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Real wages vs economic growth

There is a significant discrepancy between the stagnation of real wages in the last 40 years and other indicators including economic growth, human development index, food expenditures as share of the disposable income etc.

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Are we doing better or not compared to our parents?

How do you explain the discrepancy between the indicators?

Answer 1239

The mirror image to the earnings income should be capital income, which would have taken up the increase in total earnings - there must be an increase in total earnings with a growing economy.

Edit: My idea was that the development of income from wages would be inversly to the development from capital, see http://research.stlouisfed.org/fred2/graph/?g=6vW.

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You have PI: Personal Income, PII Personal Income from Interest, PDI Personal Income from Dividends, A576RC1 Wage and salary disbursements. Obviously a large and increasing part of the personal income is missing in the graph.

But you can see a general trend that the two components do behave as predicted, but a key ingredient is omitted. Any comments to improve the graph would be appreciated. One missing part is the transformation to per capita values.

Answer 1240

Part of the explanation appears to be that these figures (which relate to the US) for several reasons understate growth in real earnings. An article in the Chicago Fed Letter identifies the following issues with a data series for real hourly earnings that looks very similar to the above for the period 1964-1996 (and comes from the same underlying source, ie the US Bureau of Labour Statistics):

  1. Exclusion of fringe benefits and social insurance contributions which have grown faster than earnings.
  2. Exclusion of some categories of workers who are likely to have experienced faster growth in earnings.
  3. Use of an inappropriate price deflator.

Adjustment for these points leads in the article to a revised real hourly compensation series showing a clear upward trend broadly in line with productivity growth, with 1996 70% higher than 1964.

This still leaves a question about the relationship between productivity growth and the various indicators mentioned such as economic growth, but implies that the scale of discrepancy is much less than the chart in the question may suggest.

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