It's an interesting little factoid. The median American house has grown by some 40 percent over the past generation. Yet to hear some economists tell it, that huge home enlargement somehow has happened just at the same time that the average worker has seen no increase in his real, inflation-adjusted wages. That means no increase in his standard of living—at least as measured by his take-home pay. (Of course, living in a bigger house filled with flat-screen TVs, iPods, laptops, Wiis, and carpet-cleaning robots could be taken as de facto signs of a higher standard of living. Plus, those wage numbers ignore nonwage compensation such as healthcare benefits and 401(k) programs).
But here's the thing: If one readjusts wage growth for the likely fact that government inflation numbers have continually overstated inflation, guess what? You find that real wages have grown by around 40 percent over the past generation—matching the increase in home size. Here is how Northwestern University economist Robert Gordon calculated the numbers for me during an E-mail exchange earlier this year:
- The correct statement is that correcting the upward bias of the official [consumer price index] adds more than 1 percent per year to official estimates of the growth in median and mean wages. Cumulatively since 1977, my best estimate of the upward bias in the CPI cumulates to 38 percent between 1977 and 2006. Thus if someone came along and said the male median wage adjusted for CPI inflation has been stagnant since 1977, I would translate this into a true 38 percent increase.
And it sure looks as if that bias continues today, anywhere from 0.9 percent a year, according to two Federal Reserve economists, to 0.67 percent a year, according to economist and inflation-stat expert Michael Boskin. (Here is a recent, more in-depth posting on this topic.) Consequently, that means wages most likely have been growing at a nice clip throughout this decade—even before the recent upsurge in pay, even as measured by faulty government numbers. Split the difference between Boskin and the Fed guys, and it means that wages, rather than being stagnant this decade, have actually risen by around 6 percent when you take inflation into account.