World Economy

New Study Reveals:: US Workers Wages Back at 1974 Levels

New Study Reveals:: US Workers Wages  Back at 1974 Levels
New Study Reveals:: US Workers Wages  Back at 1974 Levels

Forget the chatter about tight labor markets, low unemployment, and vastly improved productivity. Purchasing power for most Americans has stagnated for decades.

If you get a $1,200 annual raise on the same day that your rent goes up by $100 a month, you don’t need an accountant to tell you that you didn’t actually make any financial progress. And while that’s an excessively simplified example, it’s nonetheless a pretty fair representation of what has been happening to most American workers over the past four decades, reported.

Even though the official unemployment rate has been hovering around record lows in recent years, wage growth has stayed stagnant, a new study from Pew Research reveals. In fact, the real average wage, which Pew defines as “the wage after accounting for inflation” has roughly the same purchasing power as it did 40 years ago. And while some workers have seen gains, most of the increases have gone to those who were already the highest-paid.

 Purchasing Power

Average hourly wages for non-management, private-sector workers were $22.65 in July, up 2.7% from a year earlier, according to bureau of labor statistics data cited by Pew. That’s in line with general patterns over the past five years, when wage growth has been between 2% and 3% annually. 

In the 1970s and early 1980s, however, when inflation was high, “average wages commonly jumped 7%, 8% or even 9% year over year,” according to Pew’s Drew Desilver.

“After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then,” he wrote. 

“In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.”

 Bitter Reality 

For some workers, the reality is actually worse. Real wages among the lowest-paid quarter of workers have increased just 4.3% since 2000, while the top tenth of earners have seen an increase of 15.7% to $2,112 a week (compared to $26 each week for the bottom 10%).

The heart of the problem is that while wage increases may make people feel like they’re getting ahead, they don’t necessarily mean folks are actually doing better, or that they have more discretionary income. To determine the real state of the economy and how the “average worker” is doing, you need to examine the purchasing power—which for the most part has not really changed.

For now, despite a few job categories where employers have been compelled by a tight labor market to nudge wages up a bit, this period of low unemployment has yet to improve the situation of average workers from where it was when President Ford was in the White House.

 Leading Economists at a Loss

Today’s New York Times tells us that wages should be rising, because stock markets are soaring, the global economy is growing and unemployment levels are at record lows. But wages aren’t rising, Forbes reported.

Yet the world’s leading economists aren’t much help in understanding, let alone solving, the problem of stagnant wages:

- It’s “the economy’s biggest mystery,” writes CNBC’s Jeff Cox.

- “This is one of the big economic questions of our time,” said Angel Talavera, lead eurozone economist at Oxford Economics in London.

- “The lack of wage growth at the aggregate level despite the declines in the unemployment rate and strong job gains remains a mystery,” Joseph Song, US economist at Bank of America Merrill Lynch, wrote in a note to clients.

“Economists are stumped,” writes Noah Smith in Bloomberg.

Federal reserve Chairman Jerome Powell also admits to being troubled. “I wouldn’t say it’s a mystery,” he said cautiously. “But it is a bit of a puzzle.”

The combination of strong growth and stagnating wages flies in the face of basic economic principle that falling unemployment should lead to higher wages. Employers compete harder for workers. Paychecks rise across the board. Inflation goes up. Therefore, wages increase, as businesses pass on the higher cost of labor to customers.

These indubitable truths are enshrined in what’s known as the Phillips Curve, a staple graphic of introductory economics courses named for its originator, the New Zealand-born economist William Phillips. 

Most economists no longer use the Phillips Curve in its original form because it was shown to be too simplistic and no longer fits the data. Yet the curve remains the primary framework for understanding and forecasting inflation used in central banks.

Economists have devoted enormous energy trying to explain why inflation and wages remained stuck in neutral,” writes Jack Ewing in the New York Times. But to no avail. “Economists have not been able to agree on why pay for most people in the United States, Europe, Japan and other wealthy countries had long been stagnant even as unemployment plummeted.”

Stagnant worker salaries thus aren’t a bug in the current economy: they’re a feature. Holding worker salaries as low as possible is a key to securing short-term quarterly profits, executive bonuses and rising share prices. Seemingly unnoticed by the world’s leading economists, shareholder value is not only the gospel of the global economy. It’s also the root cause of stagnant worker salaries.


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