“We’re Seeing a Fundamental Reorganization of Work in America”

Today’s episode is about arguably the most important economic statistic out there: real (or inflation-adjusted) wage growth. For much of the last few years, many people’s real wages have declined. But for the last few quarters, real wages have been growing. In fact, they’ve grown so much for the poorest workers that several key measures of inequality are falling, and the Black-white wage gap is shrinking. But many Americans still don’t seem to buy the idea that things are getting better. Today’s guest is Dr. Arindrajit Dube, a professor of economics at University of Massachusetts Amherst—and one of the world’s top researchers on minimum wage policies and pay. He says things are happening in this economy that we haven’t seen since the 1950s or 1960s. “We’re seeing a fundamental reorganization of work in America,” Dube said.

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In the following excerpt, Dr. Arindrajit Dube defines real wages and explains how they were affected by the COVID-19 pandemic.

Derek Thompson: So we’re going to talk about real wages for this entire interview. And I don’t know that I’ve ever done an entire podcast episode about a single economic statistic. I do think this is a very important economic statistic. But before we get started, I would actually be interested in your perspective here. Here’s a scenario. You are teaching an undergraduate seminar on labor policy and real wages, and it’s day one of class. And you don’t want to assume any knowledge, but in 90 seconds you want to kick things off by explaining why real wages might be one of, if not the most important, indicator of economic health and progress. How do you open that seminar?

Dr. Arindrajit Dube: Right? For most people, we don’t own a whole lot of stocks or bonds, so income from capital is relatively small compared to income from labor. So the key question becomes, if we want to understand prosperity, especially broad-based prosperity in a society, we’ve got to pay attention to what’s happening to wages. Now, wages, on the other hand, by themselves are not enough because you could have a 10 percent increase in wage, but if prices are also increasing by 10 percent, well, your purchasing power hasn’t really increased. So the key thing that economists look at to understand what’s happening to people’s paychecks is to look at the growth in nominal wages and then subtract from that the growth in prices inflation. And that is what real wage growth is all about.

Thompson: I want to tell this story in chronological order, the story of real wage growth since the calamity of the pandemic. And I want to start with the pandemic. So the economy crashes and unemployment skyrockets, and the government passes a bunch of stimulus bills. This is a chaotic period for economic data. And you wrote in an essay that understanding exactly what happened to this all-important statistic of real wages during the 2020 and maybe even early 2021 period, the worst part of the pandemic, is actually very hard. It’s very hard to tell a clear and accurate story about real wages during the crisis. Why is that?

Dube: That’s a great question. So to understand what the problem is in terms of measuring wages, let’s just review how we actually go about measuring wages to begin with. One of the most common ways of doing that is by looking at a household survey. It’s called the current population survey. The government collects data every month from about 30,000 to 40,000 households. And what you can do is you can look to see, let’s take all the people who say they’re working this month and let’s look at what they say they’re earning. And let’s take the person in the middle, we’ll call it the median wage, OK? And so let’s just do that, and let’s do that in January of 2020. Let’s do that in February 2020, March, and so forth. Now, here’s the thing. If you actually were to do that exercise, you would find that in between February and April of 2020, the median wage rose by something like 12 percent.

Thompson: Wow.

Dube: Now that sounds like an amazingly good thing.

Thompson: Yeah, it makes it sound like 2020 was, like, the best year for the economy in the last, like, 150 years.

Dube: Very surprisingly, apparently all we needed to do to unleash prosperity in America was to unleash the pandemic. So that sounds weird and kind of scary, but turns out to be actually wrong. So why is it wrong? Well, here’s the thing. Remember what I told you? The median is the person, if you kind of rank everyone by their wage and you take the middle person. Now what happens to that middle person or who that middle person is when suddenly a whole bunch of people stop working? Because after all, that’s exactly what happened. Unemployment rate over the same months shot up from below 4 percent to 15 percent.

So suddenly, you took 10 percent of the workforce, usually from the lower-wage strata, and you just kind of got rid of them. And then you took the rest of the people and you took, well, who’s in the middle of that bunch? And that’s your new median. Well, the new median actually just excludes a bunch of low-wage workers that went into figuring out the old median. And that’s why suddenly the composition of the workforce really has tilted away from low-wage workers, making it seem like the median wage rose a lot. But it’s like saying suddenly, what happens to the wage if a really rich person like Jeff Bezos walks into a small bar.

Thompson: Right. Well, it’s even worse than that, maybe.

This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.

Host: Derek Thompson
Guest: Dr. Arindrajit Dube
Producer: Devon Baroldi

Subscribe: Spotify