The Myth of Stagnant Wages

It's a core message found in almost every Democratic presidential stump speech.

"Corporate profits and CEO pay are hitting new highs, while wages for hard-working Americans are stagnant." —Hillary Clinton, February 2007

"For too long, they've told us we can't do anything about disappearing jobs and stagnant wages."—Barack Obama, June 2007

"I talked earlier about some of the adverse effects of globalization—stagnant wages and rising inequality." —John Edwards, August 2007

That's the rhetoric used to discredit the six-year economic expansion. But this line of argument is nothing new. According to left-of-center economists, middle-class wages—and thus our standard of living—have been stagnant for some three decades. In other words, the entire 30-year economic experiment of low taxes, free trade, and less regulation begun by Margaret Thatcher and Ronald Reagan has been a complete and utter failure.

Perhaps. But before you consider some data I have compiled (as well as a couple of interviews), consider this: If the standard of living of the average American really had not improved for more than three decades, wouldn't there have been a tremendous political backlash by now? Wouldn't the Democratic Party have fully mutated into a full-scale social democratic party—nationalized healthcare, a return to superhigh tax rates—rather than moving right over the past three decades? Would centrist or right-wing candidates (Reagan I, Reagan II, Bush I, Clinton II, Bush I, Bush II) have won six of the past seven elections? I think not. Anyway, here are the real numbers:

1) According to the Labor Department, median weekly earnings in the second quarter were a full 2 percent higher than they were in the second quarter of 2006. What's more, economist Brian Wesbury of First Trust Advisors points out that earnings for workers at the 10th percentile of earners (where 90 percent of workers earn more than they do) rose 1.1 percent faster than inflation as measured by the consumer price index. Workers at the 25th percentile enjoyed wage gains of 2.3 percent above inflation, the fastest increase for any point along the income distribution, even faster than for those at the 75th percentile and 90th percentile.

2) Men who go to college are making more than they did in 1973. Men who don't have any college make less. That's according to data from the left-leaning Economic Policy Institute. But those numbers are all adjusted for inflation, and many economists think government numbers overstate inflation. If so, then all Americans, on average, are substantially wealthier than they were back then. Here is what Northwestern University economist Robert Gordon E-mailed me earlier this year:

The correct statement is that correcting the upward bias of the official CPI adds more than 1 percent per year to official estimates of the growth in median and mean wages. Cumulatively since 1977, my best estimate of the upward bias in the CPI cumulates to 38 percent between 1977 and 2006. Thus, if someone came along and said the male median wage adjusted for CPI inflation has been stagnant since 1977, I would translate this into a true 38 percent increase.

3) The Labor Department has been working on this CPI problem. But here is the conclusion of two Federal Reserve economists as of 2003: "We estimate that the CPI currently overstates the rate of change in the cost of living by about 0.9 percentage points per year.... Our estimate is boosted by new evidence that substitution bias has increased sharply since the mid-1990s, and is reduced by the cumulative impact of a variety of recent improvements to BLS procedures." By "substitution bias," they mean the ability of consumers to buy pears if the price of apples goes up, or to shift to Wal-Mart when prices go up at their local supermarket.

4) I asked economist Michael Boskin, a former Bush (I) adviser who chaired the commission in the 1990s that studied bias in the consumer price index, about his current thoughts on the subject. He referred to that previous Fed study and then added, "My own view is that the [Labor Department] improvements have helped a little more than that, but there is still a likely bias of about two-thirds of a percentage point." Split the difference between Boskin and the Fed guys, and it means that wages, rather than being stagnant this decade, have actually risen by around 6 percent in real terms.

5) All these wage data ignore that benefits are an important part of compensation and have been rising faster than inflation for some time. Why does access to our increasingly technologically sophisticated healthcare system not count as improving our standard of living?

Now, none of this means Americans should be satisfied with the economy. In fact, voters should constantly be pushing the politicians to explain what government can do—or not do—to boost growth.