Pushing back gently but firmly on Michael Strain’s non-stagnation argument

May 16th, 2019 at 2:08 pm

A few folks have asked me about my friend Michael Strain’s recent Bloomberg piece where he argues against wage stagnation (it’s “more wrong than right”). It’s an old argument but one worth having, and Michael makes some important points and misses some big ones too (5, to be precise).

Larry Mishel and I counter a much shorter-term version of Michael’s case here but similar issues pertain. Certainly, the evidence he presents doesn’t change the basic wage story that I and many others carry around in our heads.

I think Michael’s most germane point is that nobody defines “stagnation.” If you think stagnation means real wages for low-wage workers have never gone up in the past four decades, you’re wrong. The figure below, from a recent piece I published (one I’ll get back to re a key point Michael misses), shows real wages for low and moderate wage workers stagnated through the 1970s, 80s, and 2000s.

But, in periods of very tight labor markets—the latter 1990s and now—they grew at a decent clip. This is key insight #1 about real wage growth for too many workers. It’s not that they’ve never grown. It’s that their growth periods in recent decades have been few and far between. And it’s largely dependent of achieving persistent full employment, a condition that’s also been too rare in recent years (see this exciting new paper on precisely this point!).

Key insight #2 is that, sure, switching to a slower-growing deflator leads to faster wage growth and there are good arguments for various choices (see Mishel/Bivens’ cautions re Michael’s choice of using the PCE for wages). But it doesn’t wipe out long periods of stagnation. Here’s the real 20th percentile wage (2018 $’s) using both the CPI-RS (used in the figure above) and the PCE. Just like the above figure: periods of growth, but longer periods of stagnation.

Key insight #3 is especially important and I’d urge fair-minded conservatives to think more about it. If you’re trying to understand why a lot of people have long been unhappy about their paychecks, you can’t just look at wage trends, you must look at their wage levels. That’s what I do here, and I argue that given what a lot of people are taking home in their paychecks, it’s awfully hard for them to make ends meet when paying for child care, health care, housing, and maybe even saving a little afterwards.

Insight #4 is that non-wage benefits don’t change the story, and probably make it less favorable for the “no stagnation” argument. We know, for example (because Larry Mishel always tells us), that the average benefit share of compensation has not accelerated over the stagnation periods shown above. Thus, non-wage comp cannot have offset slower real growth.

But it’s also likely the case—we don’t have long time series on this—that low- and moderate wage workers are no more likely, and I suspect are less likely, to have improved benefit packages over time. That is, if the average hasn’t accelerated, my bet is that the median and below have done worse.

Insight #5 provides what I suspect is another big reason that many workers feel left behind: the rise of wage inequality. As Larry shows here, from 1979-2017, real earnings of the top 1% grew 135% faster than those of the bottom 90%. And such disparities would remain no matter which deflator you use (because both low and high wages would be deflated by the same values).

Finally, I’d urge the no-stagnation crowd to consider why, as Michael notes, stagnation is frequently asserted as fact, by “[p]residential candidates,” “commentators and other opinion leaders….” Why does this resonate with audiences, especially in places feeling the pinch of globalization and deindustrialization?

It could be that they’re using the wrong deflator. But I’ll bet it cuts a lot deeper than that. I’ll bet it’s because they’re right.

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3 comments in reply to "Pushing back gently but firmly on Michael Strain’s non-stagnation argument"

  1. Steve Jaros says:

    Concerning your points about wage levels and income inequality.

    1) I read your article on wage levels and it perplexed. Basically, what you described as the basket of goods needed to “just get by” sounds like a robust middle class standard of living to me. It would be great if the least well-off people in the USA were robustly middle class, meaning everyone is “above average” or something similar, but that society has never existed anywhere at any time and isn’t likely to.

    2) about income inequality – that doesn’t resonate with me. My wages have been relatively flat over the years. After many years of schooling, I began my professional career in 1995 at around $51,000 salary. Today, 24 years later, I earns $86,000 a year, which inflation calculators say is basically the same amount – zero net real wage growth in 24 years of working. In contrast, during that time I’ve seen NBA basketball players, dot-com investors, corporate CEOs, and movie stars experience an explosion in earnings. Doesn’t bother me at all, not the line of work i got in to. So it seems to me that the constant media reports about “income inequality” are written by liberal journalists trying to stir up resentment against the rich. It’s really none of my business what anyone else is making.

    Just my two cents …

  2. Dean Smits says:

    Deindustrialization started in 1926…….that isn’t the pinch

  3. Kevin says:

    So, I guess the argument is that minimum-wage workers living in a slum and using food stamps today are better off than their grandparents 40 years ago working for minimum wage, living in a slum and using food stamps because they have cell phones.

    To me, the question is, can they afford the basics on minimum wage? If they cannot afford at least a comparable quantity of food, housing and health care, they income has gone down. Cell phones are not a substitute for housing or antibiotics.