The End of Prosperity: Why Did Real Wages Stop Growing in the 1970s?

Posted on April 4, 2013 by

Something happened in the 1970s. Take a look at this graphic:


During most of the 20th century—until the 1970s—wages of American workers grew much faster than inflation. In the half-century after 1927 real wages of unskilled labor increased by a factor of 3.5, while wages of manufacturing workers, expressed in inflation-adjusted dollars, increased 4-fold. Then came a break. Last year, 2012, real wages of both unskilled and manufacturing workers were actually lower than in 1978.

No matter how you slice it – as long as you look at the poorer or typical (‘median’ in the statistical jargon) wage earners the pattern of stagnation or decline is the same. (See The State of Working America for details.)

Why did the pattern of vigorous, virtually continuous growth change abruptly to one of overall stagnation in the late 1970s?


The Golden Age: Why did it end? Source

The American economy did not stop growing in the late 1970. The productivity of the American worker continued to increase. Yet, suddenly American workers stopped sharing in the fruits of economic growth – the gains went elsewhere.

The post-1978 stagnation of real wages for both less skilled and for typical workers is a big part of the explanation of why economic inequality has been growing in the United States since the 1970s. As I wrote in my recent Aeon article, “the tug of war between the top and typical incomes doesn’t have to be a zero-sum game, but in practice it often is.”

Americans are not a particularly envious people and many, if not most, would not begrudge the rich the enjoyment of their wealth, especially if it’s a result of their own (rather than their parents) efforts. We know that earners of top incomes tend to work harder, put in longer hours, and sacrifice leisure and quality time with their families. Sociological surveys and behavioral experiments indicate that Americans are much more tolerant of inequality (especially if it is ‘earned’), even when compared to other Anglo-Saxon countries, such as Australia.

The problem, however, is that the proverbial tide doesn’t just lift the boats of the wealthy higher. It is that poor and middle-class families are actually sinking. In reality, the ‘inflation-adjusted dollars’ just don’t tell us the whole story about what has been happening with the middle class. How can you count yourself as part of middle class if you cannot afford to buy your own house? To put your kids through college? To afford medical insurance? Yet the costs of all three of these items have been increasing faster than inflation.

So when you consider the purchasing power of wages not in terms of an abstract basket of consumables that the Bureau of Labor Statistics has put together, but in terms of big items that make ‘being middle-class’ meaningful, what looks like stagnation of real wages really means decline. The middle class has been sinking ever since the late 1970s, but it became glaringly obvious only since 2000, when household incomes (that is, the summed earnings of the husband, the wife, and, in some cases, their adult children who haven’t moved away) started plunging, even when adjusted with the official inflation.

The sinking incomes of middle-class families became a focus of discussion last Fall during the presidential campaign. David Leonhard wrote a series of articles for the New York Times, searching for explanations of the decline. I respect Leonhard (I’ve been following his writings for many years), but I am not satisfied with his conclusions.

Here is a summary:

1. “Take immigration, especially illegal immigration. Whatever other problems it may cause, evidence suggests that it has not played a significant role in the income slump.”

2. “The minimum wage, similarly, appears to play only a minor role in the income slump.”

3. “Health care costs have grown sharply over the last decade, leaving employers with less cash to use on salaries.”

4. “Labor unions have shrunk; all else equal, unionized workers earn more, often at the expense of corporate profits.”

5. “One of the more striking recent developments in economics has been economists’ growing acceptance of the idea that globalization has held down pay for a large swath of workers.”

6. Automation: “Workers whose labor can be replaced by computers, be they in factories or stores, have paid a particularly steep price.”

Indeed, quite a “thicket of economic forces”. Apart from my disagreement with several of these specific conclusions, what I find highly unsatisfactory is the ‘piece-meal’ approach to this question. There is no unifying theoretical framework within which we could weigh the importance of some factors against others. And it’s not just Leonhard’s articles, in my readings of economic literature I have, so far, not found any technical articles that attempt to present such a unified framework (I would be exceedingly grateful if someone can direct me to such articles, if I missed them). On the contrary, some economists study the effect of immigration, others focus on education, and yet others on globalization.

The root problem is that the question of why real wages experienced a turning point in the 1970s cannot be answered with purely economic methods. As I argued in my Aeon article, we need a more sophisticated model that takes into account both economic forces and cultural change (the latter, curiously, seems to be missing from David Leonhard’s list of important factors). There I also outlined the logic of a possible explanation, based on the structural-demographic theory.

I am currently fleshing out the details of how the structural-demographic model can account for the turning point of the 1970s (this is part of the book that I am writing on the structural-demographic analysis of American history). The next few blogs will provide the details.

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