ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
Middle-class families struggling on two incomes
, December 7, 2013
The large-scale absorption of women into the paid workforce of the developed world began after about 1970. Some praised it as a step towards the emancipation of women. Others worried over the fact that families with both husband and wife working outside the home could adversely affect the traditional structure of family life.
What seemed less controversial, both at the time and subsequently, was the assumption that middle-class or lower-middle-class families with two full-time incomes would be better off financially and enjoy freer access to more of the luxuries of modern life.
A decade ago, that latter proposition was called into question by a U.S. academic, Elizabeth Warren, who, together with her daughter, recorded their researches in a book entitled The Two-Income Trap: Why Middle-Class Parents Are Going Broke (New York: Basic Books, 2003).
Elizabeth Warren arrived at her beliefs about the plight of the middle-class family by a circuitous route. Before 2012, when she was elected as senior Democrat Party Senator for Massachusetts, Warren had been a professor of law at Harvard University, specialising in bankruptcy. Recent U.S. media reports suggest that she could challenge Hillary Clinton in the Democrat Party’s 2016 race for the White House.
In the course of researches, Warren discovered, somewhat unexpectedly, that bankrupt families weren’t some hopeless underclass incapable of managing their finances; many were ordinary middle-class families who, through no fault of their own, had found themselves swamped by debt.
She uncovered the fact that over one million U.S. families filed for bankruptcy each year. As many children are living in such families as are in divorced families.
These revelations led Warren to examine the economic life of an ordinary middle-class U.S. family in 2003 and to compare it with that of the previous generation in 1970.
Her findings make fascinating reading. Apart from the obvious fact that a family on two full-time incomes enjoys a larger nominal income, the surprises came thick and fast.
Male wages, adjusted for inflation, have remained virtually unchanged across a generation. Warren has calculated that today’s middle-class worker, after adjusting his wage for inflation, is actually US$800 worse off than his father was in 1970. More surprising still, even with a larger overall pay packet, today’s average two-income middle-class family can’t keep ahead.
Back in 1970 a single-income family managed to save some 15 per cent of its income. By contrast, in 2003, a two-income family had a shortfall in income over expenditure of 0.5 per cent. Two years later the shortfall was 15 per cent.
Digging deeper, Warren was able to discover why the two-income family, despite a substantially increased cash flow, was accumulating debt. She was fortunate to be able to tap into an invaluable source of data. By happy coincidence, the U.S. maintained comprehensive data on household expenditure. Prices of individual items of household spending over the last hundred years had been painstakingly recorded.
Warren had the means to construct a model of expenditure patterns for a typical U.S. middle-class family — mother, father and two children — comparing 1970 (when married women began entering the paid workforce) with a generation later.
Her model allowed for a modest home (three bedrooms and one bathroom) and constructed typical expenditure patterns for the single-income family of 30 years ago compared with the dual-income family today.
Instinctively, she had expected to find that, with the larger overall income, families in 2003 would have more money available for discretionary spending on items such as luxury foods, clothes, entertainment, furniture and appliances. In that event, if they were sinking deeper into debt, perhaps it was because they were managing their money badly.
The data completely contradicted her expectations.
A 2003 family on two full-time incomes, compared with a 1970 family on a single-income, was actually spending less of its larger money income on food, clothing, furniture, appliances and other discretionary expenditures associated with the good life — 18 per cent less was being spent on food, 32 per cent less on clothing, and 52 per cent less on appliances. Cars also cost 24 per cent less (but, with both parents in paid work, families needed two cars).
Where were they spending more? House prices for Warren’s deliberately specified three-bedroom, one-bathroom house had increased by about 50 per cent. Mortgage costs had increased by 76 per cent. Moreover, house prices had increased as families competed for properties near good schools. With such schools no longer universally available, families who wanted good schooling had to pay more for conveniently located addresses.
Employer-sponsored health insurance costs rose by 30 per cent. Childcare expenditure — unnecessary for a single-income two-parent family in 1970 — became a significant new expenditure. Income tax on a higher income increased by 25 per cent.
Education also became a new necessary expenditure. Elizabeth Warren points out that in 1970 there was an assumption that for a child to enter the middle class it was sufficient to have graduated from high school — what we today call “year 12”.
In 1970, 12 years of publicly-funded schooling would have provided entry into the middle class. A generation later, 18 years of education would be needed. Six of these years, including two at pre-school and four at university, would require family funding. Four years of university could cost up to $100,000.
What becomes obvious from these figures is that the expenditure on items such as clothing, appliances and furniture are relatively small and discretionary. Most of the increased outlays burdening today’s two-income family are on items where the expenditure is large, constant and inescapable — mortgages, health insurance and education.
Is it any wonder that today’s U.S. middle-class family, in contrast with its counterpart 30 years ago, is going into debt to survive?
As well, today’s two-income family is much more exposed to the risk of financial hardship, and less equipped to deal with it. For example, Warren points out that 30 years ago women having children were kept in hospital five days; today they are sent home after 24 hours, into the care of the family. The same is true for other forms of hospitalisation; the practice is to get patients out of the hospital as quickly as possible and into the care of the family.
In 1970, if the male wage-earner lost his job or became ill, his wife could get some kind of work and supplement the family income.
Today, any setback to the earning capacity of either working partner means an immediate — and substantial — loss of family income essential to the financing of inescapable outlays.
Warren brings this point into clear focus by introducing some telling comparisons. A typical middle-class family 30 years ago earned about US$30,000 (adjusted for inflation to make it strictly comparable with 2003 dollars). About 50 per cent of its income was taken up by inescapable expenses.
Today’s two-income family earns US$75,000 and spends 75 per cent of that sum on inescapable big-ticket outlays. It needs both incomes to survive. Any setback in the form of family illness or job loss pushes the family into debt.
Warren believes a large proportion of U.S. middle-class family are being destroyed by debt; and destruction of the middle class means that the U.S. is becoming a society comprising only of the poor and various categories of financially well-to-do. The absence of a large and healthy middle class also disadvantages the poor. In better times the middle class helped the poor.
Australians might be tempted to brush aside Warren’s findings, comfortable in the expectation that they don’t apply here.
Can we be so sure? We know that income redistribution has adversely affected middle-class incomes in Australia, though to a much lesser degree than in the U.S. We also know that house purchase (and even renting) is becoming more financially stressful for ordinary families. Also, those same families face many of the same stresses arising from employment insecurity as apply in the U.S. And education expenses are certainly a much greater burden on our middle class today than a generation ago.
Against that we have better and cheaper health care as well as help for mothers in paid work.
Overall, we might conclude that Australia’s middle-class family is facing greater financial strains than a generation ago; but even so, for the moment, it continues to be better off than its U.S. counterpart.
There is, however, no room for complacency. Australia’s middle-class families are also confronting mounting financial problems of the same kind as are undermining the U.S. middle class.
A very large proportion of Australian dual-income families’ expenditure (as yet not accurately measured) is used to fund mortgage payments associated with house purchase and other unavoidable outlays associated with family life. As in the U.S., and compared with a generation earlier, much of this expenditure accrues to the finance industry. That alone should be a cause for concern.
The more that middle-class families have to spend servicing mortgages and other associated expenses, the less they have to spend elsewhere in the productive sectors of the economy. And, as we all know, the more we spend in productive sectors of our economy the more jobs we create.
In other words, the composition of family expenditures can be critically important for a nation’s economic well-being.
Something like the study that Elizabeth Warren has done for U.S. middle-class families would certainly not be out of place in Australia.
What we also need, which was beyond the scope of Warren’s research, is a better understanding of the broader, unavoidable stresses that arise in families with both parents working outside the home.
Though this point has attracted scant attention throughout the Western world, it might turn out to be just as important as the narrower economic considerations.
Colin Teese is a former deputy secretary of the Department of Trade.