The data suggest that income inequality is alive and well even as the expansion motors along. Strength in retail sales was in durables, a category driven by either wealth or access to credit—which is still difficult for those on the lower rungs of income. Meanwhile, the greatest weakness in spending has been in health care and food consumed at home, both categories where the elderly and other lower income households are overrepresented. Importantly, falling fuel prices are less of a benefit to these two groups as they either don’t drive or use public transportation. For retirees and near retirees, the fear of lower returns on modest assets and pensions combined with concern about health care inflation outstripping their ability to pay is a restraint on spending.

It is by now well known that real median incomes have been virtually unchanged in the United States for roughly 30 years. Yet, as one looks back 30 years it is impossible to believe that a median household is not better off today. Technology has made everything easier and the amount of labor needed to achieve the same income is substantially reduced. The housing and auto stocks are 30 years more up to date. Cell phones, which didn’t exist, are now hand held computers. In 1985, cable television was in its infancy with VH1 and Nick at Nite. The only home delivery was pizza and products from the Sears catalog. The average workweek was 40 hours compared with roughly 32.5 today, and many more workers were in physical labor. Price measures like CPI and the PCE deflator do not appear to be capturing the true rate of inflation—or deflation—resulting in underestimates of the median household’s relative well- being.

This is not simply a semantic or academic argument. Chairman Yellen, and many other business leaders and policymakers, are worried about the lack of jobs. There is always a hint of the threat of social instability underlying these arguments. The broader question may simply be do people really want to work? And what behavior should we be looking for as directives? We start from the fundamental concept that people trade leisure for paid work. Researchers are often fascinated that Americans work so hard relative to the rest of the world, yet they are already the wealthiest. This simply reflects that people will work more if paid more. The longest workweeks even in the US are among the highest income. On average, workers toil only 30 hours a week in France—not because the Government allows it, but because relative wages generate that result. Germans work a longer workweek than most other Europeans not because they are naturally more industrious, but because they are better rewarded. The ability of businesses to reward workers is in turn a result of their own investment and societal investments in infrastructure, education, etc.

One consequence of income inequality is that as more productive workers are rewarded more they will work harder, while those who face increased competition from technology and globalization will work less as the value of their pay slips relative to the value of leisure. The divide becomes self-reinforcing, with the median household losing income but benefiting from technology providing them a better leisure experience at a cheaper price. Does the decline labor force participation post-Lehman reflect a secular stagnation (with its hint of social instability) or simply the fact that an explosion in the global application of technology has resulted in less work needed per unit of leisure? We have often noted about Japan that if that is what a country looks like after 25 years of deflation and no growth, sign us up. Twenty-five years in, the elderly leadership is worried about social instability, but we see far fewer signs of unrest there than in Europe, where the parties of the right and left are rising in power.

The preceding is an abridged version of a commentary for McVean Trading and Investments, LLC and has been reposted here with permission of the author.

The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.