Real aggregate wage growth finally overtakes Reagan expansion
In my opinion the best measure of how average Americans’ situations have improved during an economic expansion is real aggregate wage growth. This is calculated as follows:
- average wages per hour for nonsupervisory workers
- times aggregate hours worked in the economy
- deflated by the consumer price index
This tells us how much more money average Americans are taking home compared with the worst point in the last recession.
Let me give you a few examples why I believe that this is the best measure of labor market progress:
First, compare an economy that creates 1 million 40 hour a week jobs at $10/hour, with an economy that creates 2 million jobs at 10 hours a week at $10/hour. If we were to count by job creation, the second economy would be better. But that’s clearly not the case. The second economy is paying out only half of the cold hard cash to workers as the first.
Next, let’s compare two economies that both create 1 million 40 hour a week jobs, but one pays $10/hour and the other pays $12/hour. Clearly the second economy is better. It is paying workers 20% more than the first.
Finally, let’s compare two economies that create 1 million 40 hour a week jobs at $10/hour. In the first economy, there are 3% annual raises, but inflation is rising 4%. In the second, there are 2% annual raises, but inflation is rising 1%. Again, even though the second economy is giving less raises, it is the better one — those workers are seeing their lot improve in real, inflation-adjusted terms, whereas the workers in the first economy are actually losing ground.
In each case, the economy creating more jobs, or more hourly employment, is inferior to the economy that pays more in real wages to its workers, In other words, the best measure of a labor market recovery is that economy which doles out the biggest increase in real aggregate wages.
In short, people work for the cold hard cash that is put in their pockets, and real aggregate wage growth measures how much more of that they’ve received.
With that introduction, here is an updated graph of real aggregate wages for the entire past 53 years:
So how does the current expansion compare with past ones? Here is a chart I created several years ago showing the real aggregate wage growth in every prior economic expansion beginning with 1964: