A couple of my recent posts discussed the immense prosperity gains much of the world has seen over the past couple centuries. The long-term track record of free-market capitalism is quite good and quite clear.
However, some people say that the American middle-class has stagnated, and is little better off today than in the 1970s. Are they right? Let’s take a look.
Has income stagnated since the 1970s?
By one measure, the inflation-adjusted average hourly wage has stagnated. But that measure uses typical CPI inflation. Many economists believe CPI overstates inflation, which makes the growth rate of inflation-adjusted wages look lower than it really is.
Furthermore, cash wages are only part of total compensation. Total compensation also includes benefits like health insurance and pension/401k contributions.
Total compensation is more useful for our purpose. This is the true cost to employers, and the true benefit to employees. Some people like to think only of cash pay, but imagine the life-long results of not having health insurance, pension, 401k, and you will realize the benefit of benefits.
BLS data via FRED shows that average inflation-adjusted compensation per hour has risen by 58% since 1970. That’s an increase of 1.0% per year after inflation. Note: these amounts use normal CPI, so the true growth could well be higher.
So, has income stagnated since the 1970s? We can quibble whether a 58% increase is good enough, but it is an increase. I would argue that a 58% increase in real compensation is not great, but better than stagnation.
However, we have experienced stagnation over the past ten years. The same data show that real compensation per hour grew 1.2% per year from 1970 to 2007, but only 0.3% per year after 2007. Real growth of 1.2% is approximately decent, but 0.3% is horribly terrible. Even a CPI fix isn’t enough to help that!
Prosperity can also be evaluated via consumption. Consumption measures how many products and services people can afford to consume or use. Has consumption stagnated since the 1970s?
% of Households owning
Clearly, more people enjoy these life-enhancing products now than in 1971. I don’t have the data to show what this looks like for just the middle-class, but it’s fair to assume that most of the gains since 1971 went to the poor or middle-class. The well-to-do probably already owned these products in 1971.
In an NBER paper published in March, Bruce Sacerdote measured the consumption of poor and middle-class families since 1960. He shows that it has increased significantly.
First, Sacerdote measured the consumption of a few specific physical items for which he could find data, namely cars, plumbing, bedrooms, and bathrooms. He shows that poor and middle-class households (specifically, those with below-median incomes, “the bottom half”) increased consumption of these items as follows:
- Cars – The number of cars per household rose from 1.0 in 1970 to 1.6 in 2015, a 60% improvement.
- Indoor plumbing – The percentage of households with indoor plumbing grew from 91% in 1970 to 100% in 2015.
- Bedrooms – The number of bedrooms per household increased 9% from 1970 to 2015.
- Bathrooms – The number of bathrooms per household increased 32% from 1985 to 2015.
Next, Sacerdote measured total consumption in dollar terms. For two-person households with below-median incomes, total consumption increased by 23% from 1972 to 2015. That’s not very good, but it’s based on normal CPI. Using the inflation adjustment that Sacerdote believes is more accurate, the increase in real consumption is 82%, or 1.4% per year.
So, has consumption stagnated since the 1970s? It appears not. People with below-median incomes own more of the marvelous appliances listed above, they enjoy more cars and bigger and better housing, and total consumption measured in dollar terms has increased around 80%.
The evidence indicates that prosperity for the poor and middle class has not stagnated since the 1970s. Both compensation and consumption have increased. The middle-class seems better off today than in the 1970s.
Is it good enough? Well, that’s a value judgment. Things can always be better. I’d prefer greater prosperity for everyone, especially the poor and middle class. We should aim to do better, especially compared to the weak performance since 2007.
Do people mean something else?
When people complain that middle-class prosperity has not improved since the 1970s, could they really mean something else? Here are a couple possible answers:
They might mean that top income earners like the top 1% have done even better than the middle-class; that we have more inequality. That is actually a separate topic. Perhaps I’ll discuss inequality in a future post. For now, I’ll just say that the top 1% can and do increase their incomes without harming the incomes of the poor or middle-class. For this post, what matters is that the middle-class is doing better compared to the 1970s in absolute terms, regardless of what happened with the top 1%.
Or people might mean that income growth since the 1970s is lower than in the quarter century prior to the 1970s. That is true based on the standard data, but the comparison is somewhat misleading since the earlier years were somewhat of an aberration. The US held an unusually dominant economic position in the world during the years after WWII, due in part to the destruction of a lot of industrial capacity in Europe and Asia. In addition, the CPI problem might be muddying the waters for this comparison as well.
I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.