Are Wages Really Falling Behind?

Mark Skousen

Supporters of the “stagnation thesis” argue that wages and the standard of living for the average American are flat or have been declining in real terms since the 1970s, and haven’t kept up with productivity.
Here’s the chart they use to support their doom-and-gloom case:

But this chart doesn’t tell the whole story. It leaves out compensation and benefits (medical insurance, paid leave, etc.) that have increased significantly since the 1970s.
When you include full compensation, including benefits, the gap disappears. The Peterson Institute recently released a study showing that wages have kept up with productivity when you include benefits. Here’s the chart:




The Peterson study comes after another study which showed that that the middle class isn’t stagnant after all. Economist Stephen Rose, of the Urban Institute, looked at how the various income classes fared between 1979 and 2014. Guess what? There was a gradual and broad-based shift of Americans from poor to rich. In fact, there was a spectacular change in the upper middle class (incomes from $100,000 to $349,999). It grew from 12.9 percent of Americans in 1979 to 29.4 percent in 2014 — from 1 in 8 U.S. households to more than 1 in 4. Meanwhile, the rich ($350,000 in income or more) went from 0.1 percent of households to 1.8 percent in 2014. If these two groups are combined, nearly one-third of Americans have incomes exceeding $100,000.

Meanwhile, the poor and near-poor (less than $29,999 of income) dropped from 24.3 percent of the population in 1979 to 19.8 percent in 2014. And the lower middle class ($30,000 to $49,999) fell from 23.9 percent to 17.1 percent. The middle class ($50,000 to $99,999) decreased from 38.8 percent to 32 percent.
Rose concluded, “The growth in the rich and upper middle classes and the declining proportion of the population in the middle and lower classes indicate widespread economic growth between 1979 and 2014.”
In sum, the Adam Smith model of democratic capitalism works. If a nation adopts his invisible hand doctrine of a “system of natural liberty,” the results are positive for rich and poor alike, but especially the poor. As Adam Smith stated in the “Wealth of Nations” (published in 1776 as a declaration of economic independence), the nation achieves “universal opulence which extends itself to the lowest ranks of the people.”
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