Tyler Cowen, of whom I'm generally a big fan, summarizes an interesting post by Michael Mandel on recent productivity growth (the lack thereof).  But he ends by trumpeting Hamilton Project analyses claiming to show that men's earnings declined by 28 percent between 1969 and 2009.  This claim, like the Mandel analyses, reinforces Cowen's argument that we are in a Great Stagnation, but it's not true!  Stop this meme!

I've not had much time to blog recently, so I submitted a brief critique in the comments to the Leonhardt post that introduced the world to this unfortunate study (co-authored, unfortunately, by a fellow classmate of mine from Harvard's inequality program) and in the comments to the Hamilton post.  Here's the basic problem: the analyses assign all nonworking men annual earnings of $0, and since labor force participation among men has declined, the result is a big drop in median earnings over time.  But a lot of that decline in labor force participation is attributable to earlier retirement (they include men as old as 64), later and longer school enrollment (they include men as young as 25), rising "disability" rates (which do not correspond in any obvious way with changes in health or job demands but which do correspond with increasing generosity in disability benefits), and other factors having nothing to do with the strength of labor markets.

I re-crunched the numbers as follows.  I included all men age 20 to 59 except for those who said they worked only part of the year or not at all because they were retired, going to school, in the Armed Forces, sick or disabled, or taking care of home and family.  Using the inflation adjustment that the Hamilton guys likely used, I find a decline in median earnings of 9 percent, not 28.

Note, however, that comparing 1969 and 2009 holds up a likely peak year (when the business cycle was at a high) to a trough year (when it was at a low).  Comparing 1969 to 2007 is apples-to-apples, and when I did that, the median was EXACTLY the same in both years (to the dollar, which is a pretty crazy coincidence).  Finally, if I use the Bureau of Economic Analysis "personal consumption expenditures" deflator, which I think overstates inflation somewhat less than other commonly-used deflators, median earnings among men rose 7 percent from 1969 to 2007.

Seven percent is no great shakes, but this figure is also too small for assessing how men's economic fortunes have changed over time.  None of these analyses account for the fact that as a group, husbands reduced their hours over time in response to rising work and wages among wives.  Nor do they account for the rising share of non-wage benefits in total compensation (health and retirement benefits have eaten into wages, presumably following the preferences of the median worker).  Nor do they include the impact of taxes (which have declined) and tax credits (which have increased).  In addition, even my figures may overstate inflation, thereby understating the earnings increase over time--inflation measurement is much more tricky when choices within categories of goods and services and retail outlets explodes and when so much of what we consume is (thanks to the inter-web) free.  Finally, the analyses do not account for changes in the composition of the population.  For instance, the fact that more men today are nonwhite and foreign-born pushes the 2009 median down, but it is likely that the typical white, nonwhite, native-born, and foreign-born men are all doing better than the trend in the overall median implies.  Someday I'll get to a full analysis.

Subject for discussion (and a future post): how are we as a nation supposed to clearly understand the state of the economy and our living standards when even moderate think tanks and researchers are so eager to hype negativity?  As I've said before, policymakers aren't the only people who--individually or collectively--can talk down the economy.
Dave Warren
3/29/2011 02:38:07 pm

This is excellent stuff, Scott.

George Mifflin
3/29/2011 10:12:06 pm

Yeah! 7% growth over forty years!

3/29/2011 10:13:09 pm

Wait, you think inflation has been overstated for the last 30 years? That is worth a post in and of itself as there have been numerous adjustments to the inflation calculations over the years and the universally lowered the estimate of inflation. Add in adjustments for things like electronics getting better and cheaper (which is great for middle income plus, not so significant for the poor who use a much greater percentage of salary on the stuff that hasn't been getting cheaper) and you have a tough sell telling people that inflation has been understated.

Kevin Murphy
3/30/2011 02:45:10 am

You maybe right - through Simpson's Paradox, it could easily be that the total median income has dropped but each class/sector (white males, non-white males, foreign born, etc.) has increased because of the shifting percentages they each represent in the population over time. You also have clearly shown once again that it usually is more important how we define our measurements than what statistical tool we actually use to measure. Great analysis. If your theory bears out, maybe Tyler Cowen would have to rename "The Great Stagnation" to 'The Great Diversification" or something like that.

4/7/2011 01:20:57 am

Sorry for the delay in approving comments--Weebly didn't send me alert emails for some reason (or Gmail threw 'em into the spam filter).

MoobyCow, yes, the adjustments have lowered the measured rate of inflation, and further (better) adjustments would lower it more. The key issues are the explosion of choice and variety in goods and services within categories and in outlets where they may be purchased, ongoing quality improvements, and the amount of free stuff we consume as the world becomes more and more internet-centric. I'll try to post on this someday, but the best evidence (Christian Broda and John Romalis) shows that inflation has been MOST overstated for the poor (who can or do substitute between goods without loss to utility when relative prices change to a greater extent than the non-poor can/do).

Kevin (are you the economist?), I recently told Tyler that I wish he'd have called his book, "The Great Decelerating But Still Impressive Improvement in Living Standards," but I fear my marketing instincts are off...


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