Are Stagnant Middle Class Wages a Myth?
*Note – I wrote this post just before the Census Bureau released the official 2017 Median Household Income Numbers. I may update these numbers in the future to reflect the 2017 data. You can find my post on the new 2017 Median Household Income here.
I heard Born In The U.S.A. the other day while working in my office. I sang out loud. That album came out in June of 1984, when I was an impressionable youth. It launched the Boss back into the Stratosphere of popularity, where he had previously been launched nine years prior with Born To Run.
The man should definitely title his next album something starting in “Born”.
I remember the first time I heard that opening line coming out of my Emerson boom-box….
“Born down in a dead-man’s town, the first kick I took was when I hit the ground”.
Being in Baltimore, a dead-man’s town (literally), I thought “Now this I can identify with”.
Ok, ok, enough diversion. Hearing it recently mainly reminded me that I was sitting on a cool set of data from the Census Department about median incomes from 1984 – 2016. 🙂
Yes, “1984” was the memory trigger. I’m a music junkie, so when I hear something from the past that I like, it often makes me think of the year it came out and what I was doing then.
In 1984 I was wearing O.P. corduroy shorts, muscle shirts, and wearing colorful rubber bracelets. And I had a massive crush on Heather Locklear, who was on T.J. Hooker.
The 80’s were really strange weren’t they?
Back on topic… Springsteen is known for being the working man’s musician, and he’s written countless songs about the plight of the blue-collar working class. About factories closing, no jobs. Unions. Poor wages.
So, after hearing the song again, and looking at my data set, I decided to analyze real wage growth from 1984 to 2016.
Inspiration comes in many forms.
Have Incomes Gone Up?
I’ll get right to it. Here’s a map of the median income of each state in 1984, but with the numbers adjusted to 2016 dollars.
The Census Bureau published this data and ran the numbers to adjust the actual median incomes of 1984 for 32 years of inflation. So imagine yourself two years ago in 2016 making these salaries, and basically that was your equivalent salary as far as purchasing power in 1984. Make sense?
Now here’s the 2016 Median Income By State.
Pretty big difference. Notice all states are now over $40,000 but I left the legend category in for effect. Remember, these are in equivalent, inflation adjusted dollars. Now let’s take a look at the difference in percentage between the two for each state.
Here’s the percentage change for each state in the 1984 median income (adjusted to 2016 dollars), and the 2016 median income.
A popular rallying cry for along time now has been that “real wages” haven’t increased, and the middle class actually makes less than they used to.
But as we can see above, every state except one, Nevada, has a higher inflation-adjusted median income than they did in 1984. Nevada dropped from $56,733 to $55,431.
Here are states with the five lowest increases (or decrease) over the 32 year period.
| Nevada | 98% |
| Louisiana | 101% |
| Delaware | 102% |
| Kansas | 105% |
| Alaska | 106% |
| Ohio | 106% |
Here are states with the five highest increases over the 32 year period.
| Washington D.C. | 158% |
| Tennessee | 139% |
| Pennsylvania | 136% |
| Iowa | 135% |
| New Hampshire | 134% |
| South Dakota | 134% |
It doesn’t surprise me at all that Washington D.C. is at the top here. Coming from Baltimore I was aware during my younger years that D.C. wasn’t a whole lot better than Baltimore. Tons of crime and murders, and large swaths of urban blight.
Well Washington D.C. has been undergoing a massive transformation for a long time now, with an influx of young and highly educated professionals. Entire sections of the city have been gentrified, and the process only seems to be accelerating.
Washington D.C. saw a 158% increase in inflation adjusted median income between 1984 – 2016. That’s huge.
Lies, Damned Lies, And Statistics
This article from CNBC challenges the often repeated ‘fact’ of wage stagnation by noting that most employees increasingly get large parts of their income from benefits such as health care, paid vacation time, flex hours, improved work environments, and daycare.
The author further cites our increasing purchasing power as compared to the 1950’s or 60’s with items such as washing machines and TV’s being much cheaper now.
This piece from the Pew Research Center takes a different view. It claims that after adjusting for inflation, today’s average hourly wage has just about the same purchasing power it did in 1978.
The author is using some of the same statistics about wage growth, inflation, and the consumer price index as the CNBC author.
So what’s the truth? Well, like anything in life, it’s probably not on either extreme and somewhere in between. While I’ve clearly shown in the maps above that incomes have gone up when adjusted for inflation (since 1984 at least), the purchasing power side of things is entirely different.
Some things such as consumer durable goods are indeed way cheaper than they were 30 years ago. But of course other things, like a house, are more expensive.
Aha, on that latter note the plot thickens……
The average home size in has increased tremendously over time. So yeah, a 2600 square foot house is going to cost more than a 1600 square foot one.
Why are houses so much bigger?
Partly because we have more stuff, which we buy.
But wait, I thought purchasing power has stayed about the same over time, according the Pew article?
Well, we buy more types of things today don’t we?
Think about it. If you’re reading this you likely have a smartphone, a laptop, possibly also a full desktop computer, and a video game system. And maybe a tablet too. You also likely have 2.3 televisions.
In the 1970’s you had none of these, except possibly a TV. But it was very unlikely your household had more than one TV in 1970.
Most middle class families now have things like webcams and bluetooth speakers, dehumidifiers and garbage disposals. Look around your house and life and consider all of things you have that either weren’t yet invented in say, the 1970’s, or that were far too expensive for the middle class.
So has our purchasing power stayed the same, or are we just purchasing more things, and more “classes” of things that never existed before?
Of course some things like the cost of college have undeniably gone crazy, there’s no question about that. But not everyone has kids, and not every kid goes to college.
There’s no denying Americans have more stuff than ever, per capita. The growth of the self-storage industry has rivaled college tuition, and shows no signs of slowing.
We’ve increased home sizes from 1600 square feet to 2600 square feet over 30 years, and yet it’s not enough. We still need more storage.
I find this disturbing.
And I also find it a very complex and under looked piece of the puzzle when I hear the cry that “middle class incomes have been stagnant”. Hmmm…
Be A Skeptic
I know, it’s a complex issue. Anecdotally, a few clicks on the web will show certain things that are more expensive than they were years ago. And others that are way cheaper. There’s college costs, and of course the big one, heath care costs.
If anything, I think we should all have a skeptical mindset when we hear that middle class incomes have been stagnant. Or that they’ve gone way up. It’s clearly not as simple as citing income data and inflation or CPI data. It’s a lifestyle issue, and we’re living very differently than we were even 20 years ago.
Any detailed analysis would require a painstaking analysis of consumer expenditures across the board – including the cost of things that didn’t exist 30 years ago, and how much of them we have.
It would be immensely complex, and still not applicable to everyone since we live very different lives, even when in the same income category.
Your turn readers – What’s your take on wage growth or stagnation? Am I totally off base in some of my analysis? Fire away!
You’re right that real median incomes are higher than in the 1980s. And that “stuff” is relatively cheaper. But, neither the price of basic goods nor the inflation metric that we use to calculate real incomes accurately reflect the real costs of having a middle-class life today.
For example, the four costs that you accepted are much higher (housing, childcare, higher education, and healthcare) are together the vast majority of the costs a middle-class household faces. Those four things have hyper-inflated at a rate far above the 2-3% annual inflation rate. Compared to them, bluetooth speakers and dehumidifiers are a drop in the budget bucket. (You’d also find that you’re using anecdotal evidence in assuming that a majority or even a plurality of Americans have those things). We all fall for this “missing the forest for the trees” bias, so it’s common that to think, “Look, that poor person has a cell phone, so they aren’t actually poor or else they’ve spent themselves to poverty!” Except maybe they have a cell phone and are homeless or can’t afford medical care.
Let’s examine these line-items:
1) Housing – The average American household spends 16% of their budget on housing. Utilities and other household maintenance is another 11% of the budget. So, together, housing alone accounts for 27% of American’s expenditures. Yes, housing is marginally higher because houses have almost doubled in size since the 1970s. But, don’t forget that homebuilders stopped selling smaller houses not just due to demand for larger units, but also because larger units have a lower profit margin on them (same deal with trucks/SUVs vs. sedans and compacts). You literally can’t buy a new-built 1600-square-foot house in most US housing markets today, a reality testified to by many FIRE enthusiasts looking to do the right thing and downsize.
2) Healthcare – According to the BLS, the average American spent more than $4,612 (or 8% of their household spending) on healthcare. There is massive variability in healthcare outlays, too, so for many, this is their single largest expense (and very non-negotiable).
3) Childcare – This is mostly an issue in the first five years of a child’s life, but childcare now exceeds the cost of in-state tuition in every state in the Union. For many in the middle class, this can quickly become the largest line-item in their budget, costing so much that it can convince mothers to drop out of the labor force entirely, to the detriment of their future household earnings (and ability to FIRE). Yes, people don’t *have* to have kids, but it’s the primary source of joy and meaning for many people who no longer trust or believe in edification from careers. The alternative sources of edification for many non-breeders in the FIRE community is travel or other forms of consumption, so it’s hard to say that not-having-kids is the surest path to edified frugality.
4) Higher Education – It’s en vogue on FIRE forums to talk about how overrated college is (relative to “studying the trades,” for example), but higher education is the clearest dividing line between prosperity and the lack thereof in the country, with very radical divergences in income, employment, wealth, healthcare coverage, and even lifespan and healthspan between those with a degree and those without. (It’s telling that among the FIRE gurus who talk about how overrated college is, all of them have degrees). It’s no wonder, then, that families would prioritize this expense for their children. With the exception of fly-by-night for-profit colleges, the ROI on higher education is still there. And, it’s something that has been hyper-inflating for decades.
I don’t know about you, but shopping for “stuff” doesn’t even come close to any of those four expenditures. In fact, once you strip out food (10% of budgets), transport (14%), and other expenses that are pretty un-fungible, you’re left with a very small discretionary budget for entertainment (4%) and shopping (AKA “Apparel and Service”) which is a mere 3% of the average American’s household budget. So, yes, perhaps people could spend a little less than the $1,600 or so they spend on “stuff,” but does that really make a dent?
More compelling is the argument to buy cheaper/older cars to get that 14% transit budget lower, but that’s actually what’s happening in the US. Again, anecdotal evidence tends to skew our perception. The average age of cars on the road in the US is now a record-breaking 11.6 years. All the brand-new extended cab pickups and SUVs that people get judgy about in FIRE discussions are outliers, not the norm for the middle class.
So wow – one of the best comments on my blog ever! Thanks for reading and for your awesome comment and contribution to the discussion. If you took that much time to comment on my blog I owe you a response for sure 🙂
I agree with a lot of what you wrote. However, there’s still the other side, the skeptic side.
About houses, in free markets consumers get what they want, with rare exception. People have clearly shown they want bigger houses. This is a choice, a collective one. If everyone, including the middle class, just refused to buy the bigger houses, you better believe the home builders will stop building them, and go with what consumers want. I’d like to see that happen, and recent data shows it may have stared, albeit slowly.
The big three costs for a majority of households are housing, transportation, and food. While I agree that childcare can be expensive, it’s not one of the big three because so many people don’t have kids. About 48% of women between 15 and 44 have never had kids. That’s huge and negates those costs for almost half.
As for food. Well, lifestyle inflation has crept in there. We’re eating out more than ever. Look at the chart in that article
that goes back to 1955. That’s lifestyle inflation, plain and simple. And it adds huge costs to one of the big three.
And I don’t agree that the extra stuff that we spend on is as minimal as you think it is (like I just showed with food). Maybe using a bluetooth speaker was a bad example. How about central air in the house, as another commenter pointed out? That was not a standard middle class thing when I grew up. I didn’t have it as a kid. You’re talking $8k for the unit and tons of dough in electricity. (they’d cost less if houses were smaller… 😉
If the argument is “well, that’s kind of essential for everyone nowadays”, then I disagree. Considering it essential would be just admitting lifestyle inflation. My friend Andy has a great house in DC and doesn’t have it, nor does he want to buy it because he’s smart with his money. He has a $250 window unit for his bedroom.
Lastly, how many middle class people are going to plop down $1000 for a new smartphone? Or even $1400 for the top model? It’s beyond crazy. My schoolteacher friend in Baltimore who makes in the $50k range is going to, she already told me. Anecdotal, sure, but you bet TONS of middle class people will be buying them. Not only is it a classic case of something we didn’t even spend money on 30 years ago, a large portion of the population is taking it even further by wasting $900 on an overly-expensive version. They can get a $90 Android like I have that has better functionality, and a bigger battery.
I’ll lastly surprise you by saying that you and I actually mostly agree. If I had to guess overall I’d say middle class wages have stagnated as compare to COL a bit perhaps, but only for a portion of the population. Mostly those looking to send their kids to college. For those who don’t have kids or don’t send them to college (a large portion right there, possibly majority), I believe much of the perception that they are not keeping up is because of lifestyle inflation. Or a redefinition of what middle class constitutes. (hint: having an Ipad is not part of the equation 🙂
Thank you for the thoughtful reply, AF! As you say, “you and I mostly agree” about a lot of this stuff. I wouldn’t even bother with FIRE (and I’m quite active as an admin, blogger, and moderator of many associated communities), if I didn’t believe that personal choices don’t have a role in financial outcomes. You have to really get “woke” to this before you can improve your situation. When I discovered FIRE several years back, I was literally able to cut half my expenditure within a year. What a feeling!
HOWEVER…
I bring up these other variables only to push back against a lot of the “common-sense” dogma in personal finance. The abiding view in America (and more specifically in FIRE circles) is that people’s financial outcomes are entirely dependent upon their personal choices. Sounds reasonable, right? Therefore, they are both practically (and morally!) responsible for those choices. But, as is obvious to anyone who studies groups of people engaging in any collective human activity, we are social animals, whose behavior and agency is at least somewhat mitigated by our context: variables that determine our decision-making and freedom for manuever. The usual blanket judgement that “everyone is stupid and that’s why they’re all screwing themselves” is a little lacking.
Some of those structural variables are “hard” ones, meaning they’re something that you, individually, probably cannot change, and therefore must simply adapt to. Examples include: the velocity (up/down) of the economy, stagnant/growing real wages, level of inflation, healthcare costs, free-market competition vs. oligopolistic corporate behaviors, the degree of vertical mobility in a society, spatial dynamics (i.e. the options for housing/transit on offer), and the stage in life you are in personally (when I “found Jesus” financially, I was young, healthy, well-educated, single, high-earning, and living in an urban context where I didn’t need a car).
So, let’s address again those “Big Three” (and the similar mostly-fixed expenses I mentioned) for how hard of a variable they might be:
HOUSING: You’re right that homebuilders respond to market incentives: they build big because we want big places. As an individual, however, you can’t really change that. You’re left competing with a large pool of lower-income people in the market for the relatively limited older housing stock that’s more modestly sized. Because the supply of that cheaper stock is much less than the demand (because all new stock coming in aims for the more profitable high-end buyer), it’s very difficult to find a smaller unit. The average selling price for a home in the US this spring was $375,200. Compare that to the median household income of $61,372… which is actually the exact same as it was in 1999 (https://fred.stlouisfed.org/series/MEHOINUSA672N/). So, yes, I can individually try to buy at the lower end of my housing market, but the entire distribution of prices have hyper-inflated while my earnings have been the same for two decades. That’s a hard constraint on the single most expensive asset/cost that most Americans ever buy.
Needless to say, there are certain countries and cities within countries where housing is much more affordable relative to income. You’ve previously shared a great map of that, as I recall. Americans are starting to take a chance on changing jobs now that unemployment is low, but moving means a lot of transition costs and also leaving a network of friends and family (which is something you can often quantify the financial impact of).
TRANSIT: It is well-established (and very true) that cars today are safe and reliable enough that you would be profligate for buying a new one instead of seeking out a model that is 5-10 years old. I haven’t owned a car since I was 18, but I will again when I have kid(s). Since I was a teenager, I’ve done quite well using public transit, cycling, or taxis and ride-sharing platforms. If/when having a single car for our household makes sense, I have a spreadsheet comparing model years for fuel economy, safety, cost, and reliability to inform my choice. I could maximize my consumer utility along those metrics for about $12K fixed purchase price, with a $5K/year annual marginal cost. That’s far below the $33,700 average selling price for new cars in the US. But, even being frugal/practical in what car you chose, that’s still a lot of money. Ironically, options for not-driving are better in richer areas, so the people who could benefit most from not having to own their own vehicle don’t usually have the option.
FOOD: Indeed, this is an area that a lot of people could economize. There’s a floor to a healthy-eating grocery budget, but you can save thousands per year by not eating and drinking out. Food today is cheaper than it’s ever been in its relative share of Americans’ budgets. So, you can afford to splurge on expensive organic whole foods, while cutting your food budget, if only you stop eating out (even McDonald’s is expensive relative to cooking at home). And, if you’re stoic enough, the easiest way to save money would be to forgo drinking, smoking, and drug-use entirely. (Is it any wonder why Mormons seem to be so good at saving…?). Maybe that doesn’t seem very fun (neither is debt!), but you can even bring your vices home and save thousands a year.
HEALTHCARE: Another increasingly salient hard variable is healthcare. This isn’t included in most FIRE discussion of the “Big Three” expenses because FIRE gurus are mostly young, healthy, insured (and perhaps a little blind to the healthcare reality they’ll encounter in a few short years or decades). For a plurality of Americans, out-of-pocket healthcare expenses cost them more than food does now (and for everyone else, it will be THE big expense later on). Expensive healthcare, sadly, is just a given in the US. Can you live a healthier lifestyle, quit smoking, and try to avoid being overweight (like an astounding 3/4ths of Americans)? Sure, but no matter what, everyone uses healthcare at some time in their lives. This burden falls especially hard on women. This hard variable is not as much of a factor for most other OECD people, so some FIRE gurus advise geo-arbitrage outside of the US to address it, but that’s a pretty radical move for most, especially in latter years.
CHILDCARE: As you say, is only relevant for those who have kids (and don’t have obliging parents or relatives to step in for free). But, for the majority of people who will have kids, it not only dwarfs both transit and food in the “Big Three,” but it becomes a life-altering financial factor long after the expenses are incurred. Five-plus years of haemorrhaging five-figures of childcare expenses means five years of not-saving during peak earning years and, more crucially, five years without redoubling those savings in investments.
That these “hard” variables (I’ll call them the “Big Five”) usually account for the large majority of household expenses in the US is a glaring blind spot in the reasoning of a lot of FIRE advice.
SOFT VARIABLES:
Where we can have more agency is in those structural variables that are “soft” ones, meaning that you are restricted (or empowered) by them sociologically and psychologically. So, yes, most shopping is a choice. Having a car might not be a practical option for you where you live, but what kind of car you “need” is a choice. This is where “common sense” comes into play. What values do you grow up with? What are the societal norms for consumption? How are “success” and social status measured? We shouldn’t discount what a barrier these “soft” variables can be to better decision-making and personal emancipation, though. If they weren’t a real barrier, would people have such a hard time to lose weight?
Some examples of “common sense” that limit people’s FIRE potential: my (much older) father was born way back in 1933. He grew up in a small apartment where the family shared a bed after his father died prematurely. They ate Spam and baked beans for dinner. In the Great Depression context of the time, they weren’t actually poor, but middle-class, and these privations weren’t unreasonable. In the muggy heat of the Washington, DC summer, you didn’t have AC at all back then. You maybe sought out shade, bought and ice cream, went to the public pool, or tapped the exotic new luxury of air-conditioned air in the matinee cinema.
But, like many Silent Generation kids, my father never wanted his kids to experience what he went through. When he got some money, he wanted a suburban house, an expansive yard for us kids, and a big new car. We, being kids, didn’t need or want these things (big yard = mowing duty!), but we learned to be ashamed when we didn’t have them and other things, because “everyone else did.” In our community, we felt “poor,” though we were quite comfortably middle-to-upper-middle-class. That was the 1990s, when everyone was over-leveraged to the hilt. I had a friend whose family lived in a McMansion with a pool and Ford Expedition SUV out front… but no money left over for furniture! It was that kind of time. By my early adult life, I had internalized the “affluenza” of my upper-middle-class suburban childhood and was indebted by student loans and credit cards and clogged up my life with consumerism.
Flash forward: I currently live in a 750 square foot apartment with my wife in Sweden, which costs me 10% of my net income. If/when we have kids, we won’t “trade up.” We have no AC, partly because of the climate, but also because the month or so to truly hot weather can be endured (even during this summer’s historic heatwave). We have no car. We mostly cook or drink at home and then we hand-wash the dishes. Re-wearing the same outfits is normal. Gizmos like bluetooth speakers or dehumidifiers would just get me bemused looks as the eccentric American. Amazon Prime Same-Day Shipping isn’t an option. And I’ve been saving 50-70% of my net income for 5 years now. This is actually much easier for me here, because nobody has or wants the “normal” things that Americans “have to have.”
So, yeah, I’m certainly living that frugal FIRE life. But, it’s easier for me to do that, given my context. Would you believe that, even with higher marginal tax rates, lower incomes, and generous Social Democratic support cradle-to-grave, that Swedes choose to save 15.6% of their income on average (while the number in the US has hovered around 6%)? That’s cultural. That’s a soft variable that enables and encourages me.
Other hard variables here make it easier, too: Healthcare is public-payer (we had an emergency just weeks ago that cost us $40 for a 5-day all-inclusive stay, including delicious meals for me, the non-ill spouse). Transit infrastructure is so good and affordable I can take planes, trains, or buses anywhere (including to my wife’s very rural hometown). Housing is affordable because the state incentivises private supply and cools speculation. If/when we have kids, paid parental leave, family tax credits, ubiquitous public nurseries ($100/month), and quality public schools make it essentially net-neutral financially. Even paying 34% marginal tax rate, I make out like a bandit! But, of course, that’s not the reality for my American family and friends back home.
Living FIRE in the modern United States might be as American as apple pie historically. Frugality and not being a flashy show-off is something my dad and his parents simply took for granted. But it’s been the most Counter Cultural thing you can do in America since the 1980s. That’s due to both these hard and soft variables. It’s *really* hard to swim against the current when the entire structure of life in the US is built around consumer credit, easy shopping, materialism, consumerism, individual-car-ownership, and a rat-race to “optimize” everything (the best house, best car, and then best education money can buy OR YOU’RE A FREAKING LOSER!). There are massive barriers to entry for being a cheapskate!
So, yes, when I try to encourage my friends back home to change their lives to spend less and save more, and I often find their excuses frustrating: Maybe consuming nice stuff is one of the few simple joys available to they who never cultivated a richer intellectual, spiritual, or experiential life (depressing, but the norm). Or, they don’t want to be different (a very human impulse, given how important social acceptance is for your wellbeing).
Often, though, their responses to do leave me humbled. Many of them have bought a house and trading down in their expensive housing market isn’t even an option. Many are a prisoner to their current employer’s healthcare policy due to chronic disease for them, their partner, or their kids, and they can’t really change jobs or move somewhere cheaper. Many are under a lot of student loan or credit-card debt so they’re just too busy bailing out the boat to think of sailing forward (and “helpful” frugal wins won’t make a dent in their Big Three/Five expenses). Many would love to ditch the expensive car-for-every-member-of-the-family, but how would people get to work or school? (Biking everywhere is fine for MMM, but not for most anyone else) Many of them are locked into lifestyle inflation because the alternative is isolation from their friends and professional network. I don’t have a lot of answers there.
Wow, first off, you had me at spam and baked beans 🙂 It was a common meal for us when I was growing up, my father was born in 1929 and I’m sure it was a regular part of his diet back then too.
Another incredible comment, that’s actually its own blog post you should put it on your blog. This stands out the most
It’s *really* hard to swim against the current when the entire structure of life in the US is built around consumer credit, easy shopping, materialism, consumerism, individual-car-ownership, and a rat-race to “optimize” everything
I’m not disagreeing with that statement at all, but just making the point that that’s why us in the FI/FIRE community are writing these blogs and get tons of readership from Americans who can’t get out of that cycle. I think they really want to, as you pointed out but they don’t know how to in some ways, and even if they know how to they can’t seem to change their behaviors even though they know factually what to do. I’m not saying it’s easy, cuz if it were everyone would be doing it.
One of my early posts was called “can everyone achieve financial independence if they just try”. In that one I talked about some of the people, a significant portion in America, who are just absolutely screwed from the beginning of life. Born to a mother whose 15 years old and hooked on crack, having no father, so on and so on. I saw lots of that growing up in Baltimore. Those people have zero chance.
That’s one extreme, the people who regardless of how they feel or how hard they try, probably have no chance. Then it goes down in grayscale iterations from there. As it goes down the more you try the more chance you can have because your circumstances aren’t quite as dire. What we’re saying is it’s a continuum scale and eventually you get to people who, if they try, they really can change these things. I agree with you that the single person can’t change how the entire market is consuming houses, but they themselves can. They can refuse a big Mcmansion and buy a smaller house. They have to swim against the grain, against that “entire US consumer market” that you mentioned.
Your second comment makes me believe that we are even more agreement than before. I think we both agree that what constitutes middle-class has changed drastically, and that’s part of the problem. It’s the divide between wants and needs. So to me, a lot of the people who say salaries and wages have not kept up with the middle class have an incredibly flawed perception of what middle class is. Is that entirely their fault? No, as you point out, It’s where America has gone. And social media and everyone’s perfectly Instagrammed life have a role in that as well.
Lastly, I’ve been to almost every country in Europe but I’ve never been to Sweden, Finland, and Norway. I’m jealous and would love to visit sometime.
Edit: “But, don’t forget that homebuilders stopped selling smaller houses not just due to demand for larger units, but also because larger units have a *HIGHER* profit margin on them (same deal with trucks/SUVs vs. sedans and compacts).”
I was so confused by this line. Thank you for clarifying.
Thoughtful analysis. Minus the Springsteen, who I never much liked.
Sadly most people just flock to a narrative that fits their worldview, and never question it. And the political climate in the US has grown so polarized that people mostly source their news from outlets that simply confirm their existing beliefs. Echo chambers.
Nice to see a more nuanced take on how household finances have evolved over the last few decades.
In the data I’ve seen, people with college educations or higher are earning far more than 30 years ago, in real dollars. But non-college-educated men in particular are earning far less. Our economy just doesn’t generate enough blue-collar jobs for all the blue-collar men, and many of them are unwilling or unable to learn new skills or move to follow job opportunities.
Anyway I see a tangent starting so I’ll nip it in the bud. Good article 🙂
Ha, music is personal so no biggie. Yes, this “argument” can get polarized and/or political quickly. I stayed out of that side of it and just laid out some numbers and thoughts. It’s very nuanced though, and a I stated gets complex quickly.
Thanks for the compliment!
Well there is very clearly a spending problem in our country which likely accounts for the feelings that the median incomes have not risen enough.
There have also been dramatic changes to the costs of cars, college tuition, and health care. I am sure that has some impact, too.
Interesting thought!
Yep, both sides of that equation have an effect an depending on each households respective situation it could be a spending problem or a COL problem.
AF another great post as usual. I love that you challenge my thoughts/normal convention. I honestly believed that because of inflation the purchasing power would have dropped compared to wage increases. But your graphics clearly have shown that is not the case which is a great and unexpected sign.
By the way, I think the 80s were awesome and by far had the best music 🙂
Thanks for the kind words Doc! As for 80’s music, some incredible songs indeed, but mostly bad production. Regardless, when I hear some of those classics I can’t help but rock out!
This is a great post. I must be about the same age as you as I recall when Born in the USA was released as well.
Oil prices in the 80s were way lower than they are today, and there is nothing different about a barrel of oil from then than today; aside from where it comes from. The same goes for electricity. That is a factor eating our incomes. I have argued with many a friend about lifestyle inflation. You could not get a computer, for instance, for less than $1500 or more in the early 80s, but now, you can get a great one for $500; great by even 20014 standards, and really for most people, that is enough. I think those things are factors. I think lifestyle inflation is the big one. The house next to mine is worth 3x as much and is about 2x as big; perhaps a bit more. The house that was comparable to mine was torn down, and replaced with a larger one. My home is a comfortable 1900 square feet. Tearing down my size homes and replacing them with huge ones is common. So is the practice of adding on. In my immediate area of about 20 homes, in the last 5 years, two were torn down and replaced with huge homes. One home had another level added on to it.
In truth, I too have been consumed by buying things. It was dramatic for me and my wife as we went from a 900 sq ft apartment in New York City to our home. We just found more stuff to buy. More couches, more things, more I don’t even know. Consumerism is a powerful item. I have a theory that I am working on. It seems to me that people who have cut the cord, and now watch fewer commercials, buy fewer items. I think it’s a powerful tool to help control spending, and I think that commercials work. I have found myself thinking less about the next new thing to buy, and a few friends seem to agree. I have not found a study to back this up, but I am looking.
I would just like to add that in the middle class area that I grew up in, very few homes had central air. Now it seems everyone does, or at least many window/wall AC units. I recall the days of 1 tv, and watched as we went from 1 to 4. I was the last to get a tv of my own, and the youngest. We have fewer phones in our home, but more ways to communicate.
Lifestyle inflation is a powerful force, and I think this movement is a great way to control it. It is good for us, but is it good for the economy at large?
You make many great points and thanks for the thoughtful comment! Biggest of all is the central air point – so true! We didn’t have it growing up in hot/humid Baltimore. I just sweated my ass off when sleeping, I thought that was normal. I think one house on our block had it, and we thought they were moviestars from California.
As for your last question, many believe America’s capitalist engine will only keep running if we keep buying, more and more. I hope that’s not true because if so we’re gonna have some problems :/
i had an emerson boom box, as you might expect, and that classic rock in heavy rotation. that’s how i remember a lot of life events, by what was on the radio.
i think if a regular person went on a job search today the tale might be different from the statistics. i know my employer has some non-union plants where you are likely only able to be a long term temp worker or contract employee with not much stability of benefits. i see less participation in the success of corporations being shared with the rank and file and more being returned to shareholders. as an investor i love it but as an employee i hate it. even when we hire for our factory laborers now the corp. is asking for factory experience of several years. they don’t even want to train anyone. this time of tight employment would seem ripe for the unions to gain traction but i don’t see it happening in the red states as those employees have been bamboozled by god and guns into voting against their own best interests time after time. they hate unions but could be laid off from their $13 temp job at any time with no recourse. i think it’s a good wake up to try and educate yourself financially and invest because if you can’t beat ’em, join ’em.
the lefty new york times wrote this, which kind of sums up my thoughts.https://www.nytimes.com/2018/07/13/business/economy/wages-workers-profits.html
awesome comment as always freddy, i appreciate your readership.
your points about unions are very pertinent and true. unions can be a powerful force for good (if we can keep them from being corrupt)
and thanks for that article. upon quick scan they claim declining wages but cite a chart that shows “Employee pay as a share of national income”. that’s not the same as median income and would be more akin to “average income” since it would skew negative due to the ultra rich – who have indeed gotten richer.
but median income is the best measure since one guy making 80 bajillion won’t skew the other numbers higher, he counts the same.
it’s complex, as i stated in the post. i just wanted to point out to my readers to have a skeptical eye and don’t just take the mantra (from either side) as gospel. it’s likely in the middle somewhere
i know that when my big brother company allows me less participation in their success or reduces benefits i silently decrease productivity. i think it’s why a lot of us want out of the rat race. it’s great to keep a skeptical eye towards anything.
can’t blame ya one bit, if all of your colleagues did that maybe they’d get the picture
Love this post and the thoughtful analysis. A complex issue for sure but now now I have some good fodder for my ongoing argument with my buddy…
boo-yah, fodder is good!
I’m a big Bruce guy as well, love that song haha. While tracking wage growth and income is very important, the other side (expenses) are often forgotten. The average American has seriously inflated their lifestyle since the 80s which can often be more telling than the income side. Do people need all that stuff!?
Having lived through the 80’s I can attest that yes, we’ve inflated. Hell, I’ve inflated, but I’m also FI so I can get away with it 😉
The Nevada statistic catches my eye. Living in California, I’ve seen firsthand the large number of retired people moving there. It makes me wonder how non-wage folks skew a state. Technically not at all, but the economy may require more baristas and lower wage support that factors into the median. Love those lies and statistics. Keep ’em coming!
I don’t know much about employment in Nevada, so at first glance I thought “maybe the casino’s aren’t paying the workers well anymore”. Which is probably just a silly/ignorant thought.
Thanks for your support and your kind words Susan!
Damn man, stoked on where you took this article after crunching the data.
Consumerism and the amount of things that we “need” has never been bigger just like those damn houses. My kids still live at home but know we could fit into a smaller house (it was built in 1962 so I avoided new) Avoiding all the new fancy bells and whistles has really helped me not fall into that consumer trap including the big one buying a new vehicle every few years.
Again, love this post and your summary
Thanks Chris! This isn’t an issue that can be purely ‘proven’ by data so I went off my thoughts on some of it. Sometimes that’s anecdotal, but I do have numbers to back some of it up as well.
Nice map! I think you hit the nail right on the head. Lifestyle inflation is why it feels like our income has stagnated. It’s also a lot easier to buy stuff today because of Amazon.
Middle class today is a lot different than middle class in 1984. Now, you need a smart phone, big screen TV, computer, and all kind of techs. It’s a different world.
Thanks as always Joe! You said it best, what people think “middle class” is has inflated, plain and simple.
“We’ve increased home sizes from 1600 square feet to 2600 square feet over 30 years, and yet it’s not enough. We still need more storage. I find this disturbing.”
Eh, yeah! Now I’m off to read that massive essay at the beginnen of the comment section, seemed interesting 🙂
Yep, if a 2600sq ft. home isn’t enough to store all your stuff, well… I can’t help you.
Hey AF, great post and love your blog. Longtime reader, never a commenter, but thought I’d comment on the last two posts in one shot. There is a great Marketplace Morning podcast (NPR) episode from 9/13 that describes how household income only grew if you do not take gender in consideration. Yikes. 6-min episode only, worth a listen. To your point, statistics change a lot once we look at specific slices of data such as states, gender, etc. Thanks for all the work you do in creating this blog, the detailed maps and analysis.
First off – THANK YOU for reading, I really appreciate it! I listen to NPR podcasts once in a while but they’re not normally in my queue, will definitely check that one out. So happy you commented!
Everything that is essential is more expensive and everything that is not is cheaper.
Housing, health, childcare, education – all items that you can’t do without if you need them and their costs have risen beyond inflation.
The best thing to do is to hack those costs – find a creative way to eliminate or reduce them somehow.
Most spending is structural – change the structure of your life and you can drop your expenses (or at least spend more money on what you want and less on what you need).
Insightful look at this, I didn’t see it that way but it matches up, the essential/non-essential divide. Not sure if college is essential but then again the income numbers show that college graduates leave their peers in the dust. But it’s still totally feasible to make a great living without it.
Awesome comment, thanks!
There’s a lot of nuance here, and yep, I’m sure our changing consumption patterns have a lot to do with how far that middle class income goes. Although I’m making 1984 DC wages so screw the nuance! 😂
You may be making 1984 wages, but you’re still saving at a rate that few Americans do
I was born in the 80s so I have no basis for comparison. The map is interesting. You’re right, you hear a lot in the media that wages are stagnant, but the data suggests otherwise. I will say however, I think wages and compensation has changed for different professions and fields. It would be interesting see the breakdown. I wouldn’t be surprised if workers that fall under the traditional category of “blue collar” worker have wages that are stagnant because a lot of their jobs could be replaced by machines or artificial intelligence. And when a job can be easily replaced, the wage is likely going to be stagnant. Also interesting is the stagnation (actually decline) in the doctor’s wages. My senior colleagues say that back in the good old times in the 80s, many doctors made a million a year (who knows how much that is in 2016’s dollar). Now… something in the 200k range is considered pretty good. Interesting, right?
Great comment.. automation has been and will continue to change the white/blue collar dynamic. Although it’s also replacing some white collar jobs too
Ah! I know I’m late to the dance on this one – but I completely agree. It’s clear wages have gone up! Well, except for Nevada.
We clearly have more options on what we can spend money on. It’s not just more TVs and electronics. Think about other costs associated with them. No one had internet in 84. Now most people pay 50-100/month.
Think about landlines. What do those cost back then or today? Less than $10/month? Most cell phone plans are $75-150 a month. Big difference. AND that’s not including the 500-800 for the smart phone.
Transportation? Bike shares, electric scooters, Uber’s etc. that wasn’t a think back in the day.
How much did cable cost? Pretty sure that has increased 10x.
Think of all the subscriptions people mindlessly spend money on and may not use – one for books, one or multiple for music, multiple streaming services for TV/media, gym memberships, wine clubs, meal plan stuff. The list can go on and on.
All great points Drew. I didn’t mention the Netflixes and Blue Aprons, but yes the list goes on and on when you think about it and that stuff adds up to lots for many middle class people.
Heh, we technically still have 0 TVs after a year of having a broken one since it was finally our roommate who finally gave in and bought one 😉 Crazy to me how much the Seattle area has changed in that time as well – not crime ridden past like DC, but more just the forgotten “out west,”
I haven’t forgotten Seattle… I love it and hope to get back out there soon, as a gateway to the Cascades
Great analysis on the comparison in standard of living between the 1980s and now. There are many factors that make it a difficult apples to apples comparison.
Your citing of increasing house sizes and access (and consumption) of consumer products also changes the cost of living for everyone across time. Wages have gone up in real terms in most places as you show, yet purchasing power is the more telling statistic.
My wife and I try our hardest not to consume needless items nor filling our house to the brim. We regularly declutter and try to live a leaner lifestyle to avoid the typical American household outcome (more space = more stuff).
Sounds like you and your wife are figuring out a better way early on. With that attitude you’ll be FI before you know it!
I think the main argument for the “wages have stagnated” line of thinking is that inflation adjusted wages have need doubling every 30 years for as far back as the oldest among us can remember stories from their oldest among them. When you have 6 or 7 generations of doubling as an average outcome, and then all the sudden an extra 30% puts you at the top of the rankings, that’s a pretty striking slowdown if you ask me. Now whether or not that “your kids will make double what you did” was ever sustainable is another question all together. There’s a good book out there called “the rise and fall of American growth, which does a better job of explaining it than my measly comment here, but you get the idea.
Yep, that kind of growth is likely not sustainable. Thanks for that book recco, I’ll have to check it out!
There is a very simple explanation for this, and I’m really surprised that no one has mentioned it in the 40-plus comments above. “Wages” are what is reported in a W-2. You can also call this “hourly earnings”. “Income” is wages plus everything else you earn – capital gains, dividends, self-employment income, etc… “Wages” have flatlined for the past 20-25 years or so, especially for those earning below the median. In contrast, “Income” has increased fairly substantially, as you show. By measuring “income”, you are talking about something quite different from “wages”.
Great comment. I guess I should say I didn’t deliberately use the word “wages” in my title per se – I also commonly hear the rallying cry that “incomes haven’t kept up with inflation”. You’re point is valid in that many or most folks conflate the two as the same, and they’re not. The CNBC article I linked to in the piece touches on the “extras” that many or most households have nowadays as compared to years ago. For sure more folks have 401ks and stocks or index funds than 30 years ago.
The square footage justification for higher home prices is misleading for at least a couple reasons:
First, newer homes are built to maximize reported square footage so they minimize or don’t include features that are not included in square footage like garages and basements. For example, on paper my new house is much bigger than my old house, despite them being about the same size in practice. My new house is about 2200 sq ft, but the reported square footage of my old house was only 1200 sq ft because the 1000 sq ft live in daylight basement is not included in the figure. Plus, while both houses have two car garages, the old house had ample shop space, whereas the new house barely fits two cars. In other words, the square footage statistics are extremely misleading, the newer house is only bigger on paper, when you consider storage space it’s actually smaller.
Second It ignores how much of the value is in the property itself (i.e. the land vs the improvements) which seem to be ever shrinking in size yet increasing in price. So even if you live in a tiny shack, you still need to pay more for the property it sits on.
You make some interesting points Jon, I’ll have to check into that. I know for my house the newer “internet born” sites like RedFin and Zillow are sometimes correcting for those older sq ft numbers. Usually they do that when the house goes up for sale, since it gets reinspected and the city/county has to update for tax purposes. I’m sure like you say the data can often be inaccurate, but anyone whose been alive over 45 years or so and remembers the 1970’s knows that houses are bigger now, simply from experience. Many of my friends live in older homes (early 1900’s and even some from the 1800’s) and all are smaller, but that’s anecdotal.
Thanks for the comment!
Did some quick checking and the official data that many sites use (and everyone from Bloomberg to the the NY Times and thousand of others have reported on increasing home sizes) comes from the Census Bureau and they cite Median and Average Square Feet of Floor Area . So according to that they’re counting floor area only. That should negate any inconsistencies with garages etc that you mentioned. The data seem clear that floor area has increased substantially. Perhaps sometimes basements were not counted as you mentioned, but my house was built in 1950 and mine sure is counted in the number, even when it was an unfinished basement.
Found your blog trying to find information about wage stagnation. Haven’t had the time to read all the comments so perhaps you’ve addressed my concern there. My concern was not about median wages, but those in the bottom wage brackets — those who would benefit from an increase in the minimum wage. Wage growth for the top income brackets has skyrocketed compared to those in lower brackets, so with the magic of averaging, it is no wonder that median wages show little stagnation. The explosive growth in people eligible for “entitlements” is due to the lack of wage growth in the lower third of income brackets. That’s the problem — not median wage growth.
First off thanks for reading!
You’re confusing median and average. Median is used for things like this because it’s the middle of a total set of numbers. Average is very different. With median, those ultra rich incomes do not have any effect on the number. With average they do. If you look at ,average incomes they are indeed way higher than median incomes and yes it’s because of the crazy growth of the ultra rich. But I’m using median here so that’s not a factor.
I’d just like to comment that it appears you’ve calculated “percent difference” incorrectly. Also, it may be more accurate to represent these changes as “percentage change” from old value to new value. For example, the percentage change for median wages for Washington state (where I live) from 1984 to 2016 (32 years!) would be ~28%. Looks much less significant than 128%.
Thanks for the feedback. I changed “difference” to change. I see your point but it can be described both ways. The number 1.28 is 28% larger than the number 1. But it’s also 128% of 1.
This just seems like you are trying to muddy the waters…. Just because we can afford cheap junk from from third world countries by taking advantage of their work force doesn’t mean much…The things that matter.. housing, healthcare, education.. they have all skyrocketed to the point where they are not realistic goals for a lot of Americans. Our system of obtaining cheap stuff from impoverished nations is not sustainable… The rust belt losing their livelihood with no plan in place to help these people out after taking manufacturing away… When people say wages are stagnant… that is normally precipitated by virtually.. sure things are different by region but over all poverty has risen by 5% since the 70… wages are virtually stagnant for most people if not dropping even compared to their cheap cell phone… The cost of things that matter over shadow the few dollars we save by using slave labor from around the world… Ultimately, other than cheap TVs… things are getting harder for the middle class in real world term… that is simply a fact…the middle class is shrinking.. that is a fact… and even the tiny bit wages might have gone up in some areas… none of that compares to how much production and CEO pay and risen compared to the workers pay… But we have a system where the corporations have successfully fooled the proletarian into fighting on the corporation’s behalf instead of their own… YAAY two class system.. I just hope I die before it happens…
I’m not trying to muddy anything, I’m giving you the straight numbers, You’re entitled to your own opinion of course, but you’re not entitled to your own numbers.
Wages are not “virtually stagnant” as you say. I’m showing the real government numbers and wages have increased faster than inflation since 1984. Are you gonna tell me the definitive government numbers that all of our economic indicators are based on are wrong?
If you say wages are stagnant and “it’s a fact”, then show me your numerical sources with real DATA.
If you say the middle class is shrinking, and “that is a fact” – then show me the real data. People repeat all sorts of things they hear, but when you ask them to back it up with the numbers they don’t have the numbers.
Show me your numbers to back up your claims.
As for housing getting more expensive, yes, per house it has gone up a lot. But the average square foot of each house has gone up A TON. The price per square foot has not really changed at all. People just wanna buy bigger houses. I admit, in some areas they may have no choice.
See this post I just did, with real data – https://accidentalfire.com/2019/01/08/have-we-reached-peak-home-bloat/
And since I just noticed I didn’t include a link to the official government data I used, it’s here – https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html
And here’s the official Bureau of Labor Statistics Inflation calculator that official government inflation reports are based off – https://data.bls.gov/cgi-bin/cpicalc.pl
So with those two links, you can run the numbers yourself, go at it. Those are the facts.
I’m curious about a multi-decade analysis of the two-income household phenomenon and how much of this is going to any putative rise in household income.
I keep hearing about rising expenditures, but little from anyone regarding the increased purchasing power of the 2019 family over the 1950 family–not taking into account that in 1950 my grandma was in the home during the day and grandad was able to pay ALL his bills on a factory income. Yet in 2019 it takes two incomes to cover just the standard bills of life.
Side note: The fact they some consumer fripparies and knick-knacks are cheaper due to overseas labor does not impress economists left and right, who are happy to point out that wowing o we the inner city poor now having an X-Box and iPhones can often hide systemic generational poverty.
*wowing over the inner city poor having…
I’m not married but lots of families in my neighborhood and lots of my colleagues at work get by just fine on one income. And they have kids and all the modern knick-knacks like ipads etc
Sorry, rents according to Fred are historically high. Healthcare has exploded and tariffs will raise the cost of everything.
The average mortgage payment was less than half of a minimum wage salary in the 1960s, which meant even minimum wage workers could afford a home. Now the average mortgage is roughly 1.2 minimum wage salaries meaning they can’t afford it anymore and it takes 30 years to pay off instead of 10-15. We need twice as many sources of income to pay for a home now and it takes twice as long to pay for it. Instead of passing down your home to your kids like previous generations, reverse mortgages have become a default retirement option. The average home was equal to 2.5 years wages in the 1960s. Today it’s 12.5 years wages, making the average home roughly 5 times less affordable. Home sizes have doubled since the 70’s, but it’s important to realize that a 2,000 sq ft home is roughly 75% as expensive as a 1,000 foot home. So it would be more accurate to say the average sized home from 50 years ago is roughly 3.5 times less affordable today.
Healthcare is roughly 7 times less affordable, and college is roughly 12 times less affordable.
Attaining a basic level of financial security has never been more difficult.
Yes, we have more median household income than ever, but real median hourly wages shows stagnant middle class wages since the 70s. Dual income households went up by over 300% in the last 50 years. But median household income doesn’t account for that. instead it reflects it as a good thing that households are forced to depend on more source of income to stay afloat. and if young adults are living with their parents longer than at any point since the great depression ended (they are)… median household income reflects that as a good thing too because it means more source of income per household, yet common sense would tell you that’s an indicator that our quality of life is declining.
It now requires twice as many sources of income to provide a basic level of financial security. Its 3.5 times less affordable to pay for a home 12 times less affordable to pay for college tuition and 7 times less affordable to pay for healthcare… And Retirement in it’s traditional sense of no longer having to work is dead.
So if all of this is true… then how is it possible that we have more median household ever? income thanit’s because the way the federal bureau of labor tracks inflation is through consumer pricing index. But consumer price inflation is not the same as cost of living inflation.
Sure it’s a good thing that luxuries like computers TVs appliances and electronics are multiple times more affordable than they were in the past. But none of those things come remotely close to making up for the fact that homes are 3.5 times less affordable, healthcare is 7 times less affordable, tuition is 12 times less affordable and providing for a family requires twice as many earners.
Measuring inflation though CPI suggests that all the reductions in consumer prices cancels out the increases in basic living costs… But it doesn’t.
If home prices go up 6 percent a year while wages go up only 2%, it takes 15 years for houses to become half as affordable. And this is precisely what we’ve seen for 50 years. We’ve
had to adopt duel income households, 30 year mortgages and reverset mortgages to keep houses affordable. So what’s next, 50 year mortgages and dual family households? Let’s say that actually happened… Median household income would interpret those things as net positives. If it takes 4 sources of income to keep a household afloat… Median household income has risen off the charts!!! So much progress lol.
“reverse mortgages have become a default retirement option.” Really? C’mon man…
Based on data from the United States Census Bureau, only 2-3% of eligible Americans have a reverse mortgage, which suggest this is merely a niche financial product that appeals to a minority of seniors.
As for the house size and price thing, the main reason houses are less affordable is Americans want bigger houses and choose that way. Price per square foot hasn’t changed much over time. Don’t believe me?
You do make a good point about the glory days of the 50’s and 60’s and the fact that median household incomes then often (not always) meant one salary. But we didn’t force women to go into the workforce now did we? Have you ever heard of the women’s movement and women’s liberation? Women chose to have careers and be on an equal footing, this wasn’t thrust upon them. Then guess what, they realize the household now had way more money with 2 incomes – so let’s buy a bigger house!! Your point is true but for all the wrong reasons.
The numbers are the numbers, median household incomes have not been stagnating, they’ve been beating inflation. Run them yourself but you’ll get the same results I did. And as I pointed out in the article that doesn’t mean it’s all unicorns and roses – I do think 2 things, namely healthcare and college tuition – are indeed troublesome. The former is especially bad because everyone needs it, the latter not so much because you don’t have to send your kids to college, esp a 4-yr one. But the rise in tuition has still been ludicrous and mostly caused by the fact that Uncle Sam is willing to just give out those loans like candy, so why wouldn’t colleges want the money. In the end it’s a wealth transfer program from Uncle Sam to colleges and it needs to stop.