Wednesday, October 31, 2007

What really has happened to the real wage? 

The answer is, "it depends!"

It depends on your choice of how you keep it real (to use my previous metaphor). Terry Fitzgerald finds that if you use the same deflator for all three series commonly used to discuss real wages -- average hourly earnings, median hourly wage, and national labor income per hour -- and you look at the same types of jobs being measured, average real hourly earnings rises 10% between 1975 and 2005, rather than falls 4%. Median hourly real wage rises 20% rather than 12%.

It also depends on whether or not you count benefits, which national labor income includes. Fitzgerald finds that counting in benefits would help you shrink the three figures to 16% for AHE, 28% for MHW, and 39% for NLI per hour. That still is a pretty big difference, which Fitzgerald thinks is partly accounted for by the difference between median and mean, and the difference between the groups of workers covered in the three measures. But that won't likely take care of all of those differences. And even if you take the largest of the three numbers, that's a real wage increase per year averaging only 1.1% -- lower than most other 30 year periods in U.S. history. (Fitzgerald seems to prefer the 28% figure for the thirty years, or around 0.83% per year over the time.)

So when you hear about the declining middle class yet read that things are just grand, the question to ask is, what exactly are they measuring? Skepticism is highly recommended.