<p>No they do not have to increase for an economy to function.</p>
<p>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 <a href="https://economics.stackexchange.com/questions/15558/productivity-vs-real-earnings-in-the-us-what-happened-ca-1974">older answer</a>).</p>
<p><a href="https://i.sstatic.net/FDT3A.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/FDT3A.jpg" alt="enter image description here" /></a></p>
<p>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.</p>
<p>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).</p>
<p>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).</p>
<p>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).</p>
<p>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).</p>
<p>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.</p>

CC BY-SA 4.0
2021-11-17T18:19:51.187Z
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
user123124
CC BY-SA 4.0
2021-11-17T19:11:31.730Z
@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
1muflon1
CC BY-SA 4.0
2021-11-17T19:13:16.950Z
thanks alot, stuff are hard to measure!
user123124
CC BY-SA 4.0
2021-11-23T07:07:55.513Z
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.
H2ONaCl
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2021-11-23T07:14:51.393Z
We are also ignoring redistribution changes in that period.
H2ONaCl
CC BY-SA 4.0
2021-11-23T07:16:24.913Z
@H2ONaCl regarding your first point as mentioned in the answer  "Now to be fair, there are some economists who will dispute this because it is hard to measure real wages..." problems with non-monetary benefits is that they are hard to measure. You can make reasonable argument they stayed constant of course  others might disagree. Regarding your second point, this is not driven just by manufacturing, the graph shows manufacturing because that is where you would expect wages to better track productivity than in service sector. However, this being said if you look at statistics for
1muflon1
CC BY-SA 4.0
2021-11-23T07:18:12.210Z
all production and non-supervisory workers in the US https://i.sstatic.net/3f4Pu.jpg the image pretty much the same. Btw this is what you would expect since by Balassa-Samuelson theorem you would expect wages in service sector to track wages in manufacturing.
1muflon1
CC BY-SA 4.0
2021-11-23T07:30:33.597Z
"Production and non-supervisory" is a important class because politicians prefer to do photo opportunities with these people but again we are selecting a subset of workers.
H2ONaCl
CC BY-SA 4.0
2021-11-23T07:33:52.257Z
Anyway, all my remarks are really about the question "have workers done badly" which is a little different from "will the economy be well functioning" which is what user123124 is asking.
H2ONaCl
CC BY-SA 4.0
2021-11-23T07:45:32.677Z
@H2ONaCl but you can’t take workers as whole because that includes CEOs, it is standard to exclude those in literature because they would skew statistics. Non-supervisory excludes people in top management roles. By the way doing this is considered a good practice not a problem in literature. Next also I don’t think US workers did badly even if the wages stagnated given they are worlds top 10% in terms of income. Moreover, recently we see correction where real wages again increase, my point is that it is reasonable to conclude they were more or less stagnant for the 40y period mentioned
1muflon1
CC BY-SA 4.0
2021-11-23T08:21:14.300Z
@H2ONaCl well that is the question of controlling for quality improvements in goods and services mentioned in my 3rd paragraph. Also I don’t think anyone would question that US poor have nice cars and bottled water today. Rather most would say they also had a nice cars and bottled water in the past. Is driving modern Nissan Altima so much better than driving 70s Chevrolet? Of course, depending on how you estimate this you can show real improvements but again it’s generally accepted there was but that’s why I put those caveats in my answer
1muflon1
CC BY-SA 4.0
2021-11-17T18:06:14.517Z
2021-11-17T18:06:14.517Z
1muflon1
<p>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?</p>
<p>Or does this necessarily imply that one has not taken part in the increase in productivity? Is that all that bad?</p>
<p>How do economists think, will the economy be well functioning if real wages do not rise?</p>

CC BY-SA 4.0
2021-11-17T17:11:13.073Z
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.
ChinG
CC BY-SA 4.0
2021-11-17T17:33:30.127Z
@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..
user123124
<macroeconomics>
Does real wages have to increase for an economy to function from a mechanical point of view
user123124
# Does real wages have to increase for an economy to function from a mechanical point of view

(Asked by: username_0 on 2021-11-17)

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?

**Tags:** macroeconomics

> **Comments:**
> **username_1**: 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.  
> **username_0**: @username_1 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..  

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## 1 answers

### Answer by username_2 on 2021-11-17. Score: 2 | Accepted answer

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](https://economics.stackexchange.com/questions/15558/productivity-vs-real-earnings-in-the-us-what-happened-ca-1974)).

[![enter image description here](https://i.sstatic.net/FDT3A.jpg)](https://i.sstatic.net/FDT3A.jpg)

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.

> **Comments:**
> **username_0**: 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  
> **username_2**: @username_0 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  
> **username_0**: thanks alot, stuff are hard to measure!  
> **username_3**: 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.  
> **username_3**: We are also ignoring redistribution changes in that period.  
> **username_2**: @username_3 regarding your first point as mentioned in the answer  "Now to be fair, there are some economists who will dispute this because it is hard to measure real wages..." problems with non-monetary benefits is that they are hard to measure. You can make reasonable argument they stayed constant of course  others might disagree. Regarding your second point, this is not driven just by manufacturing, the graph shows manufacturing because that is where you would expect wages to better track productivity than in service sector. However, this being said if you look at statistics for  
> **username_2**: all production and non-supervisory workers in the US https://i.sstatic.net/3f4Pu.jpg the image pretty much the same. Btw this is what you would expect since by Balassa-Samuelson theorem you would expect wages in service sector to track wages in manufacturing.  
> **username_3**: "Production and non-supervisory" is a important class because politicians prefer to do photo opportunities with these people but again we are selecting a subset of workers.  
> **username_3**: Anyway, all my remarks are really about the question "have workers done badly" which is a little different from "will the economy be well functioning" which is what username_0 is asking.  
> **username_2**: @username_3 but you can’t take workers as whole because that includes CEOs, it is standard to exclude those in literature because they would skew statistics. Non-supervisory excludes people in top management roles. By the way doing this is considered a good practice not a problem in literature. Next also I don’t think US workers did badly even if the wages stagnated given they are worlds top 10% in terms of income. Moreover, recently we see correction where real wages again increase, my point is that it is reasonable to conclude they were more or less stagnant for the 40y period mentioned  
> **username_2**: @username_3 well that is the question of controlling for quality improvements in goods and services mentioned in my 3rd paragraph. Also I don’t think anyone would question that US poor have nice cars and bottled water today. Rather most would say they also had a nice cars and bottled water in the past. Is driving modern Nissan Altima so much better than driving 70s Chevrolet? Of course, depending on how you estimate this you can show real improvements but again it’s generally accepted there was but that’s why I put those caveats in my answer  

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