American Workers Struggle as Real Wages Decline: The Discontent Continues
The American economy is experiencing a paradox. While top-level economic indicators such as the unemployment rate and inflation suggest a positive outlook, citizens are expressing discontent with the state of the economy. This dissatisfaction is reflected in various polls, which indicate that a significant majority of voters believe the economy is fair or poor. Additionally, more voters claim to be worse off under President Biden than they were before his term began.
To understand this disconnect between economic indicators and public sentiment, it is crucial to look beyond headline numbers and examine the decline in workers’ real wages. Real wages refer to wages adjusted for inflation, providing a more accurate reflection of workers’ purchasing power. A closer analysis reveals that real wages have significantly declined in recent years.
Some commentators argue that real wages are actually rising, pointing to the average hourly earnings measure from the Bureau of Labor Statistics’ Current Employment Statistics. However, this measure has become less reliable due to significant workforce-composition changes during the pandemic. As low-paying service jobs were shed, the average wage in the economy appeared to increase. But this was mainly due to the removal of low-paying jobs from the sample, rather than genuine wage growth for individuals. As these jobs have been added back, average hourly earnings have fallen.
Labor shortages have also played a role in suppressing average hourly earnings. Sectors such as leisure and hospitality, which typically offer lower wages, have been responsible for a significant portion of job growth in the past year. As the economy adds more of these low-wage positions, it brings down the overall average. Consequently, average hourly earnings do not reflect the wage growth experienced by workers in other sectors.
To gain a clearer picture of the economy, it is necessary to consider changes in wages for each type of job and industry. The Bureau of Labor Statistics’ National Compensation Survey’s Employment Cost Index provides such insights. According to this index, inflation-adjusted wages have actually shrunk by 3.7 percent since the end of 2020. This decline has erased all the gains made in the late 2010s, and workers’ real wages today are at the same level as they were in 2015.
These declining real wages have significant implications for many Americans, making important life milestones increasingly out of reach. Rising Treasury yields have led to higher mortgage and car-loan interest rates. Although gas prices have decreased, the inability to afford a home or pursue traditional life goals such as starting a family has left many feeling frustrated and dissatisfied.
To reverse this trend, a substantial productivity growth surge would be required. Productivity growth can lead to higher real wages and decreased prices. However, the current regulatory landscape makes it unlikely for such a surge to occur. The potential impact of artificial intelligence on productivity remains uncertain.
Barring unforeseen productivity growth or a significant drop in energy prices, real wages are likely to continue stagnating, leaving Americans discontented with the economy. Without addressing the decline in real wages, the American dream of homeownership and financial stability may remain elusive for many working-class individuals.
