However, the more important flaw is subtle; stagnant wages do not necessarily imply a stagnant standard of living for the lower classes. There are several reasons that there is not a direct link between wages and standard of living.
First, nominal wages have not been stagnant at all - they're much higher than they were a few decades ago. What's meant when referring to stagnant wages is that they have been relatively stagnant when converted from nominal wages to real wages by comparing them to the inflation rate. The inflation rate is an average inflation rate across all goods and services. However, [T]he rich have faced a higher effective rate of inflation than the poor have. Examples:
- The price of fish eggs (caviar) has increased much more than the price of chicken eggs (not to mention chickens).
- The price of high end wines have gone through the roof, while two-buck chuck (Charles Shaw wines) provide far more value per real dollar (in my opinion) than has ever been available.
- Ferraris have really gotten expensive, but my Hyundai Elantra was amazingly cheap and good and there are even less expensive cars.
Second, wages aren't the same thing as compensation. Compensation includes vacation, sick leave, health care, perks such as cars or meals, and other benefits in addition to wages. As Daniel Griswold elaborates, measures of real wages only are misleading:
A more accurate measure of earnings is “real hourly compensation,” which includes not only wages but benefits. The Bureau of Labor Statistics data on wages and benefits combined tell a more accurate and encouraging story about the well-being of the average American worker. Since 1973, average real hourly compensation for American workers has increased 45 percent, for an average annual growth rate of more than 1.1 percent. Figure 2 shows that real hourly compensation has not only climbed since 1973, but its rise has accelerated in the past decade along with America’s growing economic openness. The average American worker has not suffered from “stagnant” earnings in the past three decades but in fact has enjoyed real gains.Third, while it should be obvious, many pundits seem to overlook that fact that the wage data from decades ago are for different people than the current wage data. The people who were in the bottom quintile of income back then have generally moved up to higher quintiles (see here and here for more information). Those are then replaced in the lowest quintile by immigrants, students, etc. who will then also attain higher incomes over time.
Next, standard of living is not directly dependent on income. That might seem like a surprising statement, but if you think about it, standard of living is mostly dependent on "outgo". It's your ability to spend, not your income that determines how well you can live. These days, many more of the poor get substantial assistance that's not considered income. For example, the vast majority of students have low incomes, but because of financial aid and parental help, they mostly live far better than their incomes would otherwise indicate. Other programs like the Earned Income Tax Credit and Food Stamps also help lower income families have higher outgo and therefore a better standard of living.
Also, median family size has fallen by about 3% per decade over the last few decades. So even a stagnant household wage would still mean that the typical person in the median family is better off.
The bottom line is that the poor from the past are, in general, significantly better off now and this is corroborated by the fact that poor households typically have numerous amenities that their counterparts from decades past did not have. If the current Administration and Congress don't blow it too badly, the trend of the poor having an ever better standard of living will probably continue.