Five Ugly Decades of Middle-Class Wages in America

By Doug Short, Advisor Perspectives:

Here’s a perspective on personal income for production and nonsupervisory private employees going back five decades. The Bureau of Labor Statistics has been collecting data on this workforce cohort since 1964. The government numbers provide some excellent insights on the income history of what we might think of as the private middle class wage earner.

The first snapshot shows the growth of average hourly earnings. The nominal data exhibits a relatively smooth upward trend.

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There are, however, two critical pieces of information that dramatically alter the nominal series: The average hours per week and 2) inflation.

The average hours per week has trended in quite a different direction, from around 39 hours per week in the mid-1960s to a low of 33 hours at the end of the last recession. The post-recession recovery has seen a disappointingly trivial 0.8 bounce (that’s 48 minutes).

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What about inflation? The next chart adjusts hourly earnings to the purchasing power of today’s dollar. I’ve use the familiar Consumer Price Index for Urban Consumers (usually abbreviated as the CPI) for the adjustment with a linear extrapolation for the latest month. Theoretically, the CPI is designed to reflect the cost-of-living for metropolitan-area households.

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Now let’s multiply the real average hourly earnings by the average hours per week. We thus get a hypothetical number for average weekly wages of this middle-class cohort, currently at $700 — well below its $827 peak back in the early 1970s.

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Note that this is a gross income number that doesn’t include any tax withholding or other deductions. Disposable income would be noticeably lower.

Latest Hypothetical Annual Earnings: $34,983, Down 15.4% from 42 Years Ago

If we multiply the hypothetical weekly earnings by 50, we get an annual figure of $34,983. That’s a 15.4% decline from the similarly calculated real peak in October 1972. By Doug Short, Advisor Perspectives.

And there is another trend. But how much longer can this go on? Read…   Corporate Profit Margins vs. Wages in One Disturbing Chart

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  9 comments for “Five Ugly Decades of Middle-Class Wages in America

  1. johnnygeneric says:

    The use of the CPI is very misleading since its definition has changed over the years resulting in the present deceptive low inflation. Shadowstats does a great job of tracking the CPI based on earlier calculation methods. Using these, I’m sure the numbers for today would look at lot worse.

    • economicminor says:

      Yes and with a truer reading of CPI the US would be in a recession and the PTB can’t allow the illusion of prosperity and growth to be reveled because the Emperor really has no clothes!

  2. Richard Lamb says:

    Whilst some people will be aware of the wage growth extrapolated in the first chart they will be rather unaware of the conclusion extrapolated in the final chart. What would be interesting is to overlay the increase in personal debt on the final chart. What I suspect is that the Reagan financial “reforms” allowed the use of personal debt to bring the first and last charts into some form of relativity.

    The American Dream has been just that and has merely been perpetuated by the uptake of personal debt. Now that dream has become for many a nightmare.

  3. Bruce Krasting says:

    The hypothetical real wages chart is interesting. What jumps out at me is 1) the Nixon Period and 2) the Carter period. Look at how adjusted real wages plunge in those years.

    We certainly want to avoid that happening again – Right? So what caused that big plunge??

    It was inflation that did real wages in. That being the case why is it that so many economists want inflation to shoot up today? Guys like P Krugman want inflation at 4%. He says that would cure what ails us. But not according to your data.

    Question: Is high inflation bad for workers?

    • economicminor says:

      Inflation is bad for the producing class and good for those who control the assets and money creation. Inflation transfers the wealth of a nation upward. You know, like the opposite of trickle down.. Like in Bizarroland. Or in an Orwellian culture where war is peace. Most people do not have the time to put it all together as they are so busy running the hamster wheel to keep their bills paid and food on the table.

    • Wolf Richter says:

      Bruce, I’ve called this phenomenon “inflation without compensation” for that very reason. Of course, in the current environment there’s another angle to “inflation without compensation”: interest rates that are below the rate of inflation. However, debtors (including governments) love inflation because it pays part of their debts. And companies love it because it lowers the cost of labor and makes sales and profits (which are never adjusted for inflation) look much better. Hence the current global propaganda about “not enough inflation” or “deflation” or “lowflation” or whatever.

      Unfortunately, not enough people ask the question you just asked!

    • Ben Johannson says:

      If nominal wages increase sufficiently to avoid erosion of purchasing power, then no. If not, possibly.

  4. Onoreno DiNardo says:

    I often observe items on your blog and especially naked capitalism’s, because I like bringing attention to the inequities developing in the economy and standards of living. This series of charts isn’t something easy to understand, or easily transmissible to folks that are working at Wendy’s or Family Dollar, or Hobby Lobby. I know, generally your posting is more thorough and well developed for those of us that are frequent readers of economics and social issues. Still I’m hoping for something accessible to the average wage earner and voter.

    Perhaps a series of graphs indicating the progressive development of the data, culminating in a final display? I know most folks can follow the progression. Say from average wages for the bottom 3/5 of incomes, over years, then adjusting for CPI, for debt loads, etc. Most folks can clearly see that their purchasing power has eroded, that they have less disposable income, etc.

    Somewhere in this, there would be shifts in expectations, where in the 1970’s you could likely go to college without substantial debt, this is no longer true today. Automobile costs, utility costs, whatever. I know this is a tall order, but perhaps it’s been done?

    In any case, thanks for the blogging and effort. it is important.

Comments are closed.