I wrote a blog a week ago in which I claimed that ( as many people believe ) globalization didn’t destroy the American middle class:
After I wrote the article, John Lettieri of the Economic Innovation Group , wrote a tremendous thread , that clearly supports my reasoning. He demonstrated that the schedule of America’s pay stagnation, which was almost 1973 through 1994, simply didn’t align well with the industrialization era that first came into being with NAFTA in 1994. In reality, American pay started , growing , once right after NAFTA was passed.
In fact, income rise since NAFTA has been almost as powerful as in the years after World War 2!
Then, I believe this is a story that is too easy. Although there was a lot of sounds and political hand-wringing over NAFTA, most Americans definitely don’t think it was opposition from Mexico that hollowed out the US middle class — they think it was China.
And while many economists believe that NAFTA hurt some particular manufacturing , in a few specific places, they generally agree that it helped most Americans, the China Shock, which many economists believe was nevertheless dangerous to the working class, is what caused the most damage.
And if you add the China Shock to Lettieri’s timeframe, you see that by some measures— but not by others — there’s a minute, shorter era of salary stagnation that lines up with it very effectively. Lettieri’s figures now display the China Shock:
You can see that middle income have decreased between 2003 and 2015 while ordinary hourly earnings for production and nonsupervisory employees are increasing.
Obviously, the Great Recession is the biggest factor after 2007 ( and many economists believe the China Shock , only lasted through 2007 ). However, there is a strong argument that Taiwanese contest did hang American pay back for a few years in the 2000s.
And in case you were wondering, how’s the break for men and women:
And Lettieri has more figures showing that the story , looks the same for the working class , as it does for the end group.
Therefore, I believe the plot is more complex than Lettieri claims. The boom in middle-class and working-class income in the late 1990s may include come , in lieu of , some little winds from NAFTA, and the China Shock may have exerted a drag on American pay during the 2000s.
The biggest pay stagnation in modern American history occurred before the age of globalization, roughly between 1973 and 1994, according to the graphs ‘ much larger narrative.
What was the cause of that amazing stagnation? Since there are so many issues going on at once, it’s quite difficult to remove cause and effect in finance. The decades between 1973 and 1994 featured two oil shocks, big inflation, two huge changes in the global financial regime, many significant recessions, changes in trade deficits and imports, and many more.
There was so much going on that, according to the proverb,” just one damned thing after another,” the pay stagnation was unavoidable.
But as a second go, we may look at some of the ideas of why that slowdown happened, and see if they match up with the timetable.
Productivity is sagging
Part of the slowdown in pay was due to rising inequality. When we compare average versus median hourly pay ( which includes benefits like health insurance and retirement matching contributions ), we can see that the average stagnated less than the median:
However, it is still obvious that the regular price also stagnated from the beginning of the 1970s through the middle of the 1990s. This suggests that there was something widespread going on — it wasn’t just the end class getting hit.
A productivity slowdown was a part of that” something.” If you look at common daily compensation versus regular labor productivity (output per hour worked ), you see a humble divergence, but the productivity slowdown from the early 1970s until the late 1990s is clearly apparent, and it simply lines up with the stagnation in wages:
Nobody knows for certain why productivity dropped for 20 years, but in my opinion, the main explanation is that the oil shock of 1973 caused an era of energy scarcity that forced industrial economies to turn away from energy-intensive growth.
Is it also possible that the same underlying shifts that made productivity slow down during those two decades also caused inequality to rise, and , labor’s share of income , to fall from 63 % to 61 % over the exact same period? Because the timing coincides so perfectly, it seems plausible. But I don’t know of a good theory as to how a technological shift could cause all of these things at once.
Financialization
One common theory is that American industrial policy, including trade policy, stopped favoring manufacturing and instead switched to favoring the financial sector in the 1970s and 1980s. This is, for example, the thesis of Judith Stein ‘s ,” Pivotal Decade: How the United States Traded Factories for Finance in the Seventies“. However, if you consider the growth of the US economy as a percentage of the US economy, it has been more or less unchanged from the end of World War Two until the turn of the century:
And in the 1970s, profits, or financial , actually decreased as a share of the total before rising again in the 1980s and again in the late 1990s and early 2000s:
Here, the timing is inconsistent. There’s no clear measure of financialization that coincides specifically with the early 1970s through the mid-1990s. If the wage stagnation was caused by financiers putting pressure on businesses to reduce wages, the explosion of finance profits in the 1980s might account for at least some of it.
But that can’t explain the wage stagnation in the 1970s, nor the re-acceleration in the late 90s and early 00s ( when financial profits exploded but wages did well ).
The collapse of trade unions
A lot of research suggests that unions drive down economic inequality ( though researchers disagree on exactly how big the effect is ). Farber et al. ( 2021 )  , write:
We find consistent evidence that unions reduce inequality, explaining a significant portion of the dramatic decline in inequality between the mid-1930s and the late 1940s, using distributional decompositions, time-series regressions, state-year regressions, and a new instrumental-variable strategy based on the 1935 legalization of unions and the World-War- II era War Labor Board.
Here’s a picture of that relationship:
As we saw above, wage inequality — the divergence between average and median compensation — was responsible for , part , of the stagnation in middle-class wages, though not all of it.
However, this doesn’t seem to fit in with the timing either. As you can see from that chart, unions have been in decline since the mid-1950s. In the 1980s, the wage stagnation may have been a little more rapid, which might explain the stagnation. But overall, it’s been pretty smooth. That is incompatible with the 20-year wage stagnation that began in the early 1970s and ended in the mid 1990s.
Inflation
The chart of real wages for production and nonsupervisory workers shows a dramatic slowdown from around 1973-1994. However, a chart of the actual number of dollars they made per hour, or nominal wages for those same workers, shows no such slowdown other than a moderate flattening in the 1980s:
The difference, of course, is , inflation. Prices increased rapidly between 1973 and 1983:
The smoothness of nominal wage growth , raises the possibility , that nominal wage growth is very , sticky , — that workers are able to negotiate about the same number of additional , dollars , from year to year, despite big changes in the purchasing power of a dollar.
Again, the timing is off par for the time period of stagnant wages. But I suppose it might explain the first half of it.
Trade between Japan and Europe
Finally, we’re back to trade and globalization. Americans were undoubtedly concerned a lot about competition from Japanese and European companies, especially in the early 1980s. The Japanese and European auto and machine tool industries really did put American companies under intense competitive pressure starting in the 1970s.
However, the overall statistics don’t always show this effect. Import penetration rose in the 1970s, but flatlined in the 1980s and early 1990s:
As for the trade deficit, that was zero in the 1970s and then had a brief but temporary surge in the 1980s:
Some people I talk to seem to think that wage stagnation began as a result of the , abolition of the Bretton Woods currency system , in 1971-73. However, due to that change, which rendered the US dollar the world’s official reserve currency, the US dollar depreciated, which increased US export competition and depressed imports.
The dollar then surged again in the early 80s and collapsed in the late 80s after the Plaza Accord ( an agreement to weaken the dollar ):
And the Japanese yen strengthened more or less consistently against the dollar throughout the entire period of stagnation in terms of wages.
So trade with Europe and Japan just doesn’t line up with the wage stagnation in terms of timing, either. If you believe that globalization’s overall import penetration is the most important indicator of globalization, trade might have had an impact in the 1970s. If you believe that trade may have had a better indicator, trade might have had an impact in the 1990s. But then the trade deficit and imports both surged in the late 1990s, which is when the wage stagnation , ended.
In any case, we’re left with a little bit of a mystery. The only macro trend that lines up very neatly with the great wage stagnation of 1973-1994 is the productivity slowdown, but there’s no good theory explaining how that could explain , all , of the wage stagnation, since productivity rose more than wages. De-unionization, financialization, inflation, and trade with Europe and Japan can at best account for some sub-periods of the wage stagnation, not the entire thing.
In fact, the great wage stagnation may have been the result of a number of factors, including inflation and a rise in imports in the 1970s, accelerated de-unionization and financialization, and the collapse of exports in the 1980s, with productivity stagnation acting as a corrosive factor the entire time.
But we should always be suspicious of complex, multi-factorial explanations for trend breaks on a chart. That wage stagnation screams out for a short story because it started and abruptly ended. We just don’t have one yet.
Update: Some people have questioned whether the widespread influx of women into the US workforce may have contributed to the wage stagnation from 1973 to 1994. Here’s the employment rate ( also called the “employment-population ratio” ) for American women:
The timing here doesn’t line up in the first place, as you can see. When the wage stagnation began, American women had already been entering the workforce at a steady clip for 25 years. ( The labor force participation rate, for women, appears to be much the same. )
Also,  , empirical evidence , suggests at most , a small effect , of female labor supply on male wages— and if you look at the breakdown for men and women, you see that the stagnation for men was  , worse , than for women over 1973-1994.
And theoretically, women’s widespread employment shouldn’t lead to a salary decline overall. Just like , immigration , or a baby boom, women’s entry into the workforce is both a positive labor , supply , shock and also a positive labor , demand , shock at the same time— when women earn more, they spend most of what they earn, on things that require labor to produce. So we shouldn’t anticipate that the addition of women to the workforce will lower wages.
Thus, this theory also doesn’t line up with the timing of the stagnation, and it’s not clear why we would expect it to be a major factor in the first place.
This article was originally published on Noah Smith’s Noahpinion , Substack, and is republished with kind permission. Become a Noahopinion , subscriber , here.