This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at Advisor Perspectives/VettaFi.
I've updated this series to include the April release of the consumer price index as the deflator and the monthly employment update. The latest hypothetical real (inflation-adjusted) annual earnings are at $48,368, down 8.3% from 50 years ago. Hourly earnings are below their all-time high after adjusting for inflation.
The Bureau of Labor Statistics has been collecting data on this workforce cohort since 1964. The government numbers provide some excellent insights on the income history of what we might think of as the private middle-class wage earner.
The first snapshot shows the growth of average hourly earnings. The nominal data exhibits a relatively smooth upward trend. The COVID pandemic caused a temporary rise in earnings likely due to demand for temporary work. Hourly earnings in April were at $28.62, up from $28.51 in March.
There are, however, two critical pieces of information that dramatically alter the nominal series: the average hours per week and inflation.
The average hours per week has trended in quite a different direction, from around 39 hours per week in the mid-1960s to a low of 33 hours at the end of the great recession (2009). During the COVID crisis, weekly hours were at 34. In 2021, weekly hours reached levels last seen in the mid-90s before dropping back to around the 34 hour mark we currently sit at. More specifically, weekly hours in April were at 33.8 hours, down from 33.9 in March.
What about inflation? The next chart adjusts hourly earnings to the purchasing power of today's dollar. We've used the familiar CPI for urban consumers or the adjustment with a linear extrapolation for the latest month. Theoretically, the CPI is designed to reflect the cost of living for metropolitan-area households. We use a linear extrapolation to compute the latest monthly inflation data until the mid-month release of the official CPI data.
Now let's multiply the real average hourly earnings by the average hours per week. We thus get a figure for average weekly earnings of this middle-class cohort, currently at $967 — below its $1,054 peak back in the early 1970s.
This is a gross income number that doesn't include any tax withholding or other deductions. Disposable income would be noticeably lower.
Here's a look at the YoY comparison for the last 20 years.
Latest hypothetical annual earnings: $48,368, down 8.3% from over 50 years ago
If we multiply the hypothetical weekly earnings by 50, we get an annual figure of $48,368. That's an 8.3% decline from the similarly calculated real peak in October 1972. In the charts above, we've highlighted the presidencies during this timeframe. My purpose is not to suggest political responsibility, but rather to offer some food for thought. The so-called supply-side economics popularized during the Reagan administration (aka "trickle-down" economics), wasn't very friendly to production and nonsupervisory employees.
Footnote: Here is a slightly different look at the data. I've adjusted using the less familiar CPI for urban wage earners and clerical workers, the CPI-W, which is theoretically a better match for the production and nonsupervisory cohort. The index, among other things, assigns a slightly higher weighting for gasoline (e.g., longer drives to work and the grocery store). Also, this is the series the government uses to calculate the Social Security Cost of Living Adjustments (COLAs).
Here is the real hourly history with this deflator.
Here is the real hourly data multiplied by the average weekly hours. The latest data point is 5.9% below the 1972 peak.
For additional perspectives on earnings, see our commentaries on household income.
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