The Real “Truth About the Economy:” Have Wages Stagnated?

Prof. Don Boudreaux responds to “The Truth About the Economy,” a recent video featuring former Labor Secretary Robert Reich (http://lrnlbty.co/z0ACuH). In the video, one of Reich’s key points is that most people’s wages have barely increased since 1980. However, when Reich’s numbers are examined in greater detail, his claim does not hold up. If you care about this issue, there are three things to consider:

  1. How inflation is calculated
  2. Benefits workers receive other than wages
  3. The distinction between statistics and individuals
Adjusting for inflation, especially over long periods of time, is as much an art as it is a science. In an attempt to measure inflation, economists have developed several indexes. All of these indexes are considered legitimate, but all of them yield different results. In “The Truth About the Economy” video, Robert Reich uses the consumer price index (CPI) to calculate the average hourly wage, and he finds that wages haven’t risen much over the past 30 years. However, when using other methods of adjusting for inflation, which are no less respected, the average hourly wage rate rises as much at 18% over the same 30 year period.
Index differences aside, everyone agrees that all forms of compensation must be considered to accurately calculate worker’s compensation. This includes not only wages and salaries, but also benefits like health insurance, retirement benefits, vacation days, sick pay, and more. It’s worth noting that fringe benefits have become a larger share of income over the past 30 years. According to Don Boudreaux’s calculations, which include fringe benefits, average hourly wages have increased up to 26% over the past 30 years.
Lastly, and most importantly, Robert Reich confuses statistical categories with real people. When Reich says that, since 1980, most people’s wages have barely increased, he gives the impression that most people have enjoyed no economic gains over the past three decades. What he means is that, adjusting for inflation, average wages have not increased. The real flesh and blood people within these statistical categories have actually experienced increased compensation. Some workers are gaining skills, others are retiring, and others are joining the workforce for the first time. Especially noteworthy is the increasing rate at which women and immigrants have entered the workforce in the past 30 years.
To Boudreaux, Reich is right to claim that a strong economy needs a strong middle class. However, taxing the rich, as Reich suggests, is not the path to a strong middle class. The path to a strong economy and a strong middle class requires the hard work and great entrepreneurial ideas of individual people acting in a free market.

4 Comments

  1. bosthegreat

    This is a great example of government being involved in things that it has no business being involved in. Then they need "studies" like this to "prove" they are needed but they make sure to only use the part of the study that serves their purpose when showing the results. The problem is that too many people blindly believe government rather than approaching government statements with skepticism and finding the equal and opposite study. Thanks Professor Boudreaux for pointing out the other side.

  2. Anonymous

    Your arguments and examples holds some untruths of their own.  For example, the ‘fringe’ benefits of which you speak, such as healthcare.  Healthcare costs and healthcare insurance costs have risen disproportionately to the cost of living in the past 30 years.  Consequently, so have employers cost to pay for health insurance.  That’s why many employers don’t offer health insurance.  The example of a retirement benefit?  You are kidding on this one, right?  The 1970s called; they want their retirement plan back.  The collusion between our government and financiers of our economy created the 401K to get rid of retirement plans.  There’s no ‘benefits other than wages’ in middle American households.  They don’t even have paid vacation leave or sick leave in most cases.  I think you are the one making facts up.  As to ‘real flesh and blood’ workers experiencing compensation: Yes, women began to enter the workforce in the last 30 years, because a middle class family can’t get by on one income.  And anyway, how are immigrants and women entering the workforce examples of increase in wages?  That statement is a flat out fallacy.  What wages are they being paid?  You and I know what they are being paid, so don’t be coy.

  3. Lukas Koube

    People who want to make inequality look really bad often use “household” data…but almost never inform the audience that the stagnation results from an increase in the total number of households…people used to rent rooms, nowadays they rent apartments….the rise of divorce has also lead to far more houses. this means that wages and the standard of living have gone through the roof in the last 30 years, but statistical averages have barely changed….it is pretty dishonest to talk about stagnating wages the way many people do.

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