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Ive been trying to figure out why real wages should increase. If one can still buy the same stuff one could 20 years ago, isn't that good enough?

Or does this necessarily imply that one has not taken part in the increase in productivity? Is that all that bad?

How do economists think, will the economy be well functioning if real wages do not rise?

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    $\begingroup$ I think this is more of an ideological/normative question. One issue is that changes in real wages are not the same across the distribution of income, making inequality worse. Second, classical economic theory suggests that real wages should track labour productivity. The fact that real wages have remained stagnant, while productivity has been increasing point to the fact that these profits are accruing to say, firm owners. Many on the left may have an issue with this, again from an ideological perspective. $\endgroup$
    – ChinG
    Nov 17 at 17:11
  • $\begingroup$ @ChinG so basically, using "income" to compute GDP, a larger share comes from dividends? since "workers" are not taking part in increase in productivity if it had occurred. This in turn skewing the distribution. Just as an example of what could take place.. $\endgroup$
    – user123124
    Nov 17 at 17:33
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No they do not have to increase for an economy to function.

In fact, in the US during the period between 1975 - 2010 real wages tended to approximately stagnate as you can see figure published in the Scientific American, Nov 2018, p 61 (note I obtained the figure from this older answer).

enter image description here

Now to be fair, there are some economists who will dispute this because it is hard to measure real wages and control for quality improvements of goods and services people buy with their wages, but it is generally agreed taht during 1975-2010 US real wages were either stagnant or if growing only very slowly.

Consequently, if you want to know what happens to an economy if there is no real wage growth over period of time just look at the US (1975-2010).

Clearly economy can function with stagnant real wages (it could function even with declining ones, as the graph shows there were periods of time where real wages even declined a bit).

More generally, virtually any macro model of an economy that we use would work and not break down with zero growth in real wages (see Romer Advanced Macroeconomics for an overview).

There is also no reason to think growth of real wages makes economy function less and vice versa (especially not in long run, in short run it is actually growth of real wages that can cause frictions if wages are sticky).

Whether this is not good or good enough or bad depends on your personal moral/political values and it is outside of realm of economics to ascertain.

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  • $\begingroup$ Thanks! Let's assume we have a constant population and positive real growth but flat real wages then using the income measure for GDP it must imply that productivity of labor is stagnant right? w.o thinking about if this is good or bad or if certain ppl are "built" to be "unproductive and poor", again just mechaics $\endgroup$
    – user123124
    Nov 17 at 18:19
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    $\begingroup$ @user123124 not necessarily because there could be something else going on, eg change in labors bargaining power etc. However, it could mean that the productivity of labor is stagnant. Empirically labor productivity did increased over this period. However, labor productivity is difficult to measure, and often capital productivity coefficients will get loaded onto labor coefficients in estimates, so its possible that our labor productivity estimates are biased. Also recently real wages started to increase again in the US $\endgroup$
    – 1muflon1
    Nov 17 at 19:11
  • $\begingroup$ thanks alot, stuff are hard to measure! $\endgroup$
    – user123124
    Nov 17 at 19:13
  • $\begingroup$ BLS data seem to separate wages from benefits. A quote... "The usual weekly earnings data reflect only wage and salary earnings from work, not gross income from all sources. These data do not include the cash value of benefits such as employer-provided health insurance." There was more total compensation than the graph indicates. Not only that, it's strange that there is the label "real wages of goods-producing workers". This isolates the part of the workforce that fared worse from global trade. It would be interesting to see data for all workers including the services-producing workers. $\endgroup$
    – H2ONaCl
    Nov 23 at 7:07
  • $\begingroup$ We are also ignoring redistribution changes in that period. $\endgroup$
    – H2ONaCl
    Nov 23 at 7:14

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