COLA….The minimum wage is in the news again, and like many liberals I favor indexing it so it keeps up with the cost of living. Thinking about this got me wondering about something, though.
As everyone knows, median wages (adjusted for inflation) increased steadily from the end of World War II through the 60s. Then, in the mid-70s, they suddenly stagnated. Depending on who and how you measure things, median wages have either gone up slightly, stayed flat, or gone down slightly since then. But whichever measure you use, wages haven’t come anywhere close to keeping up with economic growth over the past 30 years.
Why? There are lots of reasons (though many of them, like globalization, have been considerably overstated), but here’s one that might have contributed: the widespread acceptance of COLAs (cost of living adjustments) that took hold during the inflationary 70s. During that decade it became increasingly common to view wage increases as a response to inflation and to institutionalize COLAs as a way of dealing with this.
But the end effect was that eventually COLAs became a ceiling for wage increases, not a floor, and workers increasingly began to see that as fair. They were happy as long as they were “keeping up.”
But of course, “keeping up” is literally all it is. A COLA increase is nothing more than a way of keeping your wages exactly the same. So for the past 30 years, workers have been getting COLA increases and thinking that’s fair, without fully realizing that in the past workers used to get real increases. Back in the 50s and 60s, as the economy grew everyone got richer.
I’m just noodling here. For all I know, this suggestion was thoroughly discussed and perhaps discarded years ago by some branch or another of the economics profession. But I wonder if there’s a widespread perception that as long as you’re keeping up with inflation you’re doing OK, and that’s led to an institutionalized set of lowered expectations about wage increases? If inflation were zero, and it were more obvious that wages had gone nowhere for the past 30 years, would people be more unhappy about things than they are?
