Are Your Children Earning More Than You Did?

Are Your Children Earning More Than You Did?

Per Wikipedia, James Truslow Adams defined the so-called American Dream as “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.” This suggests that each generation of Americans should be experiencing a greater degree of success and prosperity than their predecessors. Is it happening?

One way to measure prosperity is to use wages as a proxy. The Bureau of Labor Statistics (BLS) has been tracking such data since 1964, providing us with a multi-generational view. Doug Short has compiled this data and the results are interesting. The average hourly earnings of workers in 1964 were about $2.50. In 2019, 55 years later, it had grown to $23.70. Sounds great! However, it’s necessary to take inflation into account. Inflation over the period would have caused the prices of goods and services to rise, reducing the purchasing power of that $23.70 to something less.

Using the Consumer Price Index to inflate the value of the hourly wage in 1964, it comes out to about $21.80 in today’s dollars. In other words, the growth in real wages (i.e. adjusted for inflation) over the last 55 years has been less than 9% cumulatively, or only about 0.15% on average per year. But it was not the case that growth was simply flat. The greatest gain occurred between 1964 and 1973, at which point real wages peaked at over $24.20. That was followed by a long decline (with a few bumps along the way) until 1995, when workers were earning (in today’s dollars) only about $19.60 hourly. In other words, workers in the mid-1990s were earning almost 20% less in real terms than their elders twenty years earlier. Then, starting in 1996, wages began to rise again until reaching their peak of $23.70 today, which still represents a relatively miniscule 0.8% annual growth rate.

Adams does not quantify exactly how much prosperity the American Dream calls for. From a wages standpoint, it doesn’t look like the current generation is doing much better financially than the previous one. Of course, home ownership as well as investment growth has turned many Baby Boomers into millionaires. And there are countless other ways that will improve one’s financial situation. As we celebrate the current Thanksgiving holiday, rather than looking back, let’s give thanks for what we have now and vow to do what we can to make life even better for our future generations.

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