STUCK IN THE MIDDLE?

The US middle class may be doing better than the numbers suggest

The average wages of American workers are about the same today as they were in 1975, adjusted for inflation. This has led academics, politicians, and journalists to claim, with justification, that living standards for regular Americans have stagnated.

Dartmouth economist Bruce Sacerdote thinks this is wrong, and potentially damaging. In a recently published paper, he tries to set the record straight. Sacerdote does not dispute that wealth and income inequality are worsening, or that most of the financial gains of the past several decades have gone to the wealthy. He just thinks that Americans, as a whole, are doing better than official statistics would have you believe.

Sacerdote’s paper begins by showing that, for a variety of goods, US household consumption increased despite stagnant wages. For example, the number of cars per household grew from 1960 to 2010, for both poor and rich households. Over this period, the average number of people in US households fell and car quality improved, to boot.

It’s not just cars. Sacerdote also notes that the size of homes, access to indoor plumbing, and the number of bedrooms and bathrooms per household also rose meaningfully for low-income households, even though their incomes were flat.

Sacerdote is not the first to highlight increased access to consumer goods as a counterpoint to the official statistics on wages. Economist Kevin Hassett, US president Donald Trump’s appointee to head the White House Council of Economic Advisors, has cited data showing that access to household appliances increased dramatically over the past 20 years for households making less than $23,000 a year (in inflation-adjusted terms).

According to Sacerdote, the notion that living standards have stagnated is mostly based on the way the US government measures inflation.

Inflation is notoriously difficult to calculate. The most common measure is based on the US Bureau of Labor Statistic’s Consumer Price Index (CPI). Sacerdote, and many other economists, contend that the CPI overestimates inflation, and thus underestimates how much incomes are worth today compared with the past. The main complaint is that CPI does a poor job of accounting for improvements in quality, such as cars lasting longer or smartphones offering an ever-expanding range of features.

Sacerdote claims that if you adjust measures of inflation using methodologies that account for these biases, wages increased by almost 50% between 1975 and 2015. Regardless of whether the adjustment he chose is exactly right, his research highlights how sensitive wage growth is to inflation calculations. (Sacerdote notes that even under his adjusted inflation measure, wages only expanded by 1% per year, on average—a lower rate than preceding decades.)

Although Sacerdote fears the repercussions of increasing wealth and income inequality, he think it’s equally dangerous for people to think that living standards are slipping.

“It’s bad for the public to keep absorbing this notion that wages are falling or flat,” he says. “It removes a sense of optimism and pride about the country, and the productivity gains we have had. And it’s particularly damaging because it’s not true.”

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