expect labor productivity to grow around 2 percent in coming years, a touch faster than the 1.8 percent average since 1973 though well below the 2.8 percent pace of the immediate postwar period.”
Median household income grew the most under Presidents Ronald Reagan and Bill Clinton,
according to the Brookings Institution, which studied trends since 1980 when Reagan took office. Meanwhile, incomes lagged under Presidents George W. Bush and Barack Obama.
“The Clinton and Reagan fiscal approaches supported stronger rates of business investment than seen under Bush-2 or Obama,” according to the think tank. “Their support for aggregate demand included public investments to modernize infrastructure, broaden access to education and support basic research and development.”
Under Bush and Obama "income growth is lower for young people, small for those entering middle age and negative for those in the 45-49 year age group," according to Brookings.
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