The stock market is booming after a year of turbulence, the economy is adding far more jobs than expected despite the lowest unemployment since WWII, and despite the booming economy, we’re told that workers aren’t sharing in the prosperity. Why? Because wages aren’t rising fast enough.
Indeed, wage stagnation has been the great argument against Trump’s tax plan, allowing liberals to make the same tired old arguments against so-called “trickle-down economics” that we’ve heard for the past five decades. As a few writers at the Center for American Progress put it last year; “On measures that determine whether workers’ wages are keeping up with the cost of living, there has been little improvement and even some regression since the start of 2017, when President Donald Trump took office.” Forbes’ Chuck Jones wrote half-way into last year that “While GDP hit 4.1% for the June quarter… the unemployment rate is hovering at all-time lows, inflation continues to increase, real wages are stagnant.”
Before completely tearing apart a claim, it’s worth explaining the basis for why people believe it to be so. Private sector wage growth in 2018 was about 3.2%, respectable at face value, but only a net 0.76% increase when you account for inflation being 2.44% that year. It’s on this basis that the Washington Post’s fact checker Glenn Kessler gave Trump’s claim that wages are finally rising once again after stagnating “four Pinocchios,” which are reserved for particularly-bogus claims.
Kessler isn’t an economist, so he can be forgiven for not realizing that his “fact check” isn’t as solid as he thinks. Rather than take isolated statistics at face value, it’s important to remember that all the figures we’re dealing with are averages and can be affected by external factors, such as:
- An increase in the rate that people are retiring. Since those nearing retirement have decades of work experience, they far out-earn the average American. In fact, 55-64 year olds boast wages 28% higher than those age 25-34. If my workspace consisted of me earning $10 an hour, Dan earning $15, an hour, and a prospective-retiree earning $30 an hour, the average wage would be $18.33. But suppose the prospective-retiree retires while Dan and I simultaneously see our pay hiked to $15 an hour (+50%!) and $20 an hour (+33%). While every worker saw their wages increase massively, the average wage at this hypothetical firm as decreased to $17.50 an hour.
- The labor force participation rate has increased under Trump. Those who previously had given up looking for work are now re-entering the labor force. Those who’ve been out of the workforce for an extended period of time tend to have less skills in the first place – and those skills they do have atrophied over time. While they’re not dragging anyone’s individual wages down, their addition to the workforce does lower average wages on paper.
As the San Francisco Federal Reserve wrote regarding those two phenomena, “counterintuitively, this means that strong job growth can pull average wages in the economy down and slow the pace of wage growth.” The San Francisco Fed’s most recent calculations quantifying the effects of those variables were in the second quarter of 2018, and estimated a drag of about 1.5 percentage points. Assuming that remained constant for the year, it would imply nominal wage growth of 4.7% in 2018, or 2.26% post-inflation.
While I chose to focus on 2018 in particular because it’s the first year to be impacted by the Trump tax cuts, wages in 2017 were also higher than advertised. Nominal private sector wages rose 2.5% in 2017 (about in line with inflation of 2.13%), but rose close to 4.5% (or over roughly 2% net of inflation) once accounting for retirees and those rejoining the workforce.
I’ve been using the consumer price index thus far in making all my inflation adjustments (because it’s the most commonly used inflation metric), but it does tend to overstate inflation relative to other inflation measurements. For example, if I instead measured inflation using the personal consumption expenditures index (PCE), inflation is roughly 0.5 percentage points lower than used in my prior calculations. In other words, real wage growth was an even higher 3% in 2017, and 2.76% in 2018, using the PCE.
By those figures, a household with an annual purchasing power of $50,000 when Trump took office should have the equivalent of roughly $53,000 today. They certainly haven’t noticed any wage stagnation.
