Although the economy continues to show signs of remarkable durability in the face of threats from war, rising inflation and a tepid labor market, millions of Americans are downbeat about their own financial situations and prospects. Some recent economic data help explain why, despite the stock market setting record after record, many people feel that the economy isn’t working for them.
* Labor share: As Greg Ip notes in The Wall Street Journal, this week’s economic data show that corporate profits grew by a healthy 2.7% in the first quarter, while worker compensation increased by just 0.8%. That imbalance reduced the labor share of gross domestic income to 51%, the lowest level on record, dating back to just after World War II (see his chart below). Meanwhile, the share of national income going to profits rose to 12.7%, the highest level since 1950.
Another data point Ip points out illustrates the imbalance even more starkly: Since 2019, wages have increased 3%, while profits have increased 50%.
The labor share of income is shrinking for multiple reasons, and Ip cites the decline of unions, the offshoring of production, automation and corporate concentration. None of those factors is expected to reverse in the foreseeable future, and artificial intelligence is only expected to make matters worse.
* Food insecurity: The macroeconomic update comes on the heels of a report from the Federal Reserve Bank of New York that shows that more U.S. households are struggling to afford food.
In June 2000, 4% of households reported that they were having trouble obtaining enough food, with some of that group saying they were skipping meals at times. Now the percentage reporting difficulties getting food has risen to 10%. Among non-white households, that number has climbed to 19.1%.
The Fed researchers say the results highlight the dynamics of the K-shaped economy, in which wealthy households have benefited from rising market values while everyone else faces increasing financial hardship. The growth in food insecurity is associated with declining consumer sentiment, though there are clearly other factors involved, as well, including the outsize effect inflation has on lower-income households.
“While not necessarily causal, the observed positive association between food insecurity and overall consumer pessimism, together with the increase in the incidence of food insecurity, especially among households at the bottom of the K-shape, point to a potential explanation for the unusually low recent levels of consumer sentiment at a time when the hard economic data paint a more positive picture,” the researchers write.
* Affordability: New research from the Brookings Institution indicates that the problem of being able to afford the basics of life may be more widespread than the food insecurity data suggests. In a report released this week, researchers found that nearly half of all U.S. households are having trouble making ends meet.
The report says that in most years since 2014, more than 40% of households have struggled to afford everyday necessities. Although there was a significant improvement in 2021 and 2022, when the federal government provided assistance during the Covid pandemic, the percentage of those struggling started climbing once the financial assistance ended, rising to 45.5% of all households in 2024. For non-white households, the number is 55%.
Higher wages would help millions. An increase of $10 per hour would push 38 million households over the line in terms of basic affordability, the researchers said. Reducing monthly costs by $500 would rescue another 10 million households. On the other hand, in a sign of how close to the line many are, an increase in the annual cost of living by just $1,000 would mean that 3 million more households would be unable to make ends meet.
“Moving the needle on affordability requires action on both sides of the equation: lowering costs of living and increasing household incomes,” the researchers said. “When the costs for housing, health care, education, and food rise faster than wages, families fall behind not because they are failing, but because the math no longer works in their favor.”
