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Cost of Living vs. Wage Stagnation in the United States, 1979-2015

Inflation-adjusted wages haven't gone up, the cost of living has for the most part gone down.

The question of the cost of living in the United States is intimately connected to the issue of the so-called "wage stagnation," which is typically blamed on economic liberalization that started under President Carter, gathered steam under President Reagan, and peaked under President Clinton.

According to a 2015 report issued by the Economic Policy Institute, a pro-labor think tank based in Washington, D.C., "ever since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline. This is despite real GDP growth of 149 percent and net productivity growth of 64 percent over this period. In short, the potential has existed for ample, broad-based wage growth over the last three-and-a-half decades, but these economic gains have largely bypassed the vast majority."

True, adjusted for inflation, average hourly earnings of production and nonsupervisory employees in the private sector (closest approximation for the quintessential blue-collar worker that I could find) have barely changed between 1979 and 2015. In October 1979, average hourly earnings stood at $6.51 or $21.20 in 2015 dollars. In October 2015, average hourly earnings stood at $21.18 – slightly below the inflation adjusted 1979 level.

Looking at the average hourly earnings, however, ignores at least three very important factors: expansion of non-wage benefits, fall in the price of consumer goods and rise in price of services, such as education and healthcare.

(The accompanying infographic features 16 different household items have fallen by between 52 percent and 96 percent in terms of "time cost" since 1979. Please click on the infographic for larger versions)

First, in recent decades, non-wage benefits expanded. Today they include relocation assistance, medical and prescription coverage, vision and dental coverage, health and dependent care flexible spending accounts, retirement benefit plans, group-term life and long term care insurance plans, legal and adoption assistance plans, child care and transportation benefits, vacation and sick paid time-off, and employee discount programs from a variety of vendors, etc.

It is not easy to put an exact figure on the value of those non-wage benefits, but they could amount to as much as 30 or even 40 percent of the workers' earnings. The lion's share of the non-wage benefits, as my Cato colleague Peter Van Doren wrote in 2011, is consumed by "the dramatic increase in health insurance costs." "The fixed costs of health insurance," Van Doren shows, "are a much larger percentage of the total compensation of lower-earnings workers."

Second, many, perhaps most, big-ticket items used by a typical American family on a daily basis have decreased in price. Over at Human Progress, we have been comparing the prices of common household items as advertised in the 1979 Sears catalog and prices of common household items as sold by Walmart in 2015.

We have divided the 1979 nominal prices by 1979 average nominal hourly wages and 2015 nominal prices by 2015 average nominal hourly wages, to calculate the "time cost" of common household items in each year (i.e., the number of hours the average American would have to work to earn enough money to purchase various household items at the nominal prices). Thus, the "time cost" of a 13 Cu. Ft. refrigerator fell by 52 percent in terms of the hours of work required at the average hourly nominal wage, etc.

Needless to say, the above price reductions greatly underestimate the totality of welfare gains by an average American, by ignoring qualitative, aesthetic and environmental improvements on commonly used items. (To give just one example, a refrigerator today uses one-third of the electricity used by a refrigerator in the 1970s.)

From the above discussion it might be reasonable to conclude that Americans are much better off today than they were in the late 1970s, but that would be too simplistic. The cost of education, healthcare and housing has risen at a faster pace than total compensation. It is true that today's houses are larger, healthcare better, and education more high-tech than in the past, but quality improvements do not seem to account for the entirety of price increases. For example, there appears to be a high degree of academic consensus that housing price inflation is driven, primarily, by zoning laws. (No such consensus, alas, exists for the rise in education and healthcare costs.)

The question of standard of living is a complex one. The accompanying infographic refers to merely one part of the debate, i.e., affordability of commonly used items. While we believe that the infographic tells an important story, it should be considered within a broader context, including non-wage compensation and offsetting increases in the cost of housing, education, and healthcare.

Explore more data like this at HumanProgress.org.

Photo Credit: adactio/flickr

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  • Inigo Montoya, Micro-Aggressor||

    The problem with the infographic is that it focuses solely on once-in-a-decade purchases. Sure, the cost of appliances and vacuum cleaners has gone down, but how often do we need to buy them?

    What's far more insidious is the rise of the day-in, day-out purchases such as food and energy (though I'll grant you gas prices have lately been cratering, that's not true of electricity). It's more like a death by thousand small cuts that's harming the middle class.

    Ironically, while it's the left that constantly howls about wage stagnation, they also push for government policies that will only raise the costs of the very things (food, energy, health insurance) that keep going upward. But I guess we can all console ourselves with brand-new but totally empty side-by-side fridges and shiny new toaster ovens. (Who even uses those anymore?)

  • DaveSs||

    Most food categories are less expensive today than in 1979 actually, though not by much.

    What has changed is increased variety and increased availability out of season.

  • FreeRadical||

    According to some googling I did and with my own experience, here are some numbers:

    Milk: 1.62 in 1979, 2.50 in 2016. So, 0.24 and 0.11 hours of labor

    A dozen eggs: 0.85, 1.50 - 0.13, 0.07

  • Pat (PM)||

    You haven't been able to touch a dozen eggs for under 2 bucks since the avian flu outbreak in July. They're running more in the 2.50 range where I live.

  • macsnafu||

    Come on, the avian flu is a temporary outlier condition, not a part of the economic picture relating to wages and cost of living per se. And prices in my area have come down in the last few weeks.

  • Set Us Up The Chipper||

    Most commodities are much cheaper in terms of the number of hours worked to attain said commodity. I think cars are the one big outlier.

    Google it or consult the Rational Optimist.

  • Set Us Up The Chipper||

    One example the cost of light:

    In 1800, a candle providing one hour's light cost six hours' work. In the 1880s, the same light from a kerosene lamp took 15 minutes' work to pay for. In 1950, it was eight seconds. Today, it's half a second. In these terms, we are 43,200 times better off than in 1800.
  • MSimon||

    How many candle power is the electric light?

  • sasob||

    The price of appliances, as "adjusted" for inflation, may have come down, but so has the quality of those appliances. Refrigerators, washing machines, etc. do not last as long as they once did - they aren't made as well.

  • DarrenM||

    Maybe so, but they have more lights and knobs on them.

  • macsnafu||

    Most people don't have much choice in who their electricity provider is, as most electric companies have government-granted monopolies for cities and regions. In other words, it's not much of a market. But I think if you look at the cost of things like toilet paper and eggs, consumers are indeed better off, or at least not worse off.

  • Butler||

    An honest standard-of-living analysis would evaluate the life-styles of the 5 quintiles at a point in time and compare that to the lifestyles at another point in time. My guess is that our "poor" today (bottom quintile) are the most comfortable "poor" people that the history of humankind has ever known. I would be willing to bet that the average bottom quintile person has food and shelter and probably several of the following: car(s), smartphone, flat panel television(s), cable, internet access, jewelry, designer clothes, more than a weeks' worth of clothing, etc -- i.e. modern conveniences.

    Analyses like the above fail to take into account gov't benefits received by the "poor," like free healthcare, housing subsidies, earned income credits (i.e. cash), childcare assistance, WIC, food stamps, etc.

  • sarcasmic||

    Doesn't matter to the left. To them money is everything. They don't care or understand that what matters is what the money can buy. That goes right over their heads. So they'll dismiss the argument with something like "So what if you can buy more cheap Chinese crap? The rich are getting richer while the poor are getting poorer!" or some other emotional platitude. Can't reason someone out of a conclusion that they arrived at by emotion.

  • Inigo Montoya, Micro-Aggressor||

    But do they really care that the rich are getting richer as long as they are also doing better?

    Personally, as long as I'm doing fine, I don't really care if the guy down the street has gone from millionaire to billionaire, because I understand that it's not a fixed sum of money that we're dealing with. It's not like slices of a pie.

    Put it this way: if your boss came to you and announced your salary was going to be doubled, with your first thought be "Sweet!" or would it be to wonder if the bosses salary has gone up even higher than yours?

  • sarcasmic||

    But do they really care that the rich are getting richer as long as they are also doing better?

    Yes. It makes their blood boil because it isn't fair.

    Personally, as long as I'm doing fine, I don't really care if the guy down the street has gone from millionaire to billionaire, because I understand that it's not a fixed sum of money that we're dealing with. It's not like slices of a pie.

    You are licking the corporate boot that is holding you down. You need to join with the progressives and force that billionaire to share the wealth because it's not fair that they have so much while others have so little.

    Put it this way: if your boss came to you and announced your salary was going to be doubled, with your first thought be "Sweet!" or would it be to wonder if the bosses salary has gone up even higher than yours?

    Me personally? I'd be ecstatic. But I'm not a leftist. To them it is never enough. The mere existence of rich people is proof that they aren't paying their fair share. If they paid their fair share then they wouldn't be rich.

  • Sir Chips Alot||

    this x1,000,000

  • Lorenzo Zoil||

    I've grown to loathe the word fair. It used to, at one time, be an innocuous but highly useful little utterance. Fair Ball! Fair price. Fair trade. It was a positive in our world. But, the insidious creeping blackness of the left's incessant negativity has corrupted our little friend. Now fair is a complaint, a whine a jealous snipe. That's not fair, he has more than me, its not equal. Fair has become a political tool, a weapon, a dull knife. Fair is a right, an entitlement, no one should have more, that's not fair. How much is enough, you've taken more than you need. Fair is wounded, it is no longer a proud little word.

  • MSimon||

    Fair Dinkum.

  • Long Woodchippers||

    Yes they care, because their pitch is all about envy and greed. The proggies their minions that they are poor because the rich stole the money from them, not that they lack marketable skills.

  • contrarian||

    "Otherwise automation will only accelerate along with unemployment."

    Nothing wrong with automation, this is another zero-sum liberal fallacy, just with jobs instead of money or goods.

  • DarrenM||

    I live in San Diego, CA, not the cheapest place around, and a new 99 cents store opened up here recently. The quality is not as good as you'd get in a major retail or grocery stored, but it's good for the price and still better than 30 years ago.

  • Ron||

    A lot of the items where the price has dropped is true but the quality of construction is such that the items have to be replaced within a couple of years sometimes within a year so that number needs to be readjusted and may end up the same

  • Sevo||

    Cite missing.

  • GregMax||

    Tomatoes?

  • Sevo||

    Tomatoes don't wear out. Hell, you can kick 'em around the room and they're in as good of condition as when you started!

  • DaveSs||

    I would question that assertion.
    Two reasons:

    People were more apt to extend the life of an appliance by repairing either to do it themselves, or pay someone else
    While your Mom's refrigerator bought in 1960 may have lasted 30 years, it probably had a couple repairs in that time. If I buy a $700 fridge today and it conks out after 12 years, I'm not paying $250 for a repair to make it last another 5 years, I'm buying a new one. (If I can't fix it myself...I am a tinkerer)

    Also, there was just as much low quality crap made in the past. No one remembers these items because they ended up in the trash heap and few examples survive for us to hold up as models of 'they don't make em like they used to'

  • MSimon||

    Have you factored the cost of electricity into the price?

  • Pat (PM)||

    First, in recent decades, non-wage benefits expanded. Today they include relocation assistance, medical and prescription coverage, vision and dental coverage, health and dependent care flexible spending accounts, retirement benefit plans, group-term life and long term care insurance plans, legal and adoption assistance plans, child care and transportation benefits, vacation and sick paid time-off, and employee discount programs from a variety of vendors, etc.

    Those are hardly standard benefits for non-executive employees, except to the extent that Obamacare mandates employer health insurance coverage. Also, consider the exploding cost of pensions, which were much more common in years past but have been nearly completely phased out in any part of the market not owned by unions. If you consider pension obligations, I bet the difference in non-wage benefits from then to now is less substantial.

  • Sevo||

    Agreed that some are and some aren't common benes, but regardless, the bene package in general is much more expensive than it was in most locations, and those M/W increases are taken from somewhere; the pay of the next tier up is a good guess.
    In SF, employees get (m/p)aternal leave, paid sick leave, 'free' health care at all levels, and so forth. Of course, the government fantasized that all that would be in addition to pay, but reality has a place at the table.

  • Long Woodchippers||

    I know we don't have a fixed sum of money, but explain to me, long term, how wages are supposed to rise faster than prices? How does that jive with the circular flow of money?

    If wages go up, people will have money to either spend, save or invest. This article focuses on spending. People with a pocket full of cash, ready to spend, is what creates the inflation as the seller will price his items as high as the market can bear.

  • MSimon||

    Education is more expensive? Is more being learned?

  • buybuydandavis||

    "The cost of education, healthcare and housing has risen at a faster pace than total compensation."

    Yeah. While stuff has gotten cheaper, rent seeking has gotten more expensive.

    And how is it that Reason doesn't mention taxes in this article?

  • Jason Vick||

    Cost of living rise in United States during last years

  • pobaldy||

    big problem is that article looks at items that you might buy once, twice or rather infrequently during your lifetime, and not goods or services that are paid for weekly or monthly, which have generally skyrocketed, like food, tv and utilities, health insurance.

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