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Real wages were worse in 1980 than now

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(Read caption) Ronald Reagan gives a speech for his 1980 presidential campaign. Although the economy was shaky in 1980, wages are better now than they were then, writes guest blogger Stefan Karlsson.

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The Scott Sumner post that I discussed in the previous post had a link to an associated press story claiming that even though inflation has fallen since 1980, it feels worse since wage growth has fallen even more.

Given that 1980 was a year of economic discontent (Reagan didn't just win because the ayatolla Khomeini had humiliated Carter), I am not so sure that workers feel worse off now compared to then.

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Related to that is the fact that it's not true that real wages are falling more now than then. Quite to the contrary, if you look at the official numbers real wages are performing much better now. While inflation dropped from 12.5% in December 1980 to 2.1% in February 2011, growth in nominal weekly earnings only fell from 7.9% to 3.0%, meaning that the increase in real weekly earnings rose from -4.1% to 0.9%.

There is however one reason to believe that the perceived improvement is much smaller than these numbers would indicate: namely that since 1980 the consumer price index methodology has been changed several times to incorporate "hedonic adjustment" and similar changes that all have happened to lower the reported inflation rate. But since inflation numbers haven't been changed retroactively in accordance with the methodological changes, this means that today's inflation numbers aren't strictly comparable with the older ones. Older inflation numbers would have been much lower if the new methodology had been used, and newer inflation numbers would have been much higher if the old methodology had been used.

It actually doesn't matter in this context whether the old or new methodologies were more accurate. Either way, the fact remains that the current inflation numbers is associated with a higher cost of living increase than the same number in the past. This explains why workers may not have perceived the alleged improvement.

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