The Wage Stagnation Debate

David Cay Johnston writes about stagnating wages:

America grew and grew during this era. GDP, adjusted for inflation and increased population, was up 227 percent. But wages and fringe benefits did not grow with the economy. For most workers, they fell. Wages peaked way back in 1972-1973, were on a mostly flat trajectory for more than two decades, rose briefly in the late 1990s, and then fell sharply in the new century.

Scott Sumner responds that living standards are realistically much higher:

I don’t know what to make of these arguments. I find it hard to think of a single area where American living standards aren’t obviously much higher than 1973:

— 1. Houses are bigger and have more baths.
— 2. Electronics are so much better it is ridiculous. 100 times as many TV channels.
— 3. We take jet vacations to Disney World or Europe, not car trips to a state park.
— 4. Granite counter-tops vs. Formica.
— 5. Thai or sushi restaurants vs. meat and potatoes “supper clubs.”
— 6. Better medical care and longer life expectancy.
— 7. Cars with paint that doesn’t rust out in three years.
— 8. For the lower middle class: Wal-Mart vs. K-Mart.
— 9. No more purple shag carpets.

It’s worth noting that there’s a certain disjoint between the decades-long trend in wages and the trend in income. Here’s earnings:

earnings4-1024x701 1

But during most of this time workforce participation was rising:

civilian employment population ratio

So for most of this time family income was rising, though that hasn’t been the case recently:


Consequently, there’s no contradiction between observing that the average wage-earner has not seen his CPI-adjusted pay increase and observing that the average family has more buying power than it had decades ago.

That said, I don’t think you can seriously deny that the CPI tends to understate the rate of progress. There are some goods, like air travel, where we seem to have been suffering from declining product quality. But for almost everything, there’s been a steady accumulation of small improvements in quality and range of choice.

But that said again, I think this kind of observation from the right basically misses the point Johnston is making. Macroeconomic statistics have their limitations. But those limitations aren’t new. It’s always been the case that the CPI to some extent understates the rate of economic progress. At the same time, the CPI has always had these flaws. The fact is that the past ten years have been dismal compared to other ten year periods for economic performance. And the fact is that since a political movement that promised faster growth in exchange for more inequality became dominant, we’ve gotten more inequality and we haven’t gotten an increase in growth that makes up for it. Relative to the Keynesian era, the middle class has seen less in the way of gains. This is Johnston’s point and noting the improvement in kitchen countertop quality doesn’t really undermine it.