The Great Wage Stagnation

Young Professionals Feb 26, 2019

Over the past few decades, the cost of goods and services seem to go up without fail. In order to keep up with the increasing prices, one would expect the salary of an average person to go up at the same rate as well.

However, this has not happened. For the past few decades, the middle class American has not seen a significant raise in their salaries.

Imagine if your lunch cost $1 more tomorrow, but your salary stayed the same. That is one less dollar for your living expenses. Now what if this happened across the board for everything you purchase? You would not be able to purchase the same amount of goods and services.

Luckily for us, that has not happened.

Purchasing power is our ability to buy goods and services. If purchasing power decreases, that means we cannot afford as much goods and services. If you lunch went up in cost and your salary stayed the same, then your purchasing power decreased.

According to Pew Research Center, in the past 40 years, our purchasing power has not decreased. But it has not increased much either. Essentially, we are in an era of wage stagnation.

Normally, this is not an issue if we maintain the same standard of living. Unfortunately, young professionals are saddled with student debt, which continues to grow every year.

With no wage growth and increasing debt, young professionals are being set up for failure, with little to no means of saving for retirement.

Truthfully, this is a structural and political issue that is not being addressed effectively. Over the years, we have seen minimum wage go up along with inflation, meaning there was no increase in living standards.

For example, consider your wage is $12 and your lunch is $10 and your wage and inflation increase by 2%. Your wage and lunch are now $12.24 and $10.20 respectively. Since there is only a $0.04 gain, your living standards remain unchanged.

In our capitalist economy, there are no incentives for politicians or the wealthy to increase wages and the standards of living for the average person. We have to take matters into our own hands.

There are a few actions you can take.
1. Learn to budget and save more for retirement
2. Look for ways to increase your income (new job, side hustles, raise, etc)
3. Avoid living beyond your means

The first two points are straightforward. The third point about living beyond your means is just as important as the other two.

We, as Americans, love consumption, love buying, and love debt. There is nothing wrong with buying the essentials, but many of us buy the non-essentials in excess. Most of us do not need a fancy couch or $300 sneakers.

We should avoid buying things to bring us happiness. Buying things, especially with debt, to bring us short-term happiness does not help us in the long-term.
Many of us need to take a hard look at our finances and say enough is enough. If there is something we do not need, we should not sacrifice our financial futures.

In a time when we do not make more money, we should not spend excessively and be reasonable with our consumption choices.

The Great Wage Stagnation has been here for 40 years and will continue to exist for who knows how long. Now is the best time to make better decisions.

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Cover Image: unsplash-logoAndre Benz

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Alan Chen

Hi! One day, I will build a technology company that will change the world. Right now my focus is teaching personal finance. Now that you know a little about me, feel free to reach out and chat!

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