Real wage growth, or the lack thereof, has become a hot-button issue in the US.
It is something you often hear about in the race for the White House. In simple terms, many Americans feel like they’re not doing any better than they were five or ten years ago. And sure enough, growth in wages minus inflation has fallen sharply over the past 30 years.
“Our analysis shows that this economy-wide average real wage growth rate has declined by a third since the mid-1980s,” researchers at
Liberty Street Economics over at the Federal Reserve Bank of New York said in a post Wednesday.
The reason why, according to the Fed, has to do with demographics. Real wage growth tends to be concentrated in the early years of a career, when new professionals are learning on the job, and rising through the ranks.
“Real wages tend to rise early in a worker’s career, flatten out mid-career and then decline as the worker approaches retirement,” the researchers said in an earlier post. “This inverted U-shape pattern is a well-established feature in the labour economics literature.”
As America’s baby-boomer population ages, more and more people are moving in to a mid-career slowdown and pre-retirement decline. They’re not doing the things that tend to lead to big pay increases, like investing in new skills, and moving around from job to job.
And that is dragging down the total real wage growth figure.
“The fraction of the US population in the fast real wage growth phase has declined from close to 60 per cent in the 1980s to the mid-40 per cent range recently,” the researchers said. “Correspondingly, a greater fraction of the US population is now in the flat and declining life-cycle phases of real wage growth.”
This obviously has significant implications for the economy, but it also serves as a useful reminder that the early years of your career count for a great deal. In fact, real wage growth typically tops out at 40 years old. Brutal.
“Real wages, holding constant any cyclical effects, show positive growth that is concentrated early in a worker’s career,” the researchers said. “By age 40, real wage growth has typically declined to around zero.”
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