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Real wages are essentially back at 1974 levels, report shows

The Motley Fool logo The Motley Fool 8/14/2018 Daniel B. Kline

If you get a $1,200 annual raise on the same day that your rent goes up by $100 a month, you don't need an accountant to tell you that you didn't actually make any financial progress. And while that's an excessively  simplified example, it's nonetheless a pretty fair representation of what has been happening to most American workers over the past four decades.

Even though the official unemployment rate has been hovering around record lows in recent years, wage growth has stayed stagnant, a new study from Pew Research reveals. In fact, the real average wage, which Pew defines as "the wage after accounting for inflation" has roughly the same purchasing power as it did 40 years ago. And while some workers have seen gains, most of the increases have gone to those who were already the highest-paid. 

A chart shows the pattern wages have followed.© Pew Research A chart shows the pattern wages have followed.

It's about purchasing power

Average hourly wages for non-management, private-sector workers were $22.65 in July, up 2.7% from the a year earlier, according to Bureau of Labor Statistics data cited by Pew. That's in line with general patterns over the past five years, when wage growth has been between 2% and 3% annually. In the 1970s and early 1980s, however, when inflation was high, "average wages commonly jumped 7%, 8% or even 9% year over year," according to Pew's Drew Desilver.

"After adjusting for inflation, however, today's average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then," he wrote. "In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today."

For some workers, the reality is actually worse. Real wages among the lowest-paid quarter of workers have increased just 4.3% since 2000, while the top tenth of earners has seen an increase of 15.7% to $2,112 a week (compared to $26 each week for the bottom 10%).

Related video: For most U.S. workers, raises remain elusive (provided by CBS News)


What does this mean?

The heart of the problem is that while wage increases may make people feel like they're getting ahead, they don't necessarily mean folks are actually doing better, or that they have more discretionary income. To determine the real state of the economy and how the "average worker" is doing, you need to examine purchasing power -- which for the most part has not really changed.

For now, despite a few job categories where employers have been compelled by a tight labor market to nudge wages up a bit, this period of low unemployment has yet to improve the situation of average worker from where it was when President Ford was in the White House.

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