Stagnant Inflation-Adjusted US Wages: Putting Things in Perspective

Headlines about stagnant inflation-adjusted wages in the US, are becoming increasingly common. Real wages have not budged since the 60’s:

However, WSJ had an article discussing how wages are higher when measured by a different inflation index, and also after accounting for increased employee benefits in the form of employer-subsidized healthcare.

This trend is not unique to America; wages have been stagnant in all developed countries:

Also ignored in this often partisan debate that blames so-called corporate greed, is the role of utility and buying power, which has surged despite flat wages.

After adjusting for buying power, utility, and the strong US dollar, American workers are getting a good deal relative to foreign workers. The US dollar is the strongest it has been since 1986 and inflation remains low in the US:

This means American workers can take their dollars and buy far more than comparable workers in the UK, Australia, or elsewhere. Consider a hypothetical economy that has high inflation, high inflation-adjusted wages, but also slow inflation-adjusted GDP growth (stagflation). Because inflation-adjusted wages are rising, it may seem like workers are prospering, but their local currency offers a very poor purchasing value when converted back into US dollars.

For example, in 2014, in the span of just three months, the Euro and Pound lost 20% of their value relative to the US dollar. Did wages rise 20%? No, effectively equating to a 20% pay cut and wealth tax. The US dollar is special because it’s a universal unit of value, so a falling dollar hurts American wealth far less than a falling local currency hurts other countries.

A laborer in such a country may spend a good chunk of his or her income on basic necessities, as the hyper-inflationary crisis in Valenzuela shows, whereas low-skilled workers in America for the same number of hours can buy far more. American wages offer much more utility and value: Netflix, abundant credit, stores stocked with cheap food; cheap computers, phones, and TVs for the entire family. Similar electronics are more expensive in the UK:

Although healthcare and college have become more expensive,

…electronics and most food is cheaper. Additionally, an increasing percentage of healthcare and education costs are subsidized by federal or private lenders. Few pay full tuition or healthcare costs out-of-pocket. But also, there is much more utility. A TV today is superior to a TV made 60 years ago, costs fewer hourly wages to purchase, and has vastly more channels to choose from (instead of just 5 or so, which is how it was half a century ago). There are new drugs that didn’t exist decades ago. The internet has replaced libraries. Amazon has replaced inconvenient department stores.

Although UK, Australia, and Canada have higher wages, everything else is more expensive to compensate. (Such as rent, heating energy, electronics, prioritized healthcare (not universal healthcare that long waits. Even in countries that have universal healthcare, many patients will opt for the private plans if they can afford it).)

Low inflation and strong purchasing power is why America often ranks high on various ‘cost of living’ indexes, which take into account rent, inflation, cost of basic goods and services, and local wages. For this reason, American tourists in Britain are often taken aback by how small and expensive everything is, as they are not accustomed the sudden downgrade in standard of living despite Britain being a ‘first world nation’.

This is probably why so many people want to immigrate to America, because despite rising wealth inequality and stagnant inflation-adjusted wages, it’s still better than their home country. The trend could also be part of America’s transition to a post-scarcity economy where most citizens have near-zero or negative net-worth but have abundant purchasing power and technological utility, as well as subsidized healthcare (expansion of Medicaid) and housing (expansion of public housing).