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Have Worker Wages Really Gone Nowhere for 40 Years?
Reworking just a bit Ronald Reagan’s famous 1980 debate question (really more of a zinger), “Are you better off than you were four decades ago?” The above chart suggests the answer for working Americans is no. Looks like worker wages, adjusted for inflation, have gone nowhere overall since Bruce Springsteen released “Born to Run” in 1975. And some pessimists calculate the stagnation even back into the 1960s. You’ve seen headlines such as “Millennials Earn Less Than Their Parents” or “For Most Workers, Real Wages Have Barely Budged For Decades.”
But if you’re old enough to have lived through those decades, that chart probably seems intuitively odd. Just look at the stuff people own. Houses are bigger. Cars are better and people have more of them. Even many low-income Americans have cable television and internet access.
When you look at consumption rather than wages or income, as Dartmouth economist Bruce Sacerdote does in a new analysis, a more encouraging picture appears. Sacerdote in “Fifty Years Of Growth In American Consumption, Income, And Wages”: “These estimates suggest that consumption is up 1.7 percent per year or 164 percent over the whole time period. These estimates of growth strike me as consistent with the significant increases in quality and quantity of goods enjoyed by Americans over the last half century.”
Sacerdote doesn’t believe those headlines, either, skeptically mentioning them in his paper.
But what about that above chart, the one showing stagnating wages? It looks a lot different depending on the inflation measure you choose. And there seems to be a broad consensus that the traditional consumer price index measure overstates inflation, meaning real wage and income growth are higher than we think. Sacerdote instead focuses on the price consumption expenditure index, which covers a broader range of spending and adjusts for changing consumer behavior. Sacerdote (bold is mine):
PCE adjusted wages appear to have grown at .5% per year during 1975-2015 while the de-biased CPI adjusted wages grew at 1% per year over the same time period. … This adjustment reverses the finding of wage stagnation. Using the PCE to deflate nominal wages suggests real wage growth of 24 percent from 1975-2015 or about .54% growth in real wages per year. Importantly that growth is significantly less than the 1.18% annual growth in real wages (using PCE inflation) seen in the earlier decade 1964-1975 and is significantly less than GDP per capita growth of 1.8 percent over the 1975-2015 period. But 24 percent growth over the 1975-2015 is substantially better than zero growth and the PCE inflation could itself still contain upward bias. Adjusting for the Hamilton (1998) and Costa (2001) estimates of CPI bias implies real wage growth of 1 percent per year during 1975-2015 and GDP per capita growth of 2.7 percent per year.
And as he sums it up: “Estimates of slow and steady growth seem more plausible than media headlines which suggest that median American households face declining living standards.”
Now other economists have also tried to “de-bias” the numbers and have also come up with more encouraging estimates on the pace of rising US living standards and productivity growth. (Indeed, Martin Feldstein also has a new NBER working paper on this issue, “Underestimating the Real Growth of GDP, Personal Income and Productivity.”) All of which raises a question: Why do so many Americans believe in stagnation even though their own lives and personal observations might tell a different story. Sacerdote offers some possible explanations:
There are at least four important explanations that may be at work. First, I am only examining consumption within very large sections of the income distribution and there may be specific groups (for example less than high school educated men) for whom consumption is actually falling. Second, it’s possible that the quality of some services such as public education or health care could be falling for some groups. Third, the rise in income inequality coupled with increased information flow about other people’s consumption may be making Americans feel worse off in a relative sense even if their material goods consumption is rising. Fourth, changes in family structure (e.g. the rise of single parent households) , increases in the prison population, or increases in substance addiction could make people worse off even in the face of rising material wealth. A deep future research agenda would be to understand how America has lost its sense of optimism about living standards and whether the problem is one of consumption, relative consumption (relative to other people) or something entirely different.
Or maybe “slow and steady” is just too slow for a nation expecting fast growth? Still — as I have written — whether “slow or steady” or stagnation, living standards can, with better public policy, rise faster than they have or are expected too in the future.
Published in Economics
James. Perhaps you haven’t been keeping up with current events. Household debt, both mortgage debt and other, has been going through the roof! Why? Because people have been borrowing to boost their standard of living in the face of stagnant wages.
This analysis ignores the effect of changes in debt and in the savings rate. Sure. you can increase Consumption at a higher rate than Wages..if you save less and go into debt more.
You know one thing to admire about the Tiny house fad is that perhaps we will learn to do more with less.
Then where will all this economics land us?
Color me skeptical when economists use median American households as a metric. It’s better off to study the individual earners. Likewise, the tiny house movement is probably being led by the fact there are more and more singles and less and less families.
Mr. Pethokoukis is quite correct here; CPI will always overestimate inflation unless it corrected for substitution effects (people shifting their consumption due to changing relative prices). This has a big impact on historical data.
However, there is a second problem with the aforementioned data. Average or median data, but especially average, is affected by the change in age distribution of the work force. If more young (low wage) workers are entering the workforce than retiring older (high wage) workers leaving the work force, then the average will fall giving the impression of stagnant wages.
Don’t be holding your breath waiting for him to respond to this.
Is this not due to credit card culture? People own more, have a higher standard of living, but are deep in debt.
No NO NO! The purpose of inflation is to track the changes in cost of a consistent lifestyle. The basket of goods purchased MUST remain the same. Substituting cheaper cuts or meats for steak misses the point – Steak has become too expensive for the budget of median income earners. You would certainly notice if you went out to a nice steakhouse to have an expensive high quality meal with someone … and instead got MacD in a fancy dinning room – you’d notice and complain – even be outraged.
The labour force is a dynamic system, I dont think such massive numbers of people have recently retired. I think the 2008 financial crisis would have added years if not decades to the careers of the average worker – who doesn’t have squat for retirement savings. If they’re lucky enough to have remained employed. I getwhat your thinking – but I dont think its happening.
Yeah. I know. Whenever I comment on a JP post I always feel like a 10 year again – standing out in front of a friend’s house and calling out “Hey Mrs Pethokoukis, can James come out to play?”
The cost of housing increased 10% in Denver in 2016. I don’t think the CPI includes this – but its very real. It will impact the ‘standard of living’ here.
Ricochet contributors should really be expected to at least occasionally participate in the discussions of their posts. If we wanted one-way communications, we could stick with the legacy media.
We aren’t very good at measuring these things especially through time nor do we track individuals through time which is what matters. Immigrants and kids enter the work force at the bottom keep entry level low skill wages fairly constant but do individuals stay there? Is there no upward mobility? Has upward mobility changed over time? Are there groups and individuals where there is consistently no upward mobility. Are the underclass composed of the same families as 20 years ago? Do government policies actually help people escape membership in the underclass or do they help keep people culturally poor? Moreover aggregates don’t really tell us anything. What we need to know is whether government policies, education, etc actually help or hurt individuals. I have data on three individuals whose average income increased by 3% last year. What do I know about the income of any one of the three? The answer is nothing there are an infinite number of ways to reach a 3% average change.