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In America, middle-class means what it says on the tin: the group of people in the middle part of the income scale. That’s why when Americans refer to the crisis facing the middle-class, they don’t mean the availability of organic quinoa in Waitrose, but an issue of true economic and social significance.
In particular, they’re talking about the ‘great decoupling’ – i.e. the growing gap between economic output and median wages.
In a piece for Bloomberg, a sceptical Clive Crook summarises a narrative that is popular on the left – and also with more centrist politicians like Hillary Clinton:
“One of the best-loved stories about the squeeze on middle-class incomes in the U.S. concerns the long-term divergence between wages and productivity. This goes as follows: Wages have stagnated for decades even as output and profits kept going up. Owners of capital grabbed all the gains.
“For those who tell this story, the issue is justice not growth. What’s the point of striving for efficiency if the benefits don’t flow to the living standards of everyday Americans? Instead, they argue, capital needs reining in. The U.S. should restore the bargaining power of labor – with stronger unions, higher minimum wages, import barriers, taxes on profits, and so forth.”
However, this supposed divergence has come under challenge from those who say it is a statistical illusion – and that the gap, if it exists at all, is smaller than we’ve been led to believe and has only opened up in the last few years (not the last few decades).
Writing for Vox, Matthew Yglesias explains that a key issue in this statistical debate is the fact that the two trend lines – wages and production – have been calculated using different measures of inflation:
“One is the Consumer Price Index, which tries to measure the price of what a typical consumer who is not in a rural area buys. Another is the Implicit Price Deflator, which tries to measure the price of everything that is produced in the American economy.”
Unsurprisingly, the first of these measures is applied to wages and the second to production. This wouldn’t matter if the two price indices had been rising in lockstep with one another, but they haven’t:
“…the inflation rate for consumers has been rising at a faster rate than the inflation rate for the overall US economy. When you draw a chart that uses both of these inflation indexes simultaneously, then the divergence between the two ways of looking at inflation is naturally going to drive divergence between whatever two quantities you’re tracking.”
Another criticism of the decoupling analysis is that in measuring average wages it uses the median not the mean. As a result the growth of wages among the most skilled employers is disregarded. These, by-and-large, are the so-called ‘knowledge workers’ – the super-productive drivers of the modern economy. Thus the argument is that employers, far from robbing their employees of the product of their labours, have been giving credit (and remuneration) where it’s due.
However, there’s a danger here that the ‘great decoupling’ isn’t being explained, but explained away. For ordinary working people, median wages deflated by the cost of living is what counts. If you’re a factory worker who hasn’t a proper pay rise in years, the fact that the tax lawyers and brand consultants are doing nicely isn’t much comfort. As for prices, the only ones that matter to you and yours are the ones you have to pay:
“You can’t feed your kids a commercial jetliner or exports of business software, so saying something like, ‘Real wages have actually gone up a lot as long as you count a bunch of stuff that nobody buys in the price index’ doesn’t make much sense.”
Therefore if the actual purchasing power of the median wage is falling behind the economy as a whole, then that, in itself, still matters a great deal.