U.S. Wage Stagnation and the Rising Cost of Living

FT Contributor  | 

Economists, politicians, and analysts all refer to unemployment statistics when discussing the economic health of the United States. When unemployment figures are low, it means that fewer people are unemployed, and most view a high level of employment as a sign that the economy is doing well overall. Conversely, high unemployment figures usually signal a weak or struggling economy.

Unemployment data provides a simple metric by which to measure the condition of the economy, but it does not create as clear a picture as you might think. One issue is that the unemployment figures do not take into account the type of jobs that are available or the salaries that those jobs offer. Wages and purchasing power are metrics that more-accurately measure the financial health of American consumers. In simple terms, purchasing power measures how much people earn compared to the cost of living in the place where they reside.

Variables such as inflation affect purchasing power. An employee could earn a higher salary, but if inflation causes the cost of living to rise alongside their pay, then their purchasing power does not increase. If wages do not grow to match the cost of living, then purchasing power could actually decrease. When wages are stagnant or falling compared to inflation, employed people often find it challenging to meet their financial needs even though they have a job and have not taken a pay cut.

Nominal Wage vs Real Wage

One of the keys to understanding wage stagnation in American is being able to grasp the difference between nominal wages and real wages.

A nominal wage denotes the amount a person earns for their work in dollars and cents. The money you get in your paycheck represents your nominal wage for the pay period. Economists often use a different term — “real wage” — to assess how paychecks measure up to the cost of living and inflation. In other words, the real wage shows how much purchasing power you have.  

An example may help illustrate why this distinction is essential. If your nominal wage increases by 4% after one year, but inflation increases by 6% during that same year, your real wage will decrease even though the pay increase means that you are making a higher nominal wage.

Cost of Living and the Consumer Price Index (CPI)

Cost of living and the Consumer Price Index (CPI) are vital for putting wages and purchasing power into context. Cost of living can vary from place to place. Some economic organizations publish cost of living indexes, which measure the price of certain necessary services and products in different cities. This calculation leads to a localized cost of living figure.

The Consumer Price Index measures inflation and cost of living. Economists calculate the CPI by averaging the price of certain goods. Changes in these averages can signal periods of inflation or deflation. The U.S. Bureau of Labor Statistics publishes CPI figures every month.

U.S. Wage Growth and Stagnation

Variables such as cost of living and purchasing power help put wage figures into context. According to the Pew Research Center, between 1964 and 2018, the average hourly nominal wage in the U.S. increased by more than $20. However, the cost of living has increased at almost the same pace.

The increase in the price of goods and services means that purchasing power for workers is roughly the same as it was in the 1960s. Workers are no better off economically. The average hourly pay of $2.50 in 1964 would be $20.27 in 2018’s dollars (when adjusted for inflation). The nominal hourly wage for 2018 was $22.65. Essentially, this means workers are only $2.38 ahead of where they were in 1964.

Actually, today’s workers are worse off than at some points over the past 55 years. The average wage in 1973 was $4.03. When adjusted for inflation, this is equivalent to $23.68, which is higher than the actual average hourly wage for 2018.

Recent figures show that salaries have lagged behind inflation. Nominal wages increased by 5.34% between October 2018 and October 2019. Over the same months between 2017-2018, the increase was 5.25%. However, when you factor in inflation, real wages have declined by 1.3% since the end of 2017. So while unemployment is falling (from already-low 4% in January 2019 to 3.5% in September), recent real wages are also decreasing.  

Compared to historical data from previous decades, wage increases have been slow in contemporary times. Since 2013, nominal wage increases have been between 2% and 3%. Before the 2007 financial collapse, the average annual increase was around 4%. During periods of high inflation in the 1970s, yearly wage increases of 7% or more were common.

Different Wage Statistics for Different Income Groups

When it comes to workers who report their income in the U.S., wage and purchasing power statistics vary from group to group. Since 2000, the lowest 10% of earners have seen their real wages increase by 0.6%. In contrast, the top 10% of earners have seen a 1.0% gain in real wages over the same period.

As with low-income workers, college graduates have seen only marginal changes. The inflation-adjusted average hourly wage for students in 1989 was $16.59. In 2013, it was only $16.99. College graduates are not much better off, economically, than they were 30 years ago.

There is one more factor to consider when measuring employee compensation. You also need to take non-wage benefits into account. Employers sometimes offer health insurance, retirement account contributions, and other extras. In 1964, wages accounted for all of the average employee’s total compensation. In 2018, approximately 42% of total compensation did not come from wages. Instead, it came from benefits. This increase is due, in part, to factors such as the growing cost of healthcare.

Causes of Wage Stagnation

Economists have many theories about wage stagnation in the United States. The decrease in real wage growth likely has multiple causes.

Inflation of Healthcare Costs

The additional benefits that some employers provide tend to affect wages. Companies sometimes provide health coverage for employees. This coverage is an additional expense for employers. The rise in the cost of healthcare means that employers have to pay more to provide these benefits. They put money toward health insurance payments rather than wages.

Rising Reliance on Independent Contractors

One way that companies try to reduce costs is by hiring independent contractors, to whom they do not have to provide benefits. Some researchers have found that 43% of Americans will work as independent contractors by 2020.

The Decline of Labor Unions

In 1983, 20% of the workforce belonged to labor unions. However, membership dropped to 11.1% by 2015. Labor unions facilitate collective bargaining, which can lead to higher wages for all employees who are part of the union. When labor unions negotiate higher salaries, this sets a norm that can even affect the wages of non-union workers because they will expect the same standard.

Automation and Globalization

Low- and middle-income workers have been adversely affected by globalization and technology. Automation has streamlined  production and business processes, allowing companies to carry out operations with fewer employees. Globalization has also allowed employers to move production overseas for less than the cost of labor in the United States.

Costs of Higher Education

The cost of a college degree has skyrocketed. Tuition has risen 8 times as fast as wages offered to recent graduates. Student loans make up a significant portion of consumer debt. Overall, college loans accounted for $1.6 trillion in debt in 2019. This dynamic has made it harder for young people to get the kind of education that they need to qualify for high-paying jobs.

Purchasing power, inflation, cost of living, and real wages paint a more complete picture of America’s financial situation. Even though unemployment is at historically low levels in 2019, real wages are lagging for many workers and making it difficult for them to keep up with the cost of living.


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This post was updated December 4, 2019. It was originally published December 4, 2019.