Why it feels like wages aren't outpacing inflation, even though they are
Democrats like to talk about struggling families who find wages aren’t keeping up with the cost of living. But our fact-checking has found that the economic data clashes with their argument.
Readers who are pinching pennies have told us they don’t agree with our findings.
"I was a working adult in 1980 and I'm now a retiree," one reader emailed us. "I know that in 1980, a new car cost $7,000. Today, a new car is $35,000. That's an increase of 500 percent. I know that salaries in 1980 were running around $16,000 (that's about what I made an teacher) and today average is about $60,000. That's an increase of 375 percent. There is a big discrepancy between 375 percent and 500 percent. The same is true for increases in rent, buying a house, paying for college, etc. All of them outstrip increases in wages. Check it out!!"
We decided to ask a cross-section of economists whether our readers had a point. Are the inflation measurements we relied on in our fact-checks incapable of capturing changes in the cost of living, as many readers said?
We found broad consensus that while the federal measurements aren’t perfect, they’re a good yardstick for calculating overall changes to the cost of living.
The issue came up when we fact-checked two Democrats: Sen. Kamala Harris of California and Stacey Abrams, who ran for governor of Georgia in 2018. Harris is a candidate for president, while Abrams delivered the Democratic response to President Donald Trump’s State of the Union.
Abrams said in her speech that "wages struggle to keep pace with the actual cost of living." Harris said that "the cost of living is going up, but paychecks aren’t keeping up." We rated Harris’s statement Mostly False.
We fact-checked their claims by looking at several different measurements that use inflation adjustments, including various versions of the Consumer Price Index, or CPI. One version in particular, called CPI-U-RS is considered the most accurate by researchers and is used to calculate data we cited that is published by the liberal Economic Policy Institute.
What’s important here is that this inflation measurement incorporates many of the items with rapidly rising prices that many of our readers had expressed concern about. Notably, the measurement factors in health care and education costs, said Gary Burtless, an economist with the Brookings Institution.
"To the extent that consumers pay out of pocket for the health care and drugs they consume or for health insurance premiums, price changes in those items are fully incorporated," Burtless said. "And to the extent that consumers pay out of pocket for their own schooling or that of a family member, the net tuition increases and the change in school fees are fully incorporated."
A key caveat, Burtless said, is that this inflation measurement only counts what people actually pay out of their own pocket — not the full sticker price.
Josh Bivens, the research director at the left-leaning Economic Policy Institute, told PolitiFact that he agreed with Burtless’ analysis that the measurement we used is a reasonable one for studying assertions like Harris’ and Abrams’.
""One could certainly argue that health and education costs are more vital to living a secure middle-class life – I think I’d agree – but all we can do as ‘numbers people’ is weight these expenditures by their shares in peoples’ budgets," Bivens said. "When you do that, you get the official inflation measures, and it’s hard to see how to make non-arbitrary decisions about how to improve them."
"The long and short is that I use the CPI and see it as the right reference point," said Dean Baker, co-founder of the liberal Center for Economic and Policy Research. "But I can also understand how people could argue that it is not capturing everything," he said.
Here are some explanations:
People tend to notice big price increases more than many smaller price reductions. The costs of health care and education tend to be highly visible, but it’s easy to overlook long-term price reductions in other areas, such as cars, clothing and electronic goods, Bivens said.
Most people "mentally account for price changes that are especially striking or irksome to them," Burtless said. "If the price of milk rises by 55 cents per half-gallon but every other item in your shopping cart falls by half a percent per item, many people will get their ideas about overall price inflation from the one item with a big price increase rather than from the many items that saw no price change or a small cut."
These are aggregate statistics; your mileage may vary. The CPI is a national statistic — your region may be experiencing faster cost growth than the nation as a whole, especially for items like housing. And even within the same region, your personal situation may differ from that of another household due to income level, age or family structure.
"When considering anecdotal data, particularly comments of individuals from disparate geographic regions of the country, it is important to realize that the cost of living differs dramatically across the country," said Kevin L. Kliesen, a business economist and research officer at the Federal Reserve Bank of St. Louis.
Steven Fazzari, an economist at Washington University in St. Louis, agreed. "The differences people experience from the median outcome is due to different individual situations, not some inherent bias in government statistics," he said.
Inflation may outpace wages over short periods of time. It’s possible to cherry-pick specific periods in which wages failed to keep up with inflation -- in fact, the news articles Harris’ staff sent us during our original reporting included a few headlines of that sort. But if the statement is about general patterns, as Harris’ and Abrams’ were, using those short periods as evidence amounts to cherry picking.
Just keeping barely ahead of inflation is a pretty low bar. Economists said it’s understandable that people will feel disappointed by just staying modestly ahead of inflation, as has been the case in recent years. It certainly doesn’t feel like they’re making much progress toward the American Dream.
"There's an expectation of improving standard of living over time, so even seeing pay raises that cover a bit more than cost increases might not feel like keeping up the way people expected," said George Washington University economist Tara Sinclair.
That feeling is likely exacerbated in an era when income inequality is wide and often getting wider.
However, from the fact-checking perspective, if wages are growing even slightly faster than inflation, it’s not correct to say that wages aren’t keeping up.
"Something along the lines of ‘most workers are not keeping up with overall growth in the economy’ would have been less of a sound bite, but it would have been more accurate," Fazzari said.