Wages in America and the Death of the American Dream

The United States Social Security Administration recently published its wage statistics for 2023 and, given the rapid increases in the cost of living since 2020, the numbers are rather sobering.

  

Here is a table showing the distribution of compensation earned by Americans into different bands along with the number of Americans earning that amount and the cumulative number of Americans earning that amount or less:

The raw average wage (total net compensation divided by the total number of wage earners) is as follows:

 

$10,660,992,637,403.90/173,670,935 = $63,932.64

  

According to the table, in 2023, 67.6 percent of American workers had net compensation less than or equal to the raw average wage.  With median being defined as "a value or quantity lying at the midpoint of a frequency distribution of observed values or quantities, such that there is an equal probability of falling above or below it", the median American wage was $43,222.81 in 2023.

  

According to FRED, median usual real weekly earnings have not increased since the first quarter of 2020 as shown here:

 

The compounded annual rate of change in median real weekly earnings has looked rather pathetic going all the way back to 1980:

Thanks to GOBankingRates, we have an idea of how much the "American Dream" costs United States households on an annual basis in each state of the union.  The analysis includes the following household expenditures/costs:

  

1.) Annual mortgages payments

 

2.) Annual childcare expenses

 

3.) Automobile expenses

 

4.) Groceries

 

5.) Health care

 

6.) Utilities

 

7.) Education

 

8.) Pets

 

9.) Discretionary spending

 

10.) Savings

 

The true cost of the American Dream in the five most expensive states (family of four with one car and a pet):

 

1.) Hawaii - $260,734

 

2.) California - $245,723

 

3.) Massachusetts - $242,982

 

4.) Washington - $209,416

 

5.) New Jersey - $207,462

 

The true cost of the American Dream in the five least expensive states (family of four with one car and a pet):

 

1.) Mississippi - $109,516

 

2.) Arkansas - $116,511

 

3.) Kentucky - $116,815

 

4.) Alabama - $117,924

 

5.) West Virginia - $120,559

  

Needless to say, a median income family earning $43,222.81 annually is far from having the ability to live the ever elusive American Dream even in the states with the least expensive lifestyles.

  

The American Dream is on life support.   Until wages increase to the point where household earnings start to catch up to the rapidly expanding cost of living, this situation will continue to worsen, making American households even more vulnerable to economic downturns:

 

Falling Behind - The Real Cost of Living

A recently released study, "Losing Ground" by the Center for Housing Policy confirms what most of us already know; the rising cost of housing and transportation is outpacing increases in household income, no matter what the monthly headline CPI numbers tell us.

Let's open with a bit of background information to help you put the conclusions of this study into context.  In this study, the Center for Housing Policy examines the housing and transportation cost burdens for moderate-income households in the nation's 25 largest metropolitan areas and gives insight into the impact of the rapid rise and fall of home prices during the last decade.  Included in housing costs are rent and utilities for renters, mortgage payments, property taxes, insurance, utilities, condo fees and payments for home equity loans for home owners.  Transportation costs include all the trips that a household makes as part of its daily routine and includes the cost of car payments, insurance, maintenance and fuel for car owners and the price of transit for those who do not own a car.  Data for this study was gleaned from the American Community Survey conducted by the United States Census Bureau for the years 2006 to 2010 and all prices are adjusted to 2010 dollars.  Moderate income households are defined as those households that earn between 50 and 100 percent of a metro area's median income, ranging from a low of $23,956 to $47,912 in Tampa to a high of $44,531 to $89,063 in Washington, D.C.  The average moderate income household for all 25 metropolitan areas was $44,566.

Despite the fact that the nation's housing market showed a marked decline in prices over the 2006 to 2010 period, housing expenses were 52 percent higher than they were in 2000.  Transportation expenses also rose as suburban development took precedence over inner-urban development, pushing transportation costs up 33 percent.  In combination, housing and transportation costs for households rose by 44 percent over the period from 2000 to 2010, up 19 percentage points over household income which rose only 25 percent as shown on this graph:

Here are two bar graphs showing how percentage increases in household income (in yellow) have been outstripped by increases in transportation costs (in light blue) and housing costs (in dark blue) for the 25 metropolitan areas in the study:

Note the small number under the metro place name?  That's the multiple of the increased cost of transportation and housing to the increase in household income over the period from 2000 to 2010.  In the worst case, Detroit, the cost of living increased by 4.54 times the increase in household income.  In the best case, Seattle, the cost of living increased by 1.16 times the increase in household income.  As well, you can see that it was in increase in housing costs (in dark blue) that drove most of the increased cost of living in each of these metropolitan areas, even though the price of houses declined markedly after 2006.

In this time of national attention to the growing divide between wealthy and regular Americans, the authors of the study look at how the cost burden of transportation and housing impacts moderate-, median- and above-median-income households as shown on this bar graph:

On a nationwide basis, housing and transportation costs consume 59 percent of the income of moderate-income households, 48 percent of the income of median-income households and only 33 percent of the income of above-median-income households even though the latter spend nearly $9800 more annually on these two items than moderate-income households.  

Unfortunately for some households, the situation looks different when looking at the same data by metropolitan area as shown on this bar graph:

You can see that Miami has the highest cost burden for moderate-income households, consuming 72 percent of household income compared to the national average of 59 percent and Washington, D.C.'s average of 51 percent.  Even though Washington has the most expensive housing and transportation, its high average income makes it a more affordable place to live.

As I noted at the beginning of this posting, it is interesting to see that, despite the drop in real estate prices since 2006, many Americans, particularly those of modest means, are finding it more and more difficult to make ends meet, particularly as increases in wages have not kept pace with the increased cost of housing and transportation.  This leaves many American households with difficult consumption choices and affects their ability to save for both the future and to plan for emergencies.  While the American employment picture is showing modest improvement since the depths of the Great Recession, it is also quite apparent that the increases in household income simply are not big enough to meet the growing cost of living no matter what the headline inflation numbers are telling us.

Where can I earn the most and spend the least?

On Wednesday, UBS released its 2010 updated report on Prices and Earnings, the bank's look at consumers' purchasing power in 73 of the world's major cities. The report is normally issued every three years, last in 2009, but demand for the product led UBS to publish a 2010 update. For those of you who aren't aware of UBS, they are a 150 year old Swiss-based global financial services company with offices in 50 countries around the world. They are the world's second largest private wealth management company and the second largest bank in Europe.

Wednesday's report compares wages and prices for a representative sampling of cities throughout the world. Prices were surveyed for 122 different goods and services and included 112 questions about working hours, payroll deductions and wages for 15 different occupations. The basket of goods selected was weighted so that the prices added up to the monthly consumption of an average European family of three. Price levels were set in relation to New York City which was assigned a value of 100.

Here's what the 2010 report found from most expensive to least expensive for the top 10 cities in the world. The first value shows prices excluding rent and the second shows prices including rent:

City Excl. Rent Incl. Rent

1.) Oslo 120.4 94.3

2.) Zurich 114.1 89.1

3.) Geneva 112.4 90.0

4.) Tokyo 105.7 88.5

5.) Copenhagen 103.6 78.2

6.) New York 100.0 100.0

7.) Stockholm 97.1 73.1

8.) Toronto 95.2 76.1

9.) Montreal 92.0 71.9

10.) London 91.3 75.5

Let's take a quick look at a few others. Sydney, Australia comes in 12th place with values of 89.9 and 74.4, surprisingly Dubai comes in 16th place with values of 88.0 and 81.2, Los Angeles comes in 17th place with values of 87.7 and 72.4, Auckland comes in 26th place with values of 82.1 and 65.3 and Chicago comes in 27th place with values of 81.8 and 71.9. The least expensive city to live in out of the 73 surveyed is Mumbai with values of 37.5 and 30.3.

As far as wages go, the highest wages are in Europe. Again, with New York City set as the standard at a value of 100, here are the top 10 cities with the highest wage levels. The first column shows gross salary, the second column shows net salary after deductions (net may appear higher because it is normalized to New York City net):

City Gross Wage Net Wage

1.) Zurich 121.8 126.0

2.) Copenhagen 118.2 88.0

3.) Geneva 117.3 113.1

4.) Oslo 102.1 91.5

5.) New York 100.0 100.0

6.) Sydney 93.1 98.6

7.) Los Angeles 90.9 91.9

8.) Stockholm 82.4 78.6

9.) Munich 82.2 72.3

10.) Luxembourg 80.2 90.6

Here are a few randomly chosen cities and their gross and net wage values. Chicago comes in 11th place with 80.1 and 78.8, Miami comes in 12th place with 79.2 and 81.9, Toronto comes in 13th place with 78.9 and 81.6 and Montreal comes in 16th place with 77.7 and 81.8. Last on the list is Mumbai in 73rd place with values of 6.3 and 7.6.

Yes, I know, the numbers get boring after awhile. I'd like to refer back to a chart of values that UBS included in its 2009 report; these are real world numbers that we can all relate to and I thought it was a pretty interesting way of looking at income levels and purchasing power.

The wise people at UBS took two uniform products that are available everywhere in the world and then calculated how long people would have to work to purchase those products. To normalize the data, they took the price of the product divided by the weighted net hourly wage (after deductions) in fourteen professions. The products purchased were a Big Mac and an 8 GB iPod nano. Here is a list of a few cities in no particular order with the number of minutes of work needed to earn enough to purchase a Big Mac followed by the number of hours of work needed to buy the coveted iPod:

City Big Mac (mins) iPod (hours)

London 13 11.0

Frankfurt 15 13.5

London 13 11.0

Los Angeles 13 9.5

New York 14 9.0

Osl0 21 10.5

Tokyo 12 12.0

Toronto 12 10.5

Nairobi 158 160.0

Mumbai 61 177.0

Dubai 18 20.0

So, in other words, what the study tells us is that while Mumbai might be the cheapest overall place to live out of the 73 cities surveyed, you have to work a lot of hours to buy that iPod nano. If you live in Nairobi and want a Big Mac, you'll be working 2 hours and 38 minutes for the privilege. Now that's economics anyone can understand!

My only complaint about the reports are that all price information is normalized to a reference currency; the U.S. dollar which makes data subject to fluctuations in exchange rates and can penalize countries whose currency has appreciated markedly against the U.S. dollar from year to year. In the 2009 reports, the roughly 30 percent appreciation of the New Zealand and Australian dollars against the U.S. dollar caused both countries to climb upwards in the ratings to the more expensive cities.

Another comment for Canadian readers would be the noticeable absence of Vancouver from the study. With Vancouver having, by far, the highest real estate prices in Canada (and, in fact, among 6 nations in the Demographia study), my suspicion is that the city of Vancouver would rank far above both Toronto and Montreal and many other cities in the world as one of the most expensive places to live in if purchasing a house were part of the calculation.

I will be taking a further look at the 2009 report since it has more detailed information on rents, hotel room prices and other items that are of interest to most of us.