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:

 

Real Wage Growth, America's Aging Workforce and the Impact on the Economy

A recent two-part article posted on the Liberty Street Economics website shows what lies ahead for the American economy when one considers the relationship between the aging of the labour force and the behaviour of real (after inflation) wage growth.  For those of you who are not aware of the Liberty Street Economics website, it is a blog that is sponsored by the Federal Reserve Bank of New York, publishing analysis from economists that may or may not reflect the actual position of the FRBNY.

The authors, Robert Rich, Joseph Tracy and Ellen Fu, started by looking at real hourly wage growth rates for all employed individuals aged 16 and older over the period from January 1982 to May 2016 as well as the May data from 1969 to 1981 using the CPI to convert nominal hourly wages to real hourly wages in Q1 2014 dollars.  The data is then divided into 140 different demographic cohorts based on decade of birth, gender, race and educational level (i.e. one cohort would be white male high school graduates born in the 1960s).

Here is an example of their findings which looks at the real wage profiles plotted on a logarithmic scale of white males born in the 1950s divided into groups based on educational attainment:

   

While this is only a single sample of the 140 cohorts, the five cohorts within the white male, born in the 1950s cohort, the authors found that the same pattern developed across all of their demographic cohorts.  They observed that real wages tended to shift up as educational attainment rose and that real wages tended to rise early in a worker's career, flattening out in mid-career and declining as the worker approaches retirement.  

While all of this is not terribly unexpected, the focus of the authors was to find out the implied growth rate of real wages, not simply the level of real wages, a task that is made easier because the authors used a logarithmic scale to plot the real wage profiles.  The authors computed implied real wage growth rates as the slope of the estimated cohort-specific real wage profiles at a given age.  As the slope of the line steepens, real wage growth increases.  As the slope of the line flattens, real wage growth decreases.  When the slope turns downward as age increases to the end of one's working career, the real level of wages is actually falling.

Here is a graphic showing the percentage of real wage growth for white males born in the 1950s by educational level and age:

All five educational levels show rapid real wage growth in the early part of their career with positive real wage growth ending in the mid-forties.  At this point, real wage growth is either flat for less than high school graduates and declining for white males with some college.  By the age of 55, all categories are experiencing negative wage growth; in other words, wage growth is not keeping up with inflation.  

From my own personal experience in the workforce, early wage growth was at very high rates, partly because of the high inflation levels in the late 1970s and early 1980s, however, a great deal of the wage growth was related to on-the-job-learning and on-the-job-training.  This generally makes a worker a more valuable commodity to their employer.  After a few years, workers, myself included, tended to look for more suitable employment that better matches their acquired skills with a new employer.  At this point, wage growth is also substantial.  After that point, as workers age, there is a diminished incentive for employers to invest in on-the-job training since the worker's working like is shorter.  This results in significant slowing of wage growth rates.  As such, the authors found that real wage growth profiles can be divided into three segments:

1.) fast real wage growth up to age 40

2.) flat real wage growth between the ages of 41 and 54

3.) negative real wage growth over the age of 55

Now, how is this going to impact America's workforce.  Here is a graphic showing how the age distribution of the adult population of the United States has changed between 1980 and 2015:

The authors' analysis shows that the fraction of the U.S. population that is in the fast real wage growth phase of their careers has dropped from nearly 60 percent in 1980 to just under 45 percent in 2015.  As shown in this graphic, this aging of the American workforce has had a substantial impact on aggregate real wage growth rates since 1980:

Aggregate real wage growth for all workers in America has declined from 1.8 percent in the mid-1980s to 1.2 percent in 2015, a decline of 33 percent.  

In conclusion, the authors note that U.S. real wage growth has slowed down over the past three and a half decades as the American workforce aged.  With real wage growth becoming negative for workers over the age of 55, this trend will continue for the coming decades as the proportion of older workers rise.  Since real wage growth generally reflects the rate of labour productivity growth, it certainly appears that the ongoing aging of the American workforce will negatively impact future labour productivity and wage growth, realities that will ripple through the economy, affecting future economic growth rates.

    

Why Has GDP Growth Been So Modest?

Updated January 2015

We all know that there is a close relationship between personal consumption and GDP growth as shown on this graph from FRED:

As the decades have passed, personal consumption has made up an ever-increasing component of GDP, rising from a low of 58.5 percent in 1967 to its current level of 68.2 percent.  That said, if we focus on the tail end of the curve showing the data since the end of the Great Recession in June 2009, this is what we find:

It's obvious that the personal consumption component of GDP has not risen since the end of the Great Recession, unlike its pattern in since the late 1960s.  Although consumer spending has risen, its contribution to GDP has not grown in the past five and a half years.  This has put downward pressure on GDP growth rates.

Let's look at a brief essay by Daniel Aronson and Andrew Jordan, both at the Federal Reserve Bank of Chicago that may explain why economic growth has generally been so modest since the end of the Great Recession.  In their essay, the authors look at the relationship between real wage growth and the labor market.  They note that there is a close relationship between the share of the labor force that is medium-term unemployed (five to twenty-six weeks of unemployment), the share that is involuntarily working part-time (less than 35 hours weekly) and real growth in wages (after inflation). 

Let's start with this graph showing real hourly wage growth between 1979 and 2914:

With recessions shaded grey, we can quickly see that in the period between 1991 and 2001 during the jobs boom, real wage growth was substantial and remained above zero until around 2005.  After the 2001 and 2008 - 2009 recessions, real wage growth has stalled or fallen.

Here is a graph showing short-term unemployment (less than 27 weeks), long-term unemployment (more than 27 weeks) and involuntary part-time workers as a percentage of the workforce from 1979 to June 2014:

In the past, the national unemployment rate has been a useful predictor of real wage growth.  As unemployment rose, real wage growth fell.  This relationship has broken down over the past five years.  Given that the unemployment rate fell from a peak of 10 percent in 2009 to 6.1 percent in June 2014, had the historical relationship between real wage growth and unemployment held, real wage growth would have been 3.6 percentage points higher by mid-2014 than it was.

Calculations by the authors show several key things for average wage earners since the end of the Great Recession:

1.) a one percentage point increase in the short-term unemployment rate results in a change in real wage growth of -0.4 percentage points.

2.) a one percentage point increase in the long-term unemployment rate results in a change in real wage growth of -0.38 percentage points.

3.) a one percentage point increase in the medium-term unemployment rate results in a change in real wage growth of -0.71 percentage points

4.) a one percentage point increase in the part-time for economic reasons underemployment rate results in a change in real wage growth of -0.40 percentage points.

As well, the authors' calculations show that the negative impact on real wage growth is higher for those that earn less meaning that the impact of the slack labor market on real wage growth is highest on those who earn the least.

The authors calculate that if labor market conditions were the same as what they were in the period between 2005 and 2007, average real wage growth would have been one-half to one percentage point higher in June 2014 than it was.

While the current job market has improved since its low point after the Great Recession, its current weakness, particularly for those that are medium- to long-term unemployed and those that are underemployed for economic reasons, is having an impact on wage growth.  Without growth in wages, consumers are forced to either take on debt or reduce spending.  In our consumer-oriented society, so much of economic growth hinges on never-ending increases in consumer spending and until consumers feel that they are wealthier or at least see some real growth in their wages, it will be more difficult to achieve the economic growth rates that we were accustomed to in the past.