Demographics and real wage growth

When discussing real income growth one of the points often made by conservatives and libertarians is that the average data on real income is irrelevantly because it does not measure the same people over time. There is some validity to this point. For example, an individual captured in the snapshot of income data in 1970 who is only 20 years old will be 55 in a snapshot of income in 2005. Because income tends to increase over time they make the argument that the average income data understates the income gains people actually experience.

The type of data behind this argument is this data on median earnings of full time employees.

(% of median) (%of 15-24)
total 100
15-24 66.0
25-34 99.8 151.2
35-44 115.6 175.2
45-54 121.6 184.3
55-65 112.7 170.8
over 65 84.2 127.5

It shows, for example that a 50 year old’s earnings are 121.6% of the average and/or 184.3% or a 20 year old’s earnings.

Of course if you have a normal pyramid shaped age structure the snapshot of average income in 1970, 1980….2000 will include the same share of 20,30…60 year olds at each time so the argument advanced that the people change is invalid. But over the last 30-40 years the US has experienced a very unusual demographic shift in the labor force because of the baby boomers maturing. As the chart shows the composition of employment has changed drastically.

But the combination of a changing income age structure and income increasing as the labor force
ages generates a significant impact on average wage growth. If you take the income structure shown in the table and apply it to the changing demographic it generates significant results.
In the 1970s because of the baby boomers entering the labor force the age of employees and the real median weekly earnings of the US employees would have actually have fallen some 2%.
From the bottom in 1980 these factors alone should have generated about a five percentage point increase in real medium weekly earnings–from 98 to 103.3 in the chart.

The actual increase in real weekly median earnings from 1980 to 2007 was about eight percentage points — from 98 to 106.2 in the chart.

So when you actually look at the data behind the claim that average real income comparisons over time are invalid you get some very interesting results. It shows that 64% of the actual increase in real income from 1980 to 2007 was due to the maturing of the labor force rather then other general economic factors such as productivity growth. So rather than productivity, etc. generating an eight percentage point real income increase from 1980 to 2007 it was only three percentage points.

Of course this is just the opposite point the conservative and libertarians intent to make, but
why should we try to confuse them with the facts.