The Real "Truth About the Economy:" Have Wages Stagnated?

Prof. Don Boudreaux responds to "The Truth About the Economy" (http://lrnlbty.co/z0ACuH), a recent video featuring former Labor Secretary Robert Reich. In the video, one of Reich's key points is that most people's wages have barely increased since 1980. However, when Reich's numbers are examined in greater detail, his claim does not hold up. If you care about this issue, there are three things to consider:

1. How inflation is calculated
2. Benefits workers receive other than wages
3. The distinction between statistics and individuals

Adjusting for inflation, especially over long periods of time, is as much an art as it is a science. In an attempt to measure inflation, economists have developed several indexes. All of these indexes are considered legitimate, but all of them yield different results. In "The Truth About the Economy" video, Robert Reich uses the consumer price index (CPI) to calculate the average hourly wage, and he finds that wages haven't risen much over the past 30 years. However, when using other methods of adjusting for inflation, which are no less respected, the average hourly wage rate rises as much at 18% over the same 30 year period.

Index differences aside, everyone agrees that all forms of compensation must be considered to accurately calculate worker's compensation. This includes not only wages and salaries, but also benefits like health insurance, retirement benefits, vacation days, sick pay, and more. It's worth noting that fringe benefits have become a larger share of income over the past 30 years. According to Don Boudreaux's calculations, which include fringe benefits, average hourly wages have increased up to 26% over the past 30 years.

Lastly, and most importantly, Robert Reich confuses statistical categories with real people. When Reich says that, since 1980, most people's wages have barely increased, he gives the impression that most people have enjoyed no economic gains over the past three decades. What he means is that, adjusting for inflation, average wages have not increased. The real flesh and blood people within these statistical categories have actually experienced increased compensation. Some workers are gaining skills, others are retiring, and others are joining the workforce for the first time. Especially noteworthy is the increasing rate at which women and immigrants have entered the workforce in the past 30 years.

To Boudreaux, Reich is right to claim that a strong economy needs a strong middle class. However, taxing the rich, as Reich suggests, is not the path to a strong middle class. The path to a strong economy and a strong middle class requires the hard work and great entrepreneurial ideas of individual people acting in a free market.

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  Education

[Khalif Jones]

i usually like your videos but i have to point out the graph is just before the 2008 market crash

[bullpcp]

No. I'm stating something else. I'm saying that if most items have gone down in hours of work necessary to consume even as most items have increased in quality.  I'm stating that in aggregate we are able to consume more goods of higher quality than ever before. I'm stating that of those goods we have a lower ability to consume per hour worked are in sectors of the economy most regulated and that this is not by chance.

[justinlip]

So according to this workers are fine nothings wrong, the rich arent over paid and comparing advances in television to inflation is a completely legit thing for someone to shit out of their fucking face. There's no way he could be defending the perception of the richest 1%, he's just a good guy who doesn't want me to be uneducated, right?. This is like telling sweatshop workers that everything is going great

[bullpcp]

You really to seem quite stuck in the monetary illusion and use household wages instead of individual compensation as a measurement. $ don't matter ability to consume per hour worked does. Households shrank and larger portion than ever before of total compensation is provided in the form of benefits. You also aren't looking at inflation adjusted general consumption and aren't looking at the nuances of specific market consumption especially those currently dysfunctional due to gov interference.

[bullpcp]

What you stated about the more purchasing power per dollar is true. What you stated more per hour adjusted for inflation is debatable. You can't very well apply inflation adjustment to earnings and not to consumption with integrity. And people work fewer hours to be able to purchase most goods and services. The goods and services that have gone up in price faster than inflation are in those sectors of the economy most regulated by the government. Healthcare, education, finance, real estate.

[bullpcp]

First off I would like to commend you on your robust and consistent defense of free speech and debate... Oh wait that was someone that wasn't a self entitled intellectual bigot that believes only their views, or ones they select, should be freely expressed and debated. Secondly you are simply wrong. The hourly HOUSEHOLD WAGE may be less per hour than it was but this is not to be confused with INDIVIDUAL COMPENSATION. They are NOT EQUIVALENT.

[Ernie Cooper]

Agree, this vid was wildly misleading... well not even that just wrong. People who are brainwashed with a vid like this are already predetermined to believe what they believe and cant think objectively.

[Ernie Cooper]

Do you really believe what you said author? I stopped listening when you suggested today's total compensation is better than it was in the past. Pensions were common in the past, today they are ghosts. The % of out of pocket medical spending today vs. 30 yrs ago also runs counter to your argument. I started working in the early 1990s. Luckily I'm college educated, wages went up. Non-educated worker in 1990s had a lot more spending power than they do now; their wages are roughly the same.

[Justas Dainauskas]

FINALLY someone has made the point about the way you account for inflation + quality changes. Looking at panel data is ALWAYS better than pooled when measuring changes in living standards, though very difficult to obtain. YOU HAVE MADE VALID POINTS, BUT YOUR CONCLUSION (about taxation and free markets) IS NOT SUPPORTED BY THE POINTS - income inequality in US is really perverse.

[rkb100100]

Food, medical care, communications and transportation have never been better. 

[Francis Cloutier]

Wow, this video is so, so misleading. Real wages have not went up. Benefits have been cut all around. Cost of living has skyrocketed.

LL is leaning crony-cap-neocon on this one.