You may be wondering why I was so annoyed with Heather Long’s article on Friday that you wonder why today’s wage growth is worse than wage growth during the dot-com boom of the late ’90s. Here is an example that will help you explain. This chart shows hourly wage growth since 1965:
The story here is that workers’ wages rose steadily in the 1970s and reached an annual growth rate of 9 percent in 1980. At the beginning of the recession in 1981/2, wages increased by about 7 per cent and even by the end of the recession, they rose by 4 per cent. After that, wage growth went up and down, but always remained within a healthy range of 2 to 4 percent. All in all, workers’ wages rose by 226 percent until the end of the Bush administration. The total wage increase for workers to date is 600 percent.
Is that likely to appear to you? If you have lived through this era, this is certainly not the case. They do not remember large pay increases in the 1970s or recession of 1981-82, which was the most brutal since the Great Depression. And if this is a story you’ve been trying to tell – big wage gains during the Nixon / Ford / Carter era, followed by big wage gains during the 1981-82 recession, and then a drop to about +3 percent in wage increases The rest of the year the decade – it would be very embarrassing for a good, long time.
So here’s the same graph, but with inflation in mind:
That looks very different. Wages rose and fell in the 1970s, but by the end of the decade, hourly wages were a dollar lower than at the beginning. Wages began to decline in 1979 and only returned to positive growth in 1982. The rest of the decade is a train accident for workers. Most of the wages fell across the entire Reagan / Bush administration, and only then were they finally positive in the midst of Bill Clinton’s administration. In fact, the real hourly wages of $ 21.08 at the start of the Reagan era fell to $ 19.61 at the end of the Bush administration. That’s a loss of about $ 3,000 a year, or nearly $ 6,000 a year for today’s money. If you add in the 70s, it’s even worse: Wages for workers dropped from $ 22.42 to $ 21.94. That’s a loss of $ 1,000 a year or just over $ 3,000 in today’s money. Taken together, workers have lost $ 9,000 in modern dollars, a drop in wages of 13 percent over a couple of decades. Obviously, the entire period of the 70s and 80s was a disaster for workers.
That’s how inflation works. Sure, wages rose 9 percent in 1980, but inflation rose 11 percent. A bread that cost a dollar at the beginning of the year cost $ 1.11 at the end. Their salary of $ 1 unfortunately only increased to $ 1.09. If you can not borrow a few cents from someone, you can not even buy a loaf of bread. That’s really it.
And that’s why you always show things like inflation-adjusted payrolls. This is real growth and the real decline in wages compared to the prices of ordinary goods, which rise or fall due to inflation. The only exception to this rule applies to arcane studies where the nominal number of dollars can make a difference, regardless of the rate of inflation. But if you’re not an arcane economist, you’ll probably never get into this situation.
Moral of History: Always correct the time series of money for inflation. There are no excuses.