Preparing to test-drive a silver Mercedes-Benz sport-utility vehicle one recent afternoon, Bobby Meehling chuckled sheepishly as he described himself as a "consummate consumer" who's had a pretty good year.
A vice president with a commercial real estate firm, the Dupont Circle resident said he has enjoyed "consistent growth" in sales and income this year, and in turn is spending more money on his family and "a little more on my luxuries." That would include the slightly used two-door, convertible, black opal Mercedes-Benz he bought earlier this year, he said, "because I really loved the color."
Consumers like Meehling help explain why upscale retailers such as Neiman Marcus and Saks Fifth Avenue have seen their sales soar this holiday season while discounters like Wal-Mart and many mid-price department store chains have struggled. They also help explain how the economy could grow at a healthy 4 percent this year even as it seemed stagnant to so many who had trouble finding a job or whose income did not keep up with higher costs for food, energy, health insurance, tuition and other items.
Pay is rising more than twice as fast for the top fifth of wage earners as it is for all others, and the pace of gains at the high end is quickening, according to economists' analyses of government income data through September.
Meanwhile, the top 20 percent of households, ranked by income from all sources and earning $127,000 or more as of 2003, accounts for more than 40 percent of all consumer spending, according to Labor Department figures.
If the highest-paid workers continue to score ever-bigger salaries, bonuses and commissions, in other words, the economy should grow solidly even if the job market for other employees improves only very slowly for a while, according to economists who have studied the data, including some at the Federal Reserve. Fast wage growth at the top, the data indicate, has more than offset weaker gains at the bottom, so that total U.S. consumer purchasing power has risen strongly.
While this may be good news for Neiman Marcus and for overall economic growth, it raises other concerns about the social costs of growing income inequality, according to economists as far apart politically as Republican Fed Chairman Alan Greenspan and Jared Bernstein, senior economist at the Economic Policy Institute, a liberal think tank.
"From the perspective of equity, this is no way to run an expansion," Bernstein said. "We ought to be able to have both growth and equity."
Greenspan has implied as much, though in more complicated language. In frequent public remarks on the subject, he has attributed the growing pay gap to the fact that highly educated and skilled workers are in growing demand in an increasingly information-based economy, while less-educated, lower-skill workers find plenty of competition for lower-paying work.
He has urged policymakers to improve public education in order to provide better opportunities to all workers. In a speech earlier this year, Greenspan said, "We need to pursue equality of opportunity to ensure that our economic system . . . is perceived as just in its distribution of rewards."
The situation is apparent to those benefiting from it.
"The rich are getting richer," said Warren Bernard, 49, a Bethesda real estate investor, who said he sees growing local demand for the houses he builds, which have prices starting at $1.25 million. Bernard said he and his partners tear down small, older houses and sell their bigger, fancier homes to the local entrepreneurs, corporate executives, professionals and others whose household incomes are bubbling higher.
But at the same time, Bernard said he feels it's a "tragedy" that his North Chevy Chase neighborhood has become unaffordable to teachers, electricians, government workers and other middle-income workers who are not enjoying rapid wage gains.
Outside the tony Mazza Gallerie shopping center in Northwest Washington, an Alexandria woman who declined to give her name carried multiple Neiman Marcus bags. She insisted she is cutting back on spending and giving more to charity. "We have so much stuff," she explained.
One man carrying bags from Neiman Marcus and Saks Fifth Avenue Men's Store said he is a chief financial officer at a European manufacturing company, and that his rising salary has paid for a new house, new furniture, new wardrobe and new entertainment system this year. But he declined to be publicly identified as doing so well, saying with a laugh that he could not give his full name "on advice of my lawyer."
The results of high-end wage gains are apparent throughout the Washington area, where ritzy retailers are thriving on one of the most buoyant regional economies in the country.
Sales "are robust" this year at EuroMotorcars in Bethesda, which sells Mercedes-Benz, Bentley and Rolls-Royce vehicles, said Gil Hofheimer, who manages the Bentley and Rolls division.
One popular seller this season is the new Bentley Continental GT, which goes for around $165,000, he said. Bentley sales alone are up more than 700 percent, he said; the company will sell more than 100 of the vehicles this year, compared with 12 last year.
Sales are up 27 percent so far this year at the Tiny Jewel Box, a family-owned jewelry store that specializes in vintage items, said chief executive Jim Rosenheim. That compares with a 16 percent increase in sales last year.
Annapolis Yacht Sales President Garth Hichens said sales are "well up over last year." The company sells about 140 sailboats a year, ranging in price from about $30,000 for the small and used to around $500,000 for the big and new.
The pay trends are also apparent in the most recent national retail figures.
The major retail chains reported a "disappointingly weak" 1.7 percent increase in November sales at their stores open at least a year, according to Michael P. Niemira, chief economist for the International Council of Shopping Centers.
But, "the luxury market continued to perform well," with combined sales for Neiman Marcus, Saks Fifth Avenue and Nordstrom stores up 5.2 percent, he said.
Meanwhile discounters posted a "sluggish" 1 percent gain, "with a very soft" 0.3 percent increase for Wal-Mart Stores Inc.
The average household income of a Wal-Mart shopper is $35,000 a year while a Target shopper's is $50,000 a year. These consumers have been among the hardest-hit by rising fuel and food costs this year, said Niemira, who estimates that Wal-Mart's sales are twice as likely to fall in response to rising gasoline prices as the industry's sales as a whole.
Meanwhile, the average household income of a Neiman Marcus shopper is more than $200,000 a year, the company estimates.
The pay trends are also evident in the Washington area neighborhoods without easy access to even a Wal-Mart or Target.
Edna Jones, 33, of Capitol Heights, said her work as a security guard at a downtown D.C. office building now earns her $10.41 an hour, up from $10 an hour when she started five years ago. That means her average weekly wage has risen 4.1 percent over a half-decade, to $416.40 before taxes.
Jones, whose husband works for fast-food restaurants, said their combined income barely covers the rent on their three-bedroom house plus all the expenses involved in caring for their three children. Still, the security job "puts food on the table," she said. "It's a struggle, but I have a roof over my head and the kids have food."
Jones said her Christmas shopping will be limited to replacing the clothes her three children grow through so quickly. She wishes she could buy them more, she said, "because they've been so good."
Average weekly earnings for production workers and non-supervisory service-sector workers -- who account for 80 percent of the employment on private, non-farm payrolls -- rose to $522 in the first three months of this year, up just 1.6 percent from the same quarter a year before, according to Labor Department data. This group includes salaried doctors, lawyers and other professionals, as well as construction workers, janitors and clerical employees.
The Labor Department doesn't calculate estimates of the pay of the other 20 percent of wage earners, a group that includes company executives and other managers in service industries. But the amount can be roughly estimated by comparing different government statistics. The figures indicate the amount for them is climbing much faster than the wages of the larger group, and the rate of increase is accelerating, according to Ray Stone of Stone & McCarthy Research Associates, who analyzed Labor and Commerce Department income data at the request of The Washington Post. These workers do not include the self-employed or others not eligible for unemployment insurance.
Managers made an average weekly wage of about $1,737 in the first three months of this year, the most recent period for which comparable data are available, an increase of 6.7 percent over the first quarter of 2003, Stone found. He said the weekly amount is somewhat overstated because of problems separating out some forms of income. The pay comparison also leaves out other sources of personal income -- which are rising -- such as dividends, interest, rents and inheritances, or capital gains from the sale of assets such as stocks and real estate. But the overall trend is clear.
The rate of wage increases for the higher-paid group had risen for four consecutive quarters through early this year, Stone found. Meanwhile, the pace of wage increases for the lower-paid workers slowed over the same period.
Although directly comparable data for the two groups were not available beyond the first quarter, the strong growth in total wage and salary income this year implies that the higher-paid group must have seen its pay rise at least twice as fast as the lower-paid group in recent months, according to economists who have reviewed the figures.
Fed economists have made calculations similar to Stone's for internal use but have not released them publicly.
Several Fed officials have raised concerns over the past year that the economic recovery could falter again if the payroll job market doesn't strengthen more, and they have used this on occasion as an argument for keeping interest rates relatively low to spur faster economic growth. But some believe the expansion will continue if pay gains remain robust for the top 20 percent, because total consumer spending will keep rising at a healthy clip.
The more sanguine viewpoint is "not unreasonable," Stone said. But he remains worried that the job market appears likely to weaken early next year. "I'm not sure we're out of the woods."