Have incomes really stagnated for 4 decades?

A popular claim in the media, and with liberal think tanks and politicians, is that median income has essentially been stagnant since about 1973. If true this would certainly be incredibly newsworthy, and potentially even suggest we need a radical overhaul of capitalism, if not an entirely different economic system.


Luckily, this claim is completely incorrect, and quite frankly, doesn't even pass the smell test.  The idea that the median household is no better off then in the 1970s is utterly absurd. We have massive televisions, large houses, cell phones, powerful computers, studio quality headphones, etc. Clearly our standard of living is substantially better. And it shows in the statistics; if one knows which to look at, and which to avoid.


Median household income, the statistic generally used to show this supposed stagnation in incomes, is flawed in several ways. Household sizes have declined dramatically. That means more divorces, and less teens/young adults working per household, both of which put downward pressure on real income statistics, even though the real material standard of living per capita may have increased.

Even worse is the measurement of inflation, the CPI, which is widely believed to overstate inflation by up to an entire percentage point a year. Compound that over four decades, and add in the fact it overstates price growth for the poor and middle class even more than it does for the rich, and it's surprising we aren't seeing a "decline" in real incomes.


Of course income itself is not a good metric to use, nonwage compensation has increased overtime, both in real terms and as a percentage of total earnings. It also helps to understand that rising healthcare costs eat up a lot of these gains, these would be passed on as higher wages or other forms of compensation if we could get healthcare costs and spending under control. This means the problem, which itself is overstated; as it is more the case of lower than usual compensation growth than no growth at all, would be much less severe if we could overhaul our healthcare system (may I suggest looking at Singapore for some guidance?). It's not a failure of capitalism as a whole, in other words.


The Federal Reserve's real compensation per hour metric (which uses their preferred PCE-deflator), is a much better way of measuring income gains. Even better is mean GDP-deflator adjusted income, as the productivity statistics one often sees coupled with the "stagnant wage" statistics use those same metrics. And while inequality has risen, the middle class has in fact seen a sizeable increase in its earnings as well.


The other, serious issue that needs attention, is that productivity growth is slowing. This is preventing incomes from rising at a similar pace to their past trend. While diminishing returns plays a role in this, there are certainly reforms that we can make to boost productivity, and encourage innovation.

We should be concerned about slow income growth, but we should not exaggerate the issue, and we must avoid misdiagnosing the problem, as it will lead to non-optimal solutions.