Wednesday , 22 May 2024

Middle-Class Real (inflation-adjusted) Annual Earnings Down 11.5% From 45-plus Years Ago

…The Bureau of Labor Statistics has been collecting data on this workforce cohort since 1964. The government numbers provide some excellent insights on the income history of what we might think of as the private middle-class wage earner. The latest hypothetical real (inflation-adjusted) annual earnings are at $38,159, down 11.5% from 45-plus years ago.

1. The first snapshot shows the growth of average hourly earnings. The nominal data exhibits a relatively smooth upward trend.

Hourly Earnings

There are, however, two critical pieces of information that dramatically alter the nominal series: The average hours per week and inflation.

2. The average hours per week has trended in quite a different direction, from around 39 hours per week in the mid-1960s to a low of 33 hours at the end of the last recession. The post-recession recovery has seen a trivial 0.7 bounce (that’s 42 minutes).

Weekly Hours

3. What about inflation? The next chart adjusts hourly earnings to the purchasing power of today’s dollar. We’ve used the familiar Consumer Price Index for Urban Consumers (usually abbreviated as the CPI) for the adjustment with a linear extrapolation for the latest month. Theoretically, the CPI is designed to reflect the cost-of-living for metropolitan-area households. We use a linear extrapolation to compute the latest monthly inflation data until the mid-month release of the official CPI data.

Real Hourly Earnings

4. Now let’s multiply the real average hourly earnings by the average hours per week. We thus get a figure for average weekly earnings of this middle-class cohort, currently at $783 — well below its $846 peak back in the early 1970s.

Real Weekly Earnings

Note that this is a gross income number that doesn’t include any tax withholding or other deductions. Disposable income would be noticeably lower.

5. If we multiply the hypothetical weekly earnings by 50, we get an annual figure of $38,159. That’s an 11.5% decline from the similarly calculated real peak in October 1972

Footnote: Here is a slightly different look at the data. We’ve adjusted using the less familiar Consumer Price Index for Urban Wage Earners and Clerical Workers, the CPI-W, which is theoretically a better match for the production and nonsupervisory cohort. The index, among other things, assigns a slightly higher weighting for gasoline (e.g., longer drives to work and the grocery store). Also, this is the series the government uses to calculate the Social Security Cost of Living Adjustments (COLAs).

Here is the real hourly history with this deflator.

CPI-W Adjusted

Here is the real hourly data multiplied by the average weekly hours. The latest data point is 8.7% below the 1972 peak.

CPI-W Adjusted Weekly Earnings

For additional perspectives on earnings, see our commentaries on household income.

Editor’s Note: The above excerpts* from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)