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| Grimes |
Donald Grimes, an economist at the University of Michigan, sent me this article (below), which he wrote earlier this month, after reading my piece about all the “stuff” middle class families enjoy in 2015. In response to claims that middle class wages have fallen dramatically compared to the inflation rate, Grimes offers a detailed, technical explanation disputing the conventional wisdom.
Recent news reports note that inflation adjusted median household income in Michigan has
declined by nearly a quarter since 1969, and that Michigan’s middle class is substantially worse
off than their parents. Yet we now have the internet, cell phones instead of party-line land-line
phones, hundreds of channels on cable TV instead of three (four in some communities), air
conditioning in all our cars and in our new homes, and an increase in life expectancy at birth of
eight years. Do those lifestyle and longevity gains count? Moreover personal income per capita
in Michigan, adjusted for inflation using the U.S. Consumer Price Index, has increased by 50
percent since 1969. So just looking at the numbers are we poorer by one-quarter or richer by
half since 1969?
One problem with using household income to measure our economic progress, or lack thereof, is
the changing composition of the typical household – we now have more single person households
and more single parent families that have always tended to have lower income, thus bringing
down the median income for all households. Individual’s decisions to live in smaller households
are not something that should count against a measure of the economy’s performance. Indeed, it
could be a sign of economic success that people can now afford to live in household situations
that they prefer.
A problem with the personal income per capita measure is that it includes transfer payments per
capita, which have increased by 356 percent in real dollars since 1969. Since most people don’t
think they are wealthier due to increased government spending on Social Security, Medicare,
Medicaid, Food Stamps, student financial aid, and other entitlement programs I have focused my
attention on the average wage and average compensation in Michigan from 1969 to 2013.
The average wage in Michigan (in 2013 dollars), adjusted using the U.S. Consumer Price Index, peaked in 1973 at $52,497, then generally declined until 1991 when it reached $43,725 (a decline of 17
percent). It then grew through 2000 to a value of $49,274 (why the 1990s were correctly viewed
as such a good period in Michigan). Since then it has slowly declined to $46,623 in 2013 (when
the 2014 data is released next month the average real wage in Michigan will show a year over
year increase of about 1.5 percent). The average real wage in 2013, adjusted for inflation using
the U.S. CPI is down about 11 percent compared to its peak in 1973 and down about 5 percent
compared to 1969 levels.
One major contributor to inflation, especially as measured by the U.S. CPI, has been an increase
in the cost of “shelter”. Shelter includes several components, most importantly it includes an
estimate of the “rental” equivalent cost of owner occupied housing. Through 2006 these “prices”
had been increasing at a very fast pace, especially outside of Michigan. There are several
reasons why including the “rental” equivalent cost in the price index is problematic in my
opinion (the treatment of housing costs is the primary reason the Federal Reserve Board of
Governors prefers using the Personal Consumption Expenditure Deflator to measure national
price inflation), but I don’t want to go into that here. Instead I just want to show what excluding
the cost of shelter will do to the measure of the real average wage in Michigan over time.
The average real wage in Michigan, adjusted for inflation using the Detroit Consumer Price
Index excluding the cost of shelter bottoms out in 1982 at $41,828. Given the severity of the
1981-82 recession, following several years of very high inflation that seems to me to be the
correct low point for the state. The real wage then slowly increases reaching an all-time peak of
$49,268 in 2000. Again this seems accurate given the historically low unemployment rate that
Since 2000, the real wage in Michigan, adjusted for inflation using the Detroit Consumer Price
Index excluding shelter, has declined by about 5 percent, but because of growth in wages before
2000 it is currently almost 5 percent above 1969 levels.
Another problem with using “money” income to measure our standard of living over time is that
it doesn’t account for the fact that an increasing share of compensation for workers has come in
the form of non-wage benefits. In 1969, non-wage employer paid benefits were about 14 percent
of wages; by 2013 this had increased to 24 percent.
Real total compensation per worker in Michigan has declined substantially since its 2004 peak
values (using both price indices). But, using the Detroit non-housing CPI to adjust for inflation,
real average compensation per worker in Michigan in 2013 was 14 percent higher than it was in
To summarize, the average wage in Michigan in 2013, adjusted for inflation using the U.S.
Consumer Price Index, was 5 percent below 1969 levels. But, if you adjust for inflation using
the Detroit Consumer Price Index excluding shelter, real wages in Michigan were almost 5
percent above 1969 levels. And, real average compensation per worker was 14 percent higher in
2013 than it was in 1969.
Michigan workers and their families lost ground during the first years of this century and are
worse off today, despite the economic recovery since 2009, than they were in the year 2000
using any of these measures. But, I don’t think most Michigan residents are substantially poorer
today than their parents and grandparents were 45 years ago.
