Apropos of nothing in particular, you may be wondering why I was so annoyed by Heather Long’s piece on Friday that puzzled over why wage growth today is worse than wage growth during the late ’90s dotcom boom—but did its puzzling using nominal wage figures. Here’s an example that will help to explain. This chart shows hourly wage growth since 1965:
The story here is that blue-collar wages rose steadily during the 70s, peaking at annual growth of 9 percent in 1980. During the start of the 1981-2 recession, wages grew about 7 percent, and even by the end of the recession wages were rising about 4 percent. After that, wage growth went up and down but always stayed within a healthy range of 2-4 percent. Add it all up, and blue-collar wages increased 226 percent through the end of the Bush administration. The total blue-collar wage increase through today amounts to 600 percent.
Does this seem likely to you? If you lived through this era it sure doesn’t. You don’t remember huge wage gains in the ’70s or in the 1981-82 recession, which was the most brutal recession since the Great Depression. And if this is a story you tried to tell—big wage gains during the Nixon/Ford/Carter era, followed by big wage gains during the 1981-82 recession, and then settling down to about +3 percent wage gains for the rest of the decade—you would be badly embarrassed for a good, long time.
Here, then, is the same chart but with inflation factored in:
This looks quite a bit different. Wages went up and down in the 70s, but by the end of the decade hourly wages were a dollar lower than they had been at the beginning. In 1979 wages began to plummet, not getting back to positive growth until 1982. The rest of the decade is something of a train wreck for blue-collar workers, with wages mostly declining throughout the entire Reagan/Bush administration and not finally going positive until the middle of Bill Clinton’s administration. In reality, real hourly wages declined from $21.08 at the start of the Reagan era to $19.61 at the end of the Bush administration. That’s a loss of about $3,000 per year, or close to $6,000 per year in today’s money. If you add in the ’70s, it’s even worse: blue-collar wages dropped from $22.42 to $21.94. That’s a loss of $1,000 per year, or a little over $3,000 in today’s money. Put all this together, and blue-collar workers lost the equivalent of $9,000 in modern dollars, which represented a 13 percent decline in blue-collar wages over the course of a couple of decades. The entire period of the ’70s and ’80s was a catastrophe for blue-collar workers.
This is how inflation works. Sure, wages grew 9 percent in 1980, but inflation grew 11%. A loaf of bread that cost a dollar at the beginning of the year cost $1.11 at the end. Sadly, your salary of $1 only went up to $1.09. Unless you can borrow a couple of pennies from someone, you can no longer even buy a loaf of bread. That’s how things really are.
And that’s why you always show things like wage series corrected for inflation. That represents the real growth and decline of wages compared to the price of ordinary goods that are rising or declining because of inflation. The only exception to this rule applies to arcane studies where the nominal number of dollars might make a difference regardless of the inflation rate. But unless you’re an arcane economist, you’re not likely to ever run into this situation.
Moral of the story: Always correct time series of money for inflation. There are no excuses.