The Supposed Decade of Flat Wages Was Worse Than We Thought

Michael Stephens | June 12, 2014

It’s well known that the wages of US workers have become disconnected from productivity growth, with real wages growing much more slowly than advances in productivity over the last several decades. This is a key part of the story of widening income inequality.

But these observed trends actually understate the degree to which working people have been left behind. New research reveals that the US economy is doing a worse job passing on productivity gains to workers than the wage growth (or even stagnation) numbers suggest.

The Levy Institute’s Fernando Rios-Avila and the Atlanta Fed’s Julie Hotchkiss looked back to 1994 and tried to see what proportion of real wage growth since then can be accounted for by key changes in the demographic profile of the labor force: principally, the fact that the average worker has become older (i.e., more experienced) and more educated.

What they found is that over 90 percent of real wage growth between 1994 and 2013 was due to demographic shifts. And the 2002–13 period, commonly referred to as the decade of flat wages, is more accurately described as “a decade of declining real wages within age/education worker profiles.” If we control for demographics, wages are back to where they were in 1998. That’s what you’re seeing in the red line below:

Real Wages vs Fixed Real Wages_Levy Institute

Of course, generally speaking, the fact that we have a more educated workforce is good news. But we also want to know the extent to which workers with a particular demographic profile—workers with a given level of experience and/or education—are seeing increases in compensation as labor becomes more and more productive. “When describing the evolution of well-being in the population,” Rios-Avila and Hotchkiss suggest, “an official index for a ‘fixed’ wage trend might be more appropriate for policymakers.” Such an index would paint a disappointing picture of the last decade.

Since 2002, wages have fallen for workers at all levels of educational attainment (this is true whether or not we take ageing into account). And as you can also see in the next figure, when we control for changes in the age/experience profile within each educational grouping, workers without a college diploma are being paid less than they were in 1994 (the gradual erosion of their wages over 2002–08, combined with the recession and unimpressive recovery, have wiped out all the gains these groups at the lower end of the educational scale made from 1994 to 2002).

Fig4B_Wages by Education_Age Fixed

The authors also find that gender and racial wage gaps have shrunk by less than it may appear over the last decade, once we account for demographic changes. Controlling for shifts in the average age and educational attainment within each group allows us to disentangle reductions in pay inequality between male and female workers that are due to, say, women’s educational advancements outpacing men’s, from other sources of progress (or lack thereof) in gender-based wage inequality.

To see the full results, download their new policy note.

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2 Responses to “The Supposed Decade of Flat Wages Was Worse Than We Thought”

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  1. Comment by acomfort — June 13, 2014 at 12:34 pm   Reply

    Getting rid of all of our present taxes on labor would lower the cost of hiring American. A tax-funded health insurance program would relieve employers of this expense and make labor more competitive with machines and robots..

    You want more and better jobs . . . here’s a couple of ways.

    The tax code can change incentives. Tax codes are social engineering they encourage some things and discourage other things.

    In many cases we raise taxes on things that we think are socially destructive (cigarettes and alcohol) and we remove taxes from things we think a good for society (churches and charitable organizations.)

    Jobs are good for society but we tax them heavily. We should try to remove all of the economic penalties (taxes) from labor.

    On the other hand:
    If a person does work, they pay several taxes. If a machine does the work it pays none. When a machine does the work of 10 people then it could be taxed at the same amount that 10 people would be taxed. That would be fair . . . right?

    With this system I don’t think we would be lacking for jobs. If we have enough “people jobs” available, then the discrepancy in income should be less and a minimum wage might not be necessary.

  2. Comment by DHFabian — June 15, 2014 at 3:51 am   Reply

    No legitimate economic discussion can disregard poverty/the jobless poor. We see some of the impact in terms of costs for foster care, as well as prison costs (esp., the increase of women in prison), yet continue to disregard the very high cost of neglecting poverty.

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