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Here’s a letter to a frequent correspondent, Nolan McKinney:
Mr. McKinney:
As it happens, I did see the new report [2] by Oren Cass released yesterday by American Compass. Although I’ve yet to study it carefully, skimming it reveals countless reasons for skepticism of its conclusions. One fact alone warns me that his analysis is too flawed to take seriously.
Oren claims that over the half-century from 1972 through 2022, after adjusting for inflation, “[t]he average hourly wage for production and nonsupervisory workers rose 1%,” thus suggesting that the wages paid to ordinary American workers stagnated for a half-century. This suggestion is mistaken, outlandishly so. Digging into his data [3] reveals that Oren arrived at this conclusion by using the data shown in this Bureau of Labor Statistics graph [4]. (You have to set the start year at 1964.) According to these data, this wage in 2022 does indeed appear to be just barely higher than it was in 1972. But this appearance is utterly deceptive.
First, looking at this figure and taking it at face value, notice that 1972 is the year in which this wage peaked before falling to a post-1972 low in June 1995. Had Oren compared the December 2022 wage to the June 1995 wage, he’d have discovered that the 2022 wage was 25 percent higher than the 1995 wage. A 25-percent wage increase, of course, is a far less arresting finding than is that of a paltry 1 percent rise. Oren also can’t fail to have noticed that these data show a quite steady rise in this wage over the 27-year period from 1995 through 2022. But reporting this steady real-wage increase over the course of more than a quarter century – and during a time that included China’s entry into the World Trade Organization – would have prevented the “Wow, that’s terrible!” reaction that Oren no doubt seeks to stir in his readers.
Second, these data on changes in the average real wage of production and nonsupervisory employees should not be taken at face value.
As Oren himself reports, wages in the data he uses are adjusted for inflation using the Consumer Price Index, but the CPI is an adjustor that notoriously overstates the inflation rate [5]. A more accurate inflation adjustor than the CPI is the Personal Consumption Expenditure price index (PCE); the PCE, for example, updates more frequently than does the CPI the weights that are attached to different items in the basket of goods used for calculating expenditures. Adjusting nominal wage rates for inflation using the PCE rather than the CPI, economist Michael Strain in 2020 found that
[o]ver the past three decades, wages for typical workers [i.e., production and nonsupervisory employees] have grown by 20 percent using the CPI. And using the PCE – the better measure of inflation – finds a one-third increase in wages.”*
A 33 percent increase in the real wages of these workers from 1990 to 2019 obviously drains, rather than adds, credence to the tale that Oren tells.
But the news is even better than that conveyed by Strain. Here’s Phil Gramm, along with Robert Ekelund (my PhD thesis advisor) and John Early, writing in 2022:
If the inflation adjustment for real average hourly earnings for production and nonsupervisory employees were to incorporate both the Chained CPI to remove the substitution bias and more accurate adjustments for new and improved products, real average hourly earnings would have risen 74.0 percent over the last 50 years [1967-2017] rather than the official reported number of 8.7 percent.**
Because the source of data used by Oren shows that the hourly wage in 1967 was about ten percent higher than what it was in 1995, we can say that over the past 27 years – since 1995 – the real hourly wage of production and nonsupervisory workers rose by about 92 percent. This real-wage increase is unambiguously impressive and severely undermines Oren’s tale of middle-class woe.
I’ll mention here one additional problem with the real-wage figure used by Oren: It excludes many employer-paid benefits [6], which, according to Gramm, Ekelund, and Early, in 2017 compared to 1967 “add 25 percent more compensation to basic wages and salaries.” If we add (as we should) these benefits to the wages, the increase over the past few decades in the real income earned by production and nonsupervisory workers is revealed to be even more impressive.
There are additional reasons why Oren’s claim that the pay of ordinary workers over the past half century has increased by a mere one percent is so mistaken as to be laughable. Perhaps in a follow-up letter I’ll detail some of these other reasons. But what is established above should suffice to cast grave doubt on the credibility of Oren Cass’s empirical claims – and, hence, on his policy recommendations.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030* Michael R. Strain, The American Dream Is Not Dead (But Populism Could Kill It) [7] (West Conshohocken, PA: Templeton Press, 2020), page 45.
** Phil Gramm, Robert Ekelund, and John Early, The Myth of American Inequality [8] (Lanham, MD: Rowman & Littlefield, 2022), page 84.