The Story of Stagnating Wages Was Mostly Wrong

(Bloomberg Opinion) -- Wages have been stagnant for decades for everyone except those at the very top: How often have we heard this claim? Presidential candidates frequently assert it as fact, as do some prominent economists, commentators and other opinion leaders.

The problem is it is more wrong than right.

You can make a case for it, of course. First, you have to select a measure of wages. Let’s go with the average hourly earnings of production and nonsupervisory employees, produced by the Bureau of Labor Statistics. About four in five people in the labor force are included in this group, and they can be thought of (roughly) as workers, not managers. They are often described as “typical workers.”

Second, you need to select a measure of price inflation to make an apples-to-apples comparison of the purchasing power of wages in different years. Economists and analysts commonly select a consumer price index (CPI) research series.

Third, pick the period over which to make the comparison. It is common to go back to 1973, in part because of the (incorrect) assertion that in this year a gap opened between worker pay and productivity.

With these choices, wages have grown a measly 5%. That weak growth is reasonably described as stagnant.

Much here is driven by the relatively poor performance of wage growth during the 1970s and 1980s. Rather than going back five decades, let’s go back three, and compare wages today with what they were in July 1990, a business-cycle peak.

If we start there — and use the same wage series and inflation adjustment as before — we find that wages have grown by 20%. While that is slow compared with the gains enjoyed by the top 1%, it is a significant increase in purchasing power.

There are two other arguments for going back three decades rather than five. Making apples-to-apples comparisons of the purchasing power of wages becomes much more difficult the further back you go. How do you compare the price of a car in 2019 with one in 1973, given the significant improvements in automobiles? How do you compare the price of a laptop in 2019 with one in 1973, given that none existed in the 1970s?

When policymakers and opinion leaders argue that wages have been stagnant for decades, many people hear that as referring to their own wages — that is, the wages of today’s workers. This strengthens the argument for comparing today’s wages with those of the early 1990s (or even more recently), rather than going back to the early 1970s, when many of today’s workers were just children.

The case for the stagnation story gets even weaker when you scrutinize the choice of price index. The Federal Reserve and Congressional Budget Office prefer the “personal consumption expenditures price index” to the CPI research series. The PCE better takes into account that consumers can substitute products in response to price changes. For example, if the price of strawberries goes up, you might buy fewer strawberries and more raspberries. By not accounting for consumers’ ability to substitute goods that are relatively cheaper, the CPI overstates inflation.

Using the PCE, the wages of a typical worker have increased by 32% over the past three decades. That’s a significant increase in purchasing power.

What about the distribution of wages, rather than the average? Median wages — for all workers, not just production and nonsupervisory workers — grew by 25% over the past three decades (using the PCE deflator). Wages for the bottom 20% of workers grew by more than one-third.

While wages are the most important component of a worker’s total compensation, they are not the only component. Employer-provided health insurance is typically a worker’s most important non-cash benefit, and it has been increasingly expensive for businesses to buy for workers. When you factor in benefits, the story about stagnating income is even weaker.

You might argue that what really matters is the flow of resources a household can use for consumption and savings, whether or not those resources come from paid employment. The CBO computes a comprehensive measure of income that includes (but is not limited to) wages, salaries and fringe benefits; capital gains and dividends; Social Security, Medicare and Medicaid benefits; unemployment insurance, food stamps and federal tax payments.

Using this measure, median household income grew by 43% between 1990 and 2015 (the last year for which data is available). Households in the bottom 20% saw their incomes increase by 62%.

I’m not trying to be sanguine here. Americans have high expectations for wage and income growth, and we shouldn’t be satisfied with the gains we’ve enjoyed over the past three or five decades. We need better policies that allow workers — particularly those at the bottom — to command higher pay. And slow wage growth after the Great Recession frustrated and scarred too many U.S. workers.

But messages matter. If all people hear is that wages have been stagnant for decades as part of a game rigged to benefit people at the top — well, they might believe it. And they might act on what they believe, lowering their aspirations and reducing their effort in the labor market. On the other hand, if they hear that slow and steady wage gains have produced significant increases in purchasing power over the last several decades, they might feel more optimistic about the value of work.

At a minimum, they might have a more accurate understanding of what’s actually been happening in their communities and society the past many years.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”

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