A favorite "progressive" trope is that America's middle class has stagnated economically since the 1970s. One version of this claim, made by Robert Reich, President Clinton's labor secretary, is typical: "After three decades of flat wages during which almost all the gains of growth have gone to the very top," he wrote in 2010, "the middle class no longer has the buying power to keep the economy going."

This trope is spectacularly wrong.

It is true enough that, when adjusted for inflation using the Consumer Price Index, the average hourly wage of nonsupervisory workers in America has remained about the same. But not just for three decades. The average hourly wage in real dollars has remained largely unchanged from at least 1964—when the Bureau of Labor Statistics (BLS) started reporting it.

Moreover, there are several problems with this measurement of wages. First, the CPI overestimates inflation by underestimating the value of improvements in product quality and variety. Would you prefer 1980 medical care at 1980 prices, or 2013 care at 2013 prices? Most of us wouldn't hesitate to choose the latter.

Third and most important, the average hourly wage is held down by the great increase of women and immigrants into the workforce over the past three decades. Precisely because the U.S. economy was flexible and strong, it created millions of jobs for the influx of many often lesser-skilled workers who sought employment during these years.

Since almost all lesser-skilled workers entering the workforce in any given year are paid wages lower than the average, the measured statistic, "average hourly wage," remained stagnant over the years—even while the real wages of actual flesh-and-blood workers employed in any given year rose over time as they gained more experience and skills.

These three factors tell us that flat average wages over time don't necessarily support a narrative of middle-class stagnation. Still, pessimists reject these arguments. Rather than debate esoteric matters such as how to properly adjust for inflation, however, let's examine some other measures of middle-class living standards.

No single measure of well-being is more informative or important than life expectancy. Happily, an American born today can expect to live approximately 79 years—a full five years longer than in 1980 and more than a decade longer than in 1950. These longer life spans aren't just enjoyed by "privileged" Americans. As the New York Times reported this past June 7, "The gap in life expectancy between whites and blacks in America has narrowed, reaching the lowest point ever recorded." This necessarily means that life expectancy for blacks has risen even more impressively than it has for whites.

Americans are also much better able to enjoy their longer lives. According to the Bureau of Economic Analysis, spending by households on many of modern life's "basics"—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.

One underappreciated result of the dramatic fall in the cost (and rise in the quality) of modern "basics" is that, while income inequality might be rising when measured in dollars, it is falling when reckoned in what's most important—our ability to consume. Before airlines were deregulated, for example, commercial jet travel was a luxury that ordinary Americans seldom enjoyed. Today, air travel for many Americans is as routine as bus travel was during the disco era, thanks to a 50% decline in the real price of airfares since 1980.

Bill Gates in his private jet flies with more personal space than does Joe Six-Pack when making a similar trip on a commercial jetliner. But unlike his 1970s counterpart, Joe routinely travels the same great distances in roughly the same time as do the world's wealthiest tycoons.

What's true for long-distance travel is also true for food, cars, entertainment, electronics, communications and many other aspects of "consumability." Today, the quantities and qualities of what ordinary Americans consume are closer to that of rich Americans than they were in decades past. Consider the electronic products that every middle-class teenager can now afford—iPhones, iPads, iPods and laptop computers. They aren't much inferior to the electronic gadgets now used by the top 1% of American income earners, and often they are exactly the same.

Even though the inflation-adjusted hourly wage hasn't changed much in 50 years, it is unlikely that an average American would trade his wages and benefits in 2013—along with access to the most affordable food, appliances, clothing and cars in history, plus today's cornucopia of modern electronic goods—for the same real wages but with much lower fringe benefits in the 1950s or 1970s, along with those era's higher prices, more limited selection, and inferior products.

Despite assertions by progressives who complain about stagnant wages, inequality and the (always) disappearing middle class, middle-class Americans have more buying power than ever before. They live longer lives and have much greater access to the services and consumer products bought by billionaires.

Mr. Boudreaux is professor of economics at George Mason University and chair for the study of free market capitalism at the Mercatus Center. Mr. Perry is a professor of economics at the University of Michigan-Flint and a resident scholar at the American Enterprise Institute.

A version of this article appeared January 23, 2013, on page A17 in the U.S. edition of The Wall Street Journal, with the headline: The Myth of a Stagnant Middle Class.

The Wall Street Journal

August 18, 1997

The Case Against Employee Benefits

By Craig J. Cantoni

As UPS’s battle with the Teamsters over pensions and part-time workers demonstrates, the American system of  employer-provided health and retirement benefits has become an anachronism, a holdover from World War II that is now out of step with the realities of today’s labor market.   Employers and employees would be better off if medical coverage and retirement programs were independent of the employment relationship.  To understand why, it is necessary to look at how the programs came into existence.

In 1940, prior to America’s entry to World War II, only 10 percent of the American work force, or 12 million people, were covered by health insurance, primarily through such plans as Blue Cross and Kaiser Pemanente, which grew in response to the hardships of the Great Depression.  After America’s entry in the war, Congress passed the Stabilization Act of 1942, which limited wage increases in order to keep prices and inflation in check during wartime.  The Act permitted the adoption of employer-paid insurance plans in lieu of wage increases. 

Then, the War Labor Board ruled in 1945 that it was illegal to modify or terminate group insurance plans during the life of a labor contract.  That was followed by a National Labor Relations Board ruling that redefined wages to include insurance and pension benefits. America was on its way to employer-paid health and retirement benefits. 

The Liberty Mutual Insurance Company led the way by introducing major medical coverage in 1949, a new insurance product that coupled comprehensive coverage with the new features of deductibles and coinsurance.  By the end of 1951, 100,000 people were covered by major medical insurance; by the end of 1960, 32 million; and by the end of 1986, 156 million.  The coverage proved so popular that at its peak, 97 percent of full-time employees in medium to large companies had employer-sponsored health insurance. 

By the 1990s, however, the percentage of the population with health care coverage had dropped to 83 percent, and of those with coverage today, only 61 percent are covered through an employer plan.  The remainder either do not have coverage or are covered by the government or an individual plan.  What happened? 

One thing that happened was the decline in employment in durable goods manufacturing, where 93 percent of workers have employer-sponsored health care benefits.  At the same time, there was a growth in retail services, where only 62 percent of the predominately female work force is covered.  Further, there was a precipitous drop in the average length of service to today’s 5.6 years, a marked contrast to the lifetime employment of the 1950s and 1960s.  Even with mandated Cobra coverage (Consolidated Omnibus Reconciliation Act of 1985) and recent portability legislation, waiting periods and exclusions for pre-existing illnesses leave frequent job-changers without coverage.

The picture is even worse for retirement benefits.  Less than 50 percent of workers are covered by private retirement plans.  In construction, it is less than one-third; and in retail services, even less than that.

The most significant cause of the decline in health and retirement coverage has been the growth in the contingent work force, which, if current trends continue, will be 40 percent of the working population in ten years.  To a large extent, companies are using part-time and contract workers for the express purpose of avoiding benefit costs and the burdensome record keeping required by legislation.  Who can blame them? 

From December 1971 to December 1991, the cost of medical care alone rose 398.9 percent, while the Consumer Price Index rose 235.5 percent.  Although medical costs have leveled off for now due to managed care, the cost of all fringe benefits has climbed to the stratospheric level of 40 percent of total compensation, compared to 17 percent in 1955.  According to the Commerce Department, benefits have gone from 4.4 percent of corporate revenue in the 1950s to almost 12 percent today.  In 1966, company contributions to Social Security and Medicare were $12 billion; now they are $200 billion.  As a result, the average per employee cost of all benefits is just under $15,000.

These numbers do not include the costs of administering benefits or complying with an ever-increasing complexity of government regulations.  The Employee Retirement Income Security Act (Erisa) alone has spawned regulations that, when printed on two sides and in 10-point type, are two-feet thick.  It takes an army of outside Erisa attorneys and benefits consultants to administer and interpret the regulations, in addition to in-house benefits administrators (about one for every 1,000 employees).  Consequently, the annual cost to a mid-size or smaller business of administering just a “simple” 401(k) plan is $475 per participant.  Unfortunately, job-creating smaller businesses are hurt the most, for they cannot spread administrative and regulatory costs across more employees like their larger brethren.

And what do companies get for this trouble and money?  They get black eyes, not only from the usual adversaries in the media and government — as UPS is finding out —but also from the recipients of their generosity:  employees.  Except for the largest and richest companies that can afford gold-plated programs, benefits are often a source of employee dissatisfaction and distrust, and rarely a source of motivation or productivity.  This is particularly true with medical insurance.

Company-sponsored medical insurance creates a parent-child relationship, in which the employer plays the role of the munificent, all-caring parent, who protects the dependent employee-child from the vagaries of life — a role that is at odds, and often in conflict, with the economic decisions of running a business.  It also forces the employer to intrude on the most personal and private aspects of someone’s life, from knowing the intimate details of a family’s medical history, to knowing the gender of an employee’s unmarried partner (for those companies offering domestic partner coverage).  Once involved with such personal matters, it seems perfectly normal for employers to devote precious time and energy to matters of health and lifestyle, by offering smoking cessation programs, stress reduction classes, cholesterol screenings, health awareness lectures and news letters about diet and nutrition — all of which creates goodwill that evaporates as soon as the employer increases premiums, switches managed care networks, or denies a claim.

Non-cash benefits corrupt the employer-employee relationship in other equally important ways.   When 40 percent or so of total compensation is in the form of benefits, it is difficult for employees to put a true market value on their compensation package or to walk away from a job that they do not like.  Similarly, from a company’s point of view, it is difficult to have true pay-for-performance when 40 percent of pay is an entitlement for which the company gets very little in return, other than complaints and headaches.  

What is the answer?  With respect to health insurance, it certainly is not another Rube Goldberg version of Hillary Clinton’s nationalized health scheme — although that is what Corporate America is getting one piece of legislation at a time by not joining forces to come up with a better idea. 

One better idea would be legislation mandating that private employer group health plans be replaced with non-profit, private-sector buying cooperatives, which would be open to everyone, including working and non-working people, full-time and part-time workers, single parents and their dependents, heterosexual couples, gay couples and any other variation of family life known to modern society.  The cooperatives would perform the same role as large employers:  getting reduced group insurance rates from insurance companies and managed care networks, being a consumer advocate, interpreting and explaining coverages, reconciling claim disputes, and educating members about healthy living.  

Getting companies out of the retirement business would be much easier.  Basically, it would require changes in tax and pension law to allow people to save as much money in individual retirement accounts as can be saved in corporate defined-contribution retirement plans.  The recent budget agreement took a step in this direction.  

The devil is of course in the details.  But if business leaders do not take the lead in working out the details, the government will do it for them, continuing a trend that began in the middle of World War II.  Maybe after 55 years, the time has come for business to correct an accident of history and get out of the benefits business.