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The Myth of American Middle-Class Stagnation
By Donald J. Boudreaux.
"For a quarter century now there has prevailed the myth of American
middle-class economic stagnation. Specifically, this myth holds that
ordinary Americans’ living standards hit a peak in the mid-1970s and
have remained stagnant ever since.
As with many myths, this one
rests on a superficially plausible foundation. Adjusted for inflation
using the Consumer Price Index (CPI), the average real hourly wage
earned by workers classified by the Bureau of Labor Statistics as
“production and nonsupervisory” peaked in January 1973
and did not again hit that height until December 2018. But at the most
recent reading, June 2019, this hourly wage is again below, by two
cents, its January 1973 level.
On its face, this statistic does indeed seem to reveal economic stagnation for ordinary Americans.
Truthful Statistics Can Easily Mislead
But as careful critics
have pointed out, this statistic (and each of the many others used to
tell the stagnation myth) is seriously flawed. For example, these wage
data do not include fringe benefits.
More fundamentally, these
data create a statistical illusion. The average wage can remain
unchanged or even fall even though each individual’s wage rises. As
women and immigrants have entered the workforce in greater numbers over
the past several decades, their doing so pulled down the average wage
because the wages of a disproportionately large number of these workers
are below the average.
It’s as if you calculate the average height
of your children each January 1st and discover, when you include in
this year’s calculation the height of your bouncing baby girl born on
December 31st, that your children’s average height is lower than it was
on January 1st of last year. You obviously don’t call the pediatrician
in a panic to report that your children are shrinking. You understand
that the average height is pulled down by the addition of a new,
below-average-height child to the population for which the average is
calculated.
Everyone is taller than they were last year
(including, by the way, the newborn), yet the average height is lower.
At least some of the apparent stagnation of real wages is a mere
statistical illusion of this sort.
An even deeper problem with
this statistic is that the CPI overstates inflation. And in overstating
inflation, too much of the rise over time in nominal wages is classified
as mere inflation rather than recognized as a real increase in pay.
One way to get around this problem is to use a more accurate inflation adjuster. Yet a more radical means of avoiding the problem is to do away altogether with the need to adjust for inflation.
Work-time Costs
Michael Cox and Richard Alm, in their still-relevant 1999 book, Myths of Rich & Poor,
reasoned that a good measure of changes in real wages is the amount of
time a person must work to earn the income necessary to buy goods and
services. If the amount of work time required to earn the income
necessary to buy a representative bundle of household goods and services
is today the same as it was decades ago, then the stagnationist tale is
true. But if the amount of work time required has fallen, then there is
very good reason to doubt claims of economic stagnation.
And so
Cox and Alm went to work. They, for example, divided the nominal price
of a pair of jeans in 1973 by the nominal wage earned by an ordinary
worker in 1973 to determine how much time that worker had to toil back
then to earn enough money to buy a pair of jeans. Then making the same
calculation for a pair of jeans today, Cox and Alm determined if jeans
became more expensive or less expensive when measured by the amount of
work time a typical worker must work in order to acquire a pair of
jeans.
Doing this calculation for a number of ordinary consumer
goods and services, Cox and Alm found that the typical American worker
in 1999 earned real wages much higher than were earned by his or her
counterpart a quarter-century earlier.
Impressed by this simple
but brilliant method of measuring changes in real wages, a few years ago
I purchased - using eBay - a Fall/Winter 1975 Sears catalog. (Readers
who, like me, were born before the mid-1970s will remember that Sears
back then was the great retailer to middle America. Its motto was “Sears
has everything!” which wasn’t much of an exaggeration.) Using the
nominal average hourly wage of production and nonsupervisory workers in
1975 - $4.73 - I divided the price of each of hundreds of the products
offered for sale in the 1975 Sears catalog by this wage.
While I
didn’t perform this calculation for all of the thousands of goods listed
in the catalog, I did do so for a sample of over 400 goods. In my large
sample I found only one good that costs more work time today than in
1975: men’s work boots. For all of the other goods in my sample -
including, but not limited to, clothing, household appliances and
furniture, recreational equipment, and auto supplies - the amount of
time that a typical American worker today must work to earn enough
income to buy those goods is less than in 1975, and in most cases it is
much less.
Here’s a small sampling of my findings done a few years ago (which you can explore in more detail here). I have since updated these findings to 2019; the trend of falling work-time costs continues.
-
In 1975 a ten-cup drip coffee maker cost the ordinary American worker
almost 8 hours of work time; today it costs that worker only 45 minutes.
- In 1975 a pair of all-cotton jeans cost 1.5 hours of work time; today it costs 20 minutes.
- In 1975 a car battery cost 9 hours of work time; today it costs 3.6 hours.
- In 1975 a microwave oven cost 93 hours of work time; today a microwave oven of similar size and power costs 6 hours.
- In 1975 an automatic dishwasher cost nearly 50 hours of work time; today a dishwasher costs 12 hours.
- In 1975 an exercise bike cost 16 hours; today it costs 5 hours.
-
In 1975 a low-priced standard-size electric washer-dryer combo cost 70
hours of work time; today this combo costs about half that, at 36 hours.
What’s
even more revealing about browsing today the 1975 Sears catalog is what
is not in it – such as, for example, a television with a remote
control. In my next column I’ll draw some lessons from what that catalog
from middle-class Americans’ alleged golden age does not contain."
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