What to Do about Wages?
On workers’ paychecks, policymakers confuse cause and effect.


Kevin D. Williamson

It’s a story of medians and means: As the left-leaning Economic Policy Institute runs the numbers, the average U.S. household income grew by 53.4 percent in inflation-adjusted terms between 1979 and 2007. That’s the mean. But the median is in an entirely different place, with the strange fact being that 90 percent of households’ incomes grew at less than that average rate. The incomes for the lowest-earning fifth grew by 29.2 percent in real terms, those of the middle fifth by 19.7 percent. Even top-10-percenter incomes near, but not quite at, the very top grew at a below-the-average pace. The reason the average overall wage growth was so much higher than the growth realized by nine out of ten households is that incomes at the very top of the distribution — the reviled top 1 percent — grew very strongly, 244.7 percent between the last days of Jimmy Carter and the waning of the George W. Bush years.

As always, it is necessary to emphasize that these bracket averages tell us practically nothing about what happened to the incomes of actual households, because households move through the brackets over the years, and the bottom fifth of 1979 was not composed of the same households as was the bottom fifth of 2007 — same goes for the top 1 percent. For example, using IRS data to track actual households rather than bracket averages, we find that of those who were in the poorest fifth in 1979, 85.8 percent had moved to a higher bracket by 1988; almost 15 percent of them had moved to the top income bracket — which is a higher percentage than remained in the poorest bracket, a fact that might be considered the finest achievement of the Reagan-era economy.

Household incomes’ rising by 29.2 percent at the bottom and by 19.7 percent in the middle — again, in inflation-adjusted terms — over the course of a few decades is nothing to turn one’s nose up at: Real standards of living increased by approximately zilch for 99.85 percent of human history before the Industrial Revolution changed everything. Americans’ attitudes toward the economy hover somewhere between optimistic and entitled, but there is no fundamental reason to assume that real standards of living will improve year after year, as though a natural law required it. The world is only what we make of it.

Still, rising household incomes is to be celebrated. But the news is not all sunshine and prosperity. A great deal of those gains in household incomes has come from having more workers per household, notably from the increasing participation of women in the full-time work force, and from more hours of work per household. Neither of those is a bad thing in and of itself: The typical American worker is not a pick-wielding coal miner out of The Molly Maguires, and more workers doing more work is generally a good thing. (Coal mining is still a pretty tough way to make a living, but, if the industry’s numbers are to be believed, it pays on average $82,000 a year, just a hair shy of a top-10-percent household income.) The upshot of this is that while annual household incomes are up, individual hourly wages have stagnated in many cases and fallen in others — for men, real hourly wages have declined slightly since the 1970s.

The liberal-leaning EPI’s findings are about the same as those of various conservative scholars and by-the-numbers academics. But its explanation of the data borders on the superstitious. If you would like a condensation of everything that is odd and wrong about the Left’s view of how the economy works, consider this argument from EPI’s report: “If inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007.” That is, it should be obviously, exactly backward: If middle-class incomes had been nearly $18,000 higher in 2007, then inequality would not have risen.

The Left sees inequality as a cause of economic facts, not an effect of them. As EPI sees things, inequality is an independent actor, a motive force in world affairs: It is not only a “determinant” of economic conditions but “by far the most important determinant”; it has, under its own steam, “blocked living standards growth for the vast majority”; and it is “the key driver behind stagnant wages for workers at the bottom.” This is a deeply weird view of how the world actually works: The Left thinks that inequality is not a mere measure of relative incomes or wealth but something that does things in the world, something that acts — and not only acts but acts decisively, determining Americans’ economic prospects. This sort of flatly preposterous analysis is the unfortunate effect of mistaking the map for the territory and the model for the thing modeled, the kind of magical thinking that causes people to believe that Superman could turn back time by reversing the rotation of the Earth.

That leads to the sort of silly writing exemplified above, but it also leads to bad policy ideas. EPI is about as respectable an economic-policy outfit as the Left has to offer, but its preferred policy responses to wage stagnation are basically primitive: raising minimum wages, as though long-term prosperity could be brought about by congressional fiat; passing paid-sick-leave laws; and changing corporate governance and financial regulation in ways that would impede or discourage income growth among corporate managers and financial professionals, who along with the occasional professional athlete and movie star make up the top 1 percent. There is more magical thinking in that, too: There is no big bucket of “national income,” and $100,000 in forgone pay for a CEO or private-equity investors does not mean that there is an extra $100,000 sitting around available to be used as income for somebody else. We talk about the “distribution” of income, but that is a purely statistical idea. There is no distributor of income, and income cannot simply be moved from one pocket to another like wampum.