Living Better in a Pay Crunch--How? : Changing Family Circumstances Mask Erosion of Real Wages

Recently several articles have appeared in the press documenting a disturbing fact: Average real U.S. wages peaked in 1974, and currently are at about the level of the mid-1960s. This means that for the first time in history typical American workers have gone more than two decades without any real increase in pay.

Most Americans certainly appear to be far better off than they were two decades ago. A $170-billion trade deficit cannot be just a statistical mirage. Someone must be purchasing all those Japanese cars, Korean video cassette recorders, Italian clothes and Brazilian shoes. How is it possible for real wages to have declined and most Americans to appear to be living better?

Obviously wages are not the only form of income. Many households receive transfer payments from the federal government, such as Social Security. And those payments have increased dramatically in the last two decades. Thanks to the indexing of Social Security payments in the early ‘70s, the elderly are much better off than ever before. By 1983 the per-capita cash household income of those over 65 actually was greater than that of the population as a whole. And each year the elderly make up a larger proportion of the population.

Many of the rest of the population are more affluent for the simple reason that, while real wages have declined, the number of people employed per household has increased substantially. Between 1973 and 1985 the United States added 28 million new jobs, increasing the total number of Americans employed by one-third. A higher proportion of adult Americans are working than at any time in this century. A large number of these new entrants into the labor force are women whose husbands also work. Thus many Americans are better off because they live in families receiving income from two people instead of one--even if, on average, each person’s wage is less than it was a decade ago.

There is another reason many families are living better: They have fewer children. Since children are a major expense, the decline in the number of children per family automatically makes remaining family members more prosperous. (The feminization of poverty has less to do with the lower wages paid to women than with the fact that households with only one breadwinner and multiple dependent children frequently are headed by a woman.)

The increase in Social Security payments, the growth in the number of families in which both adults work and the decline in the number of children per household thus have effectively masked the erosion of real wages.

To appreciate the magnitude of the economy’s deterioration in the last two decades, imagine what the living standards of the typical middle-class family would be like if it had as many wage earners--and as many children--as its parents had and also was responsible for subsidizing its parents’ retirement, including medical bills.

There is nothing wrong with making the elderly financially self-sufficient, increasing the number of working women or having fewer children. Yet these developments are disturbing because the American public does not seem to have made the connection between those three factors and the serious decline in the competitive performance of U.S. industry.

It is one thing for women to work to increase the family’s living standards, but quite another for them to have to work simply to sustain it. It is fine for couples to decide to have fewer children, but tragic for themselves and the future of our society if the reason is that they cannot afford them. Similarly, being more generous to the elderly is commendable, but not if we have to borrow from foreigners to finance our high federal deficits in order to do so.

Most Americans have yet to appreciate the full effects of the decreasing ability of U.S. companies to compete internationally. They continue to judge the nation’s economic performance by the standards of the 1970s, a decade of extraordinary economic instability in which both unemployment and inflation reached double digits. In comparison, the performance of the economy in the 1980s appears to have improved. In reality, this improvement is illusory.

Since 1980 we have gone from being the world’s largest creditor nation to being its biggest debtor, while our trade deficit has increased more than sixfold. While America remains the world’s richest nation, since it has such a large population, its workers are no longer the world’s best paid.

I hope that it will not take another major increase in unemployment or inflation to persuade the public that the capacity of American business to generate increased income for its citizenry has become seriously impaired. But before figuring out how to reverse this trend, we need to accept the fact that it has occurred.