Wages Are Higher Than Reported

Bernie, your convictions are beyond reproach, but your economics...let's talk.

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First off, thanks for calling attention to inflation's role in measuring well-being. Inflation gets a lot of airtime when it comes to tracking prices, but it doesn't get nearly enough focus for how it impacts wage growth.

I see where you're coming from. Using the government preferred measure--the Consumer Price Index (CPI)--weekly wages for non-managerial employees increased only 0.5% since 1979. For lower-income groups, it's barely better. The lowest 25% of hispanic/latino wage earners only saw wages increases of 2.7% since 1979. While not negative, these number is still unacceptable. But here's the thing: they're also wrong!

The CPI overstates inflation. This isn't controversial. There are built in biases makes CPI an upward estimate on inflation--meaning true inflation is lower than our officials reports suggest. There are three big problems with the CPI:

1) Substitution Bias: The CPI assumes we buy the same exact things everytime we go to the grocery store. But when prices rise, people adjust—if steak gets expensive, they buy chicken instead. CPI doesn’t capture this, making inflation seem worse than it actually is.

2) New Product Bias: CPI treats a $1,000 computer in 2000 as the same product as a $1,000 computer today, even though today’s machine is exponentially better. This means CPI ignores technological improvements that increase quality of life.

3) Outlet Bias: CPI assumes everyone pays full retail price. But Americans shop at discount stores, outlets, and online—getting the same goods cheaper. CPI doesn’t reflect this, making cost-of-living increases look worse than reality.

A better alternative to the CPI is a combination of the Personal Consumption Expenditures Price Index (PCE-PI) and the Chained CPI index. Unlike the CPI, the Chained CPI accounts for the substitution bias--meaning it actually reflects how people change their spending habits as prices change. Here's where things get interesting.

The Chained Index shows inflation has been overstated by 35% since 1967. This has massive implications for real wages. The measly 0.5% increase of non-managerial wages is actually 18%! The lowest quarter of wage earners showed a 2.7% increase using the CPI, but in reality their wages increased closer to 20%. Across the board—whether looking at Black wages, White wages, or lower-income wages—everyone is better than official reports show.

Bernie, more innovation is coming. Take Goodie Bag, a start-up that offers steeply discounted food to consumers. As it expands nation-wide, it'll push food prices down in a way that the CPI will never capture. Just ask a woman in Charlotte, NC who used Goodie Bag to get a chimichurri shrimp couscous salad, brussels sprouts, meatballs, and a cupcake from a gourmet market--all for only $9!

If we want to shape the future, we have to start with an accurate picture of the present. Hopefully, this breakdown makes sense, and if not, you can check my work—all my code is open-source on GitHub. The numbers show that Americans are better off than advertised, but that doesn’t mean we stop pushing for progress. It means we look for better solutions—ones rooted in innovation and a clearer understanding of reality.

Phil Gramm, Robert Ekelund, and John Early have laid out a roadmap for this, and their policy recommendations deserve attention.

Thanks for your service, Bernie. Now, let’s focus on the right data to build the right future.