Why Americans Don’t Like the Economy

“Why are the vibrations so bad?” ask legions of commentators, noting the disconnect between polls about the economy and leading economic indicators. The unemployment is within spitting distance of the 60-year lows and measured inflation it has fallen from a very high 9 percent rate to a lower, though still too high, rate of 3.2 percent.

And yet, citizens are not satisfied with the economy. According to New York News-Sienna poll, 81 percent of registered voters described the state of the economy as fair or poor, and only 19 percent rated it as good or excellent. Another pollmade by the Financial Times and the University of Michigan, found that most voters said they were worse off under President Biden than before, with only 14 percent saying they were better off. By a margin of 59% to 37%, the time-Survey of Siena Found voters who trust Donald Trump more than President Biden on the economy.

To reconcile voter discontent with economic data, we don’t have to consider headline employment and inflation indicators separately. Instead, we should combine them, and when we do, we see that workers’ real wages (that is, after inflation) have declined significantly in recent years.

Some commentators to argue that real wages are rising, but these claims are based on the popular measure of average hourly income of the Bureau of Labor Statistics of Current Employment Statistics. Average hourly earnings are a less useful indicator now because of major changes in the composition of the workforce. During the pandemic, the economy eliminated a large number of low-paying service jobs (for example, in leisure and hospitality), which increased the average wage in the economy. The average rose because low-paying jobs dropped from the BLS sample, not because people experienced strong wage growth. The effect reversed as the economy began to add those low-paying service jobs, pushing down average hourly earnings. These compounding effects persist today, as the economy is still short of 560,000 leisure and hospitality jobs (adjusting for labor force growth), in relation to pre-pandemic levels, mainly due to the difficulty for companies to find workers.

More recently, labor shortages have eased and companies have been rehiring these workers. Since leisure and hospitality wages are lower than all other major sectors tracked by the BLS, the return of these workers to the labor force has dragged down average hourly earnings growth relative to other measures. In fact, the leisure and hospitality sector has been responsible for more than a fifth of employment growth over the past 12 months; add in another fast-growing, lower-wage sector, government, and you’re looking at 42 percent of all job growth over the past year. As labor shortages ease and the economy adds a larger share of low-wage positions to the pool, average hourly earnings will continue to fall.

Therefore, to get a clearer picture of the economy, we need to adjust to the changing composition of the workforce and take into account changes in wages in each type of work and industry. Fortunately, another BLS statistic, the National Compensation Survey’s Employment Cost Index, does just that.

According to the ECI, wages adjusted for inflation have shrunken 3.7 percent since the end of 2020. Although real wages rose in response to falling energy prices late last year, they have been roughly flat since then. Worse, the decline in real wages wiped out all the gains made in the late 2010s. Real wages today remain at 2015 levels, meaning Americans’ paychecks aren’t going any further than they did eight years

Moreover, for many Americans, life’s most prominent milestones are now out of reach. The defrauded spending led to a dramatic increase in Treasury yields, sending mortgage interest rate about 8 percent. Car loan interest rate are even higher. Consumers may be happy that gas prices are going down, but that’s not comfortable if they have to put off buying a house, having children, and other decisions commonly associated with chasing the American dream. With unemployment still very low, most Americans who want a job have one, but can’t afford the traditional life-cycle accomplishments of owning a house and a car.

What could change everything? A massive jolt to productivity growth would solve many problems, raising real wages and putting downward pressure on prices. Unfortunately, given the series of new regulations that even more hamper the supply side, this seems unlikely. Artificial intelligence may offer a productivity boom, but it’s hard to project what that would look like yet.

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

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