Common beliefs are wrong - wages are still growing, wages are more stable than ever and inequality has little to do with the 1%.

From We got it all wrong by Allison Schrager.

I am a bit of a big data skeptic. I just don’t think it’s that new or interesting; it’s just a bigger version of what we already had. But sometimes the ability to manage very large data sets allows us to do a new analysis that totally overturns what we thought was true. You probably never heard about it, but that’s what happened in economics several years ago.

For years, economists, the media, and politicians all believed that work had gotten riskier. The latter two still believe it. As the narrative goes, people can’t count on stable wages anymore because income has become less predictable. This argument was central to my PhD dissertation. I even proved it using survey data.

Then, a few years later, a group of economists got their hands on Social Security records. This was an enormous data set (and a huge improvement on the surveys everyone else used) that could track what happened to the wages of many individuals over their lifetime and how they changed. This was important because when we talk about income stagnation, usually we look at median wages of the whole population at a single point in time. That does not actually tell you much about what’s happening to individuals. Older people get smaller raises, so stagnant wages may just mean an aging population. When people say, “Americans have not gotten a raise,” they could just be referring to demographic changes, not the experience of individual households. The idea that we have stagnant wages and more risk drove our policies and our conversation about work.

One of the economists who worked on the Social Security data project is Fatih Guvenen, and he joined me on my podcast last week about what he found. As it turns out, once we could examine what happened to individuals’ wages over their lifetime, many of our narratives were totally wrong. This should have been on the cover of the New York Times.

Not only are wages still growing, but they are also more stable than ever. Men’s wages still grow (but at a slower rate) and start lower when they are young. This all means men earn less over their lifetime, but they experience less risk—so it’s hard to make a welfare judgement. Other shocking findings are that high-paid CEOs are not to blame for runaway inequality, and most of the 1% are only in the 1% for a few years of their life.

One thing I love about Fatih’s work is that he approaches macro with a finance sensibility. Wages are an asset like any other, so understanding their risk characteristics takes an understanding of finance. And it turns out that while wage variability has declined, tail risk during the business cycle has increased. We know from finance that when we become too focused on volatility and ignore tail risk, we don’t insure or hedge properly. But that sums up our approach to policy lately.