The notion that middle-class wages have stagnated for many decades has become conventional wisdom, appearing regularly in media stories. The support for this position comes from the Economic Policy Institute, which reports that median real hourly pay has only increased 6 percent from 1979 to 2013.
Yet, the Congressional Budget Office finds that median income adjusted for inflation has increased by 41 percent. Since middle-class incomes rely predominantly on labor income, these two data points can’t both be correct.
In a new Urban Institute brief, I find that real median compensation rose by 38 percent from 1979 to 2013. As figure 1 shows, my estimate is different because I looked at total compensation (which includes health, retirement, and other benefits), rather than hourly wages or annual earnings. Also, instead of using the consumer price index to adjust for inflation, I rely on the personal consumption expenditures deflator (PCE).
Although it may seem odd that the results can be so far apart, I argue that my approach is the more meaningful one when talking about how economic growth has benefited typical workers and their families. Here’s why.
- Annual earnings rather than hourly wages are the main source of family income. While the historical trends of hourly pay and annual earnings are similar for male workers, they have diverged over the past few decades for women workers, who have increased their annual work hours by 45 percent since 1979.
- Employers are paying for more worker benefits. Over the past 100 years, employers have increasingly paid for a variety of items that benefit workers, including retirement contributions, health insurance payments, and payroll taxes for Social Security and Medicare. These benefits should be taken into account. Without these payments, workers would have to pay for these benefits themselves or be exposed to financial risks.
- Not all inflation indexes are created equal. Adjusting for inflation is a very difficult task. It is made even more difficult when new goods appear that didn’t exist before. US government agencies in charge of economic reporting now believe that the consumer price index is flawed and that the PCE price index is more accurate because it includes the small changes that consumers make when they change their consumption choices in response to changing prices (called the substitution effect). I agree.
- Different types of workers have very different rates of real median compensation growth. For example, compensation for women grew by 73 percent from 1979 to 2013, while compensation for men grew only 13 percent. Even with this large discrepancy, men still earned more than women. But part of the reason compensation for men grew so slowly was that women moved out of “women’s jobs” and into jobs that previously been held mainly by men. While this clearly helped women’s workers, it meant that some male workers were displaced to lower-earning jobs. Finally, in terms of race and ethnicity, the median compensation for non-Hispanic white workers grew by 52 percent over this period, while the median compensation for workers of color grew more slowly: 42 percent for non-Hispanic African Americans and 22 percent for Hispanic workers.