Great Stagnation?

by Ryan Young on January 24, 2013

in Economy, Features, Sanctimony

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After adjusting for inflation, average wages in the U.S. have been stagnant for 50 years. This is a major problem, according to many a campaign stump speech. The solutions, the speech continues, usually involve grand federal plans for everything from education to renewable energy. Vote for me.

In a wonderful piece in today’s Wall Street Journal, Don Boudreaux and Mark Perry beg to differ. They argue that even though real wages haven’t budged, actual living standards have — for the better. They give three reasons.

One is that the Consumer Price Index isn’t a very good measure of inflation. It doesn’t account for technological advances and improving product quality. “Would you prefer 1980 medical care at 1980 prices, or 2013 care at 2013 prices? Most of us wouldn’t hesitate to choose the latter,” they point out. Even if you have the same amount of dollars that you used to, today’s dollars buy better stuff.

The second reason is that while wages stay roughly the same, benefits have gone way up, so average total compensation is higher than it was 30 years ago.

Their third point is more subtle, and also the most important. Thinking only in terms of averages isn’t the right way to judge living standards. I’ll let Boudreaux and Perry explain:

[T]he average hourly wage is held down by the great increase of women and immigrants into the workforce over the past three decades. Precisely because the U.S. economy was flexible and strong, it created millions of jobs for the influx of many often lesser-skilled workers who sought employment during these years.

Since almost all lesser-skilled workers entering the workforce in any given year are paid wages lower than the average, the measured statistic, “average hourly wage,” remained stagnant over the years—even while the real wages of actual flesh-and-blood workers employed in any given year rose over time as they gained more experience and skills.

People tend to better their lot over time. That is just the kind of argument Julian Simon might make, were he around today. His combination of compassion and numeracy, which Boudreaux and Perry share, is entirely too rare. This rarity is reflected in the quality of most political speechifying.

Read the whole thing.

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