Wage Growth Challenges for the American Middle Class

The middle class struggles as productivity rises, highlighting the disconnect between wages and economic growth.

### The Struggle of the American Middle Class: Wage Stagnation and Economic Pressures
* 📈 Between 1979 and 2024, US productivity increased by **80.9%**, while hourly pay only rose by **29.4%**, highlighting a **significant wage stagnation** for typical workers.
* 💔 In June 2024, **two-thirds of middle-income households** reported that their income was **failing to keep pace with the rising cost of living**, indicating **widespread financial distress**.
* 📉 Historical data shows that actual unemployment rates have consistently been **above the natural rate** since 1979, which correlates with **slower wage growth for the middle class**.
* 🏙 A decline in geographic mobility, with only **8.7% of Americans relocating for jobs** in 2022 compared to over **20% in 1948**, has limited opportunities for **wage increases in higher productivity areas**.
* 🏠 The skyrocketing housing costs, with median home prices reaching **$426,900** in June 2024, further restrict the ability of workers to **relocate for better job prospects**.
* 🌍 Globalization has also contributed to wage pressures, with trade with lower-wage countries reducing median wages for workers without a four-year degree by **approximately $2,000 annually** between 1995 and 2013.
* 🤝 Union membership has **plummeted from 20% in 1983 to 10% in 2023**, weakening workers' bargaining power, while regulatory policies and occupational licensing have **hindered wage growth further**.
* 🗳 Political responses vary, with proposals from leaders like Kamala Harris focusing on **strengthening unions and raising the minimum wage**, while others, like Donald Trump, advocate for **broad economic growth to benefit the middle class indirectly**.

Between 1979 to 2024, productivity in the US soared by 80.9%, while hourly pay grew by just 29.4% during the same period. The paychecks of typical workers have not grown nearly as fast as overall economic growth over the past 40 years. In June 2024, two-thirds of middle-income households believed that their income was falling behind the cost of living. I think that many Americans feel the financial struggle because their household budget and their household balance sheets are facing so much pressure. Every time I check my local mom group on Facebook, I see requests or people asking where they can get some financial assistance to pay utilities or assistance with rent. And it's concerning because these people are working full-time jobs, and they just can't make things work right now. The issue of wage trends, wage suppression, I mean, it just could not be more central to what has happened to the middle class over the past couple of decades. So what exactly is keeping the middle class from

earning a higher paycheck? I think people think inflation is a policy problem, but wages are my problem. And it turns out wages are not just your problem. Wages are entirely a policy and political variable. The main goal of policymakers at the Federal Reserve is to ensure maximum employment while keeping prices stable. They rely on various economic data to guide their decisions, including the natural rate of unemployment. Economists produced this thing they call the natural rate of unemployment. It's like the lowest unemployment can go without generating inflation. Throughout history, the natural rate of unemployment has hovered between 4.5% and 5.5%. And then we look at actual unemployment and how often it is above that estimate of the natural rate versus below. And if you look at the years since 1979, we have spent far more time with actual unemployment, well above that estimate of the natural rate. Between 1949 and 1979, the actual unemployment rate was cumulatively 15.3% below the natural rate of

unemployment. In contrast, the unemployment rate was cumulatively 35.7%, above the natural rate of unemployment between 1979 and 2017. This has real-world consequences for the American middle class because wages tend to grow faster during periods when unemployment is low. The Economic Policy Institute estimates that just a one-percentage-point drop in unemployment leads to wage growth of 0.4 to 0.9 percentage points for workers near the median of the wage distribution. The best bargaining chip any employee has to getting wage growth is going to the boss and saying, I'm going to go somewhere else unless I make more money, and that's just not a credible threat. When unemployment is high, the only people whose wages are not very affected by unemployment are like the 90th and 95th percentile; like they don't need super low unemployment to get some consistent wage growth. But the middle class absolutely does. This means the Federal Reserve's policy decisions that

result in higher than necessary unemployment might be creating conditions that actively hold back wage growth for middle-class Americans. Location could be another factor. There are other reasons for why we've seen less growth in the middle than, say, at the other parts of the distribution. Another one is just that people don't move as much as they used to. The share of Americans on the move has declined over the years, from more than 20% in 1948 to just 8.7% in 2022. Between 1986 and 1997, almost 29% of job seekers relocated for new jobs. That number has fallen to just 1.6% in 2023. Location plays a crucial role in wages. Despite the surge in remote work during the Covid-19 pandemic, wages for remote and hybrid jobs haven't grown nearly as much as salaries for full-time in-office roles, with some research estimating that remote workers could earn up to 30% more if they came

into the office five days a week. Decades ago, when I was a worker living in sort of a lower opportunity area, I would move to a higher productivity city, like maybe San Francisco or New York City or Los Angeles. And as a result, I'd be able to capture higher wages, gain more skills, and then move up the income distribution. Now there's a lot less people moving across areas to capture those opportunities. Real reason behind that is astronomical housing costs that are due to excessive regulations at local levels. Home prices hit a record high in June 2024, with existing home selling at a median price of $426,900. In line with typical seasonal trends. Home prices declined in July and August, but still set new records for those months. The overwhelming number of jobs in the US are in places that have really not seen much construction of housing. Some economists also argue that globalization has played a pivotal role in stalling wage growth for middle-income Americans.

The expansion of trade with countries that have much lower wages, I think that was always going to provide quite a bit of pressure on the US middle class, because so much of that trade runs through, like the manufacturing sector, which is where a lot of middle-class jobs have been. Between 1995 and 2013. Trade with lower-wage nations like Mexico and China reduced wages for workers without a four-year degree by roughly 5.6%, or about $2,000 per year for workers at the median wage. However, whether globalization is actually to blame has long been debated, with some research suggesting it has had a minimal impact on wage and income inequality. It's not just that we did it. We also did it on terms set by trade agreements that really, you know, people call them free trade agreements. They weren't they were basically exercises in selective protectionism. Who gets protected? Who doesn't? Middle-class workers were not protected corporations, especially corporations like software companies, drug

makers, Hollywood were all protected in these trade agreements. So, like, it's not just the natural flow of globalization; it's how policies shape how it happened and who got protected and who didn't. Regulatory policies can limit the power workers have within the labor market. We've seen this huge decline in the share of workers who are represented by a union in the US economy. In 1983, roughly 1 in 5 Americans were in a union. By 2023, that number had dropped to 1 in 10 full-time salaried union workers made about 15.9% more compared to nonunion workers in 2023. A single worker going to the boss and saying, You need to give me a raise or I'll leave. That's not, there's not a lot of force behind that threat. When you've got a union doing it, there's a lot of force behind that threat. And you look at countries that look like us.

So they've experienced the same globalization shocks like the UK, Canada, and Germany. Their unionization rates have fallen a bit since the peaks, but nowhere like the US fall. And then if you just sort of look at the facts on the ground over the past 30 to 40 years in the US, there's just been clearly been a growing employer hostility to union organizing efforts. They just want their profits high. Among US employers involved in unionization efforts, more than four out of ten have been charged with violating federal laws during their union election campaigns, and one out of five campaigns involved a charge that a worker was illegally fired for trying to organize a union. Just the number of registered unfair labor practices that are firing people trying to organize a union have risen a lot. And one thing that's happened to enable that is, I mean, one, there's been a change in management norms, I think, but also like all of the penalties for doing that, just like they're not

adjusted for inflation often. They've always been pathetically low. Like if you fire a worker for trying to organize a union, the penalty you face is you have to pay them back wages after the whole legal process grinds out, and they come back to your company. But then you're allowed to deduct any wages they made in the meantime at another job they got. And so firing workers trying to form a union is just a pretty small cost of business. And it pays off great because unions really do raise wages. And that's not something employers want. The decline of union membership isn't the only roadblock for growing the middle-class workers' income. So in many cases, you'll have policies at a local level and a firm-specific level that cut off wage growth. There's occupational licensing in different areas of the country, which can make it harder to start a new career. While estimates vary between a fifth and a third of all American workers are required to have a license to work, a study found that jobs in states requiring a

license earn about 8% more compared to the same jobs in states that don't. However, just a 10% increase in licensed workers with similar skills is estimated to reduce all workers' wages down by 1.6 to 2.3%. Economists estimate that eliminating occupational licensing can reduce earnings inequality within occupations by 2 to 4%. While licensing might appear to be necessary for some professions with health and safety concerns, researchers found no statistical difference in health and safety quality outcomes between states that require licensing compared to states that don't. To be a hairstylist in some places, for instance, you need a license from the state to actually do that. So there's a lot of these types of occupations that really are not dangerous and don't need state licensing to be made safe. But nonetheless, we have these licenses in place, probably to protect the incumbents and make it harder for new entrants to come in, sort of do their own business or start this new

career field and thereby increase their wages. I think as important as the middle class is economically, and I think it's incredibly important, it is just the entire game for, I think, politics. Both political parties in the United States recognize the economic pressures facing US families. There's different visions on how to intervene effectively. I was raised as a middle-class kid, and I am actually the only person on this stage who has a plan that is about lifting up the middle class and working people of America. For Kamala Harris, strengthening wages is about two things. It's about boosting the industries where wage workers work. So she wants to build on the Biden administration's infrastructure investments to onshore domestic manufacturing and construction, and boost those domestic industries. She also has a huge focus on strengthening union protections. You better thank unions. She wants to raise the minimum wage end taxes on tips, which is a policy that Trump first proposed. And she later echoed Trump's proposals to strengthen

wages for the middle class. In many ways, it mirrors what Harris has proposed, which is to onshore domestic manufacturing and construction. He has proposed doing so by instating a hard line tariff policy. Former President Trump publicly denounced globalism during his time in office, blaming the financial struggles faced by many Americans on it. We're doing tariffs on other countries. Other countries are going to finally, after 75 years, pay us back for all that we've done for the world. He's faced some backlash from economists about how this could threaten to reheat the consumer price spikes that are just beginning to cool, but he sees it as a long term strategy to bring domestic jobs back to the US, boost manufacturing in the US. So in some ways, this is his plan to grow the US economy as a whole and let the effects sort of ripple into the middle class as a result. Another major difference is in the candidates proposed tax policies. I have a plan to give startup businesses $50,000 tax

deduction to pursue their ambitions, their innovation, their ideas, their hard work. I have a plan for $6,000 for young families for the first year of your child's life to help you in that most critical stage of your child's development. She has proposed offsetting the costs of her tax relief proposals by increasing corporate tax hikes and tax hikes on the wealthy. She's proposed increasing the corporate tax rate to 28%. She wants to increase the tax rate on long-term capital gains also to 28%. Everybody knows I'm an open book. Everybody knows what I'm going to do, cut taxes very substantially and create a great economy like I did before. So in 2017, we had the Tax Cuts and Jobs Act, which substantially lowered the corporate tax. And there's varying degrees about how much people believe that translated into higher wages. But there's a pretty strong consensus that lowering the corporate tax actually increased worker wages. Some research has estimated that the 2017 tax cut led

to a $750 increase in annual pay for full-time employees in 2017 dollars. Opposing research argues that the earning gains were concentrated in the top 10%, with no changes in earnings for the bottom 90%. Trump's framing of boosting the middle class by boosting the economy as a whole doesn't offer sort of the targeted approach that Harris has brought to her economic platform. Her policy pages consistently drawing back to the middle class, saying how her tax relief programs will benefit the middle class. Specifically, Trump is focused on growth and growing the US economy as a whole and letting the success of that policy trickle down to the middle class. Policy matters so much. And generating like the wage income that is the lifeblood of the middle class. I think a lot of people just haven't made that connection between the wages I earn and what is the policy environment. When they think policy, they think direct benefits that come from the government. But a lot of what the government does conditions how

fast their wages grow in the labor market. And yet, the connection hasn't been made on how policy affects them in the most important way they earn income in the labor market. I'm not hopeful that the presidential platforms themselves will solve the woes of the middle class, but nor do I think the federal government is in the front seat on solving the many ways. But they are taking it seriously, and hopefully, those problems will be made more transparent. We'll shine a light on them. And then, through a combination of federal action, state, and local action, that we will see some of these improvements that we need in terms of less regulation and some targeted support, where it makes sense to help middle-class families thrive.

Why Middle Class Wages Aren’t Growing

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The Struggle of the American Middle Class

Productivity in the US has increased by 80.

9% from 1979 to 2024, while hourly pay has only grown by 29.

4%, leading to financial struggles for typical workers.

Two-thirds of middle-income households felt their income was falling behind the cost of living in June 2024, despite many working full-time jobs.

The Federal Reserve's policy decisions, aimed at maximizing employment and stabilizing prices, have resulted in actual unemployment being consistently above the natural rate, hindering wage growth for the middle class.

Factors Holding Back Wage Growth for Middle-Class Americans

Higher-than-necessary unemployment and declining mobility are contributing to stagnant wage growth for middle-class Americans.

The surge in remote work during the pandemic has not led to significant wage increases, and astronomical housing costs are preventing people from relocating to higher-paying areas.

Globalization and trade with lower-wage countries have also put pressure on middle-class wages, although the impact of globalization on wage and income inequality is debated.

The Decline of Unionization and Its Impact on Workers

Union membership in the US has significantly decreased from 1 in 5 Americans in 1983 to 1 in 10 by 2023, limiting workers' power in the labor market.

Employers have shown growing hostility towards union organizing, with over 40% charged with violating federal laws during election campaigns.

The penalties for unfair labor practices, such as firing workers for trying to organize a union, have been low and ineffective, contributing to the decline of union membership and hindering wage growth for middle-class workers.

The Impact of Occupational Licensing on Wages and Inequality

Occupational licensing leads to an 8% wage increase for licensed workers, but a 10% rise in licensed workers can reduce wages for all by 1.

Eliminating licensing could decrease earnings inequality within occupations by 2 to 4%, and there is no significant difference in health and safety outcomes between states with and without licensing.

Political candidates have different approaches to strengthening the middle class, with a focus on boosting domestic industries, raising the minimum wage, and implementing tax policies to support startup businesses.

A plan for $6,000 in tax relief for young families during their child's first year has been proposed, alongside corporate tax hikes and increased taxes on the wealthy.

Trump's 2017 tax cuts aimed to lower the corporate tax rate, with mixed results on wage growth for workers.

The discussion highlights the importance of policy in influencing wage growth and the need for a combination of federal, state, and local action to support middle-class families.