The average wage earned in America has been stagnating for four decades, according to the Pew Research Center. It’s a shocking finding. Thankfully, there are two reasons to be less dismayed by it than an initial glance would suggest.
In 2018, the average hourly wage was $22.65. Pew calculates that in inflation-adjusted terms, that’s the same wage rate as in 1978.
The first reason this news should be less disturbing than it appears is that compensation includes benefits, not just wages, and the proportion of benefits to wages has been rising. Average compensation must therefore have risen faster than average wages have.
Drew DeSilver’s write-up of the findings for Pew mentions this issue prominently and links to a Bureau of Labor Statistics compendium that shows how much difference nonwage compensation can make. From 2001 through 2018, the average civilian wage grew 5.3 percent; average compensation grew 10.4 percent, almost twice as much.
Perhaps benefits have become too large a part of compensation packages. If the tax code did not favor health coverage over wages — by leaving the former untaxed — employees would have chosen a mix that included higher wages and lower benefits. But it would be a different problem if workers were not getting any more compensation as time passed, and our picture of the economy will be wrong if we don’t notice that difference.
The second reason for cheer is that even wages in isolation have almost certainly risen more than Pew indicates. When looking at changes in living standards, it’s right to adjust for inflation. But Pew has overadjusted for them, and as a result it’s not seeing actual improvements in purchasing power.
Pew appears to be using a measure of inflation called CPI-U, which is produced by the Bureau of Labor Statistics and used by many other researchers. But as Scott Winship, then an analyst at the Manhattan Institute, detailed a few years ago, that measure overestimates inflation — and vastly overestimates its cumulative impact over time.
The measure overestimated housing inflation before 1983, and so the bureau itself recommended 30 years ago that it not be used to look at trends covering that period. It also doesn’t account for the way consumers change their purchases in response to price changes. To use one of Winship’s examples: When the price of apples rises, all else being equal that’s an increase in inflation; but our measure should recognize that it’s a smaller increase than it would be if people couldn’t buy oranges instead. The CPI-U doesn’t recognize it.
The government produces a statistic that does not have these flaws and goes back to 1929: the PCE deflator. Use that better measure of inflation, and the flat trend line in wages since 1978 that Pew found becomes a 22 percent increase. Real compensation, including benefits, must have grown even more. (For those readers wondering whether that apparent progress just reflects growth at the top of the income distribution, Winship has calculated that workers in the middle of the distribution saw a 31 percent increase in compensation from 1967 to 2015.)
I can think of a few theories for why people might buy a false story of economic stagnation. While living standards have kept improving, the rate of improvement has fallen. People may have gotten used to the higher growth rates of the past. Families are less stable than they used to be: People might therefore see the good life as less attainable, which then colors their perceptions of the economy. Some groups, notably blue-collar white men, have seen a notable drop in social status compared with what their fathers enjoyed.
Some people are politically predisposed to see stagnation. For a certain kind of liberal — the kind who believes that everything started to go wrong in America’s political economy when unions, tax rates and antitrust enforcement started to decline — findings like Pew’s confirm what they already thought.
Correcting those findings doesn’t invalidate liberals’ policy prescriptions. Maybe Americans would do even better under those reforms, or others. But reformers should keep in mind their task is to build on success.