– July 29, 2019
Share:

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.

Share:

Donald J. Boudreaux

boudreaux

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.

Get notified of new articles from Donald J. Boudreaux and AIER. SUBSCRIBE