Authored by: Matt Palumbo
The myth that wages have stagnated since the 1970s has been utilized by both ends of the political spectrum over the decades for differing goals. Ron Paul observed in his 1982 book “The Case for Gold” that inflation adjusted wages declined from 1971, which he attributed to Nixon hammering the final nail in the gold standard’s coffin in ’71. The late Milton Friedman noticed a similar stagnation in his 1984 book “The Tyranny of the Status Quo,” though he was making a point about the harms of hyperinflation.
In recent times, as the period of alleged stagnation now spans almost five decades, liberals have tried to dominate the narrative. Most (but not all) choose to ignore the alleged wage stagnation of the 70s, and instead pretend the problem started with Ronald Reagan (as an indictment of his tax reform efforts, or anti-union policies). “Wages for ordinary workers have in fact been stagnant since the 1970s, very much including the Reagan years” wrote the far-left economics Nobel Laureate Paul Krugman. Meanwhile Robert Reich, who only pretends to be an economist, asks “Why did the playing field start to tilt against the middle class in the Reagan recovery, and why has it tilted further every since?” He adds, “don’t blame globalization. Other advanced nations facing the same global competition have managed to preserve middle class wages” before blaming Reagan’s anti-union policies.
And surprise surprise, they’re both wrong.
So what kind of statistical trickery is afoot here?
Inflation Isn’t an Exact Science, and Earnings are More than Just Wages
While the Consumer Price Index (CPI) is the most commonly used inflation measurement (and used by our government when determining social security raises, and other cost of living adjustments), it actually has a known tendency to overstate inflation. Naturally, this overstated inflation makes statistics on inflation-adjusted wages more unreliable (and understated) the more years back you we measure.
So what do other measurements say? According to George Mason University economist Don Boudreaux, it is true that from the mid 1970s to 2006, average wages did decline slightly by 4% if we measure inflation using the CPI. But what of other inflation metrics?
- According to the Personal Consumption Expenditures Deflator (PCE), wages rose 10% over the same period
- According to the Gross Domestic Product Deflator (GDP), wages rose 18%
Futhermore, nearly twice as much of the typical employee’s pay is in the form of fringe benefits today (19% of total compensation) as opposed to 40 years ago (10%). Put differently, nearly twice as large a share of an employee’s income doesn’t show up as income in the statistics.
With all this in mind, let’s compare how “liberal reality” stacks up against “reality reality.”
Below is a chart from the left-wing Economic Policy Institute, which claims to show a massive divergence in productivity and wages since the 1970s, suffering from all the statistical flaws I’ve discussed so far.
And yet, if all we do is include benefits and change the inflation measurement from the CPI to the Implicit Price Deflator, a radically different picture emerges.
Labor’s Share of Income Has Not Changed
The “wage stagnation” myth is most often used in discussions of income inequality (presumably to paint the picture that greedy capitalists are “taking” all the money, while workers are left with peanuts). To dispel that myth, one can simply look at worker compensation relative to corporate income. According to economist Scott Winship:
- In 1973, U.S. workers received 70 percent of the income produced by businesses; in 2007, they received 69 percent.
- For the past 70 years, labor’s share of income has fluctuated—almost without exception—between 67 percent and 71 percent.
- Since 1929, the U.S. business cycles with the highest productivity growth have also featured the highest growth in hourly compensation.
- Middle-class pay has not stagnated: during 1997–2011, productivity rose by 35 percent, aggregate compensation rose by 32 percent, median hourly compensation increased by 20 percent, median female pay climbed by 25 percent, and median male pay grew by 18 percent.
If that’s what stagnation looks like, I’d say we’re doing pretty well.
While the “wages have stagnated since the 70s/80s” argument is bunk, what of the argument that wages are stagnating in an otherwise spectacular Trump economy? Stay tuned to see that argument blown out of the water later this month.