“Why are the vibes so bad?” ask legions of commentators, noting the disconnect between polling on the economy and top-level economic indicators. The unemployment rate is within spitting distance of 60-year lows, and measured inflation has dropped from a punishingly high 9 percent rate to a lower, though still too high, 3.2 percent.

And yet, citizens are unhappy with the economy. According to a New York Times–Siena poll, 81 percent of registered voters described the condition of the economy as fair or poor, and only 19 percent called it good or excellent. Another poll, conducted by the Financial Times and the University of Michigan, found that a majority of voters said that they are worse off under President Biden then they were before, and only 14 percent said that they are better off. By a 59 percent to 37 percent margin, the Times–Siena poll found voters trusting Donald Trump more than President Biden on the economy.

To reconcile voters’ discontent with the economic data, we shouldn’t consider the top-level employment and inflation indicators separately. Instead, we should combine them—and when we do, we observe workers’ real (that is, after inflation) wages have declined significantly in recent years.

Some commentators argue that real wages are rising, but these claims are based on the popular average hourly earnings measure from the Bureau of Labor Statistics’ Current Employment Statistics. Average hourly earnings is a less useful indicator now because of large workforce-composition changes. During the pandemic, the economy shed large numbers of low-paying service jobs (for instance, in leisure and hospitality), which pushed the average wage in the economy higher. The average moved up because low-paying jobs dropped from BLS’s sample, not because individuals experienced strong wage growth. The effect reversed as the economy began adding those low-paying service jobs back, which pushed average hourly earnings down. Those composition effects linger today, as the economy is still short 560,000 leisure and hospitality jobs (adjusting for labor-force growth), relative to pre-pandemic levels, due largely to firms’ difficulty finding workers. 

More recently, labor shortages have eased, and firms have been adding back these workers. Given that leisure and hospitality wages are below those of all other major sectors tracked by BLS, these workers’ return to the labor force has dragged down average hourly earnings growth relative to other measures. Indeed, the leisure-and-hospitality industry has been responsible for over a fifth of all job growth in the last 12 months; add one other fast-growing, lower-wage sector—government—and you’re looking at 42 percent of all job growth in the last year. As labor shortages ease and the economy adds a greater share of low-wage positions back into the pool, average hourly earnings will continue to fall.

To get a clearer picture of the economy, therefore, we need to adjust for the changing composition of the workforce and consider changes to wages in each type of job and industry. Fortunately, another BLS statistic, the National Compensation Survey’s Employment Cost Index, does just this.

According to ECI, inflation-adjusted wages have shrunk by 3.7 percent since the end of 2020. While real wages rose in response to falling energy prices late last year, they have been roughly flat since. Worse, the drop in real wages erased all gains made in the late 2010s. Real wages today stand at 2015 levels, meaning Americans’ paychecks don’t go any further now than they did eight years ago.

Employment Cost Index, wages and salaries, adjusted for inflation. (Source: Bureau of Labor Statistics)

Moreover, for many Americans, the most salient life milestones are now out of reach. Profligate spending caused a dramatic rise in Treasury yields, sending mortgage interest rates near 8 percent. Car-loan interest rates are even higher. Consumers may be pleased that gas prices are down, but that’s little comfort if they must put off buying a home, having children, and other decisions commonly associated with pursuing the American dream. With unemployment still very low, most Americans who want a job have one, but they can’t afford the traditional lifecycle accomplishments of owning a house and a car.

What could turn it all around? A massive jolt of productivity growth would solve many problems, boosting real wages and exerting downward pressure on prices. Unfortunately, given the raft of new regulations that further hamper the supply side, that looks unlikely. Artificial intelligence might deliver a productivity boom, but it’s hard to project yet what that would look like.

Barring a productivity surge or a further collapse in energy prices, real wages are likely to continue to languish—and Americans to remain dissatisfied with the economy.

Photo by Spencer Platt/Getty Images


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