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TheStreet Open House

Wages Have Fallen Further Than You Thought

NEW YORK ( TheStreet) -- In a grim blog post in Tuesday's New York Times, two economists offer compelling evidence that wages have fallen even more than most people realize -- and most of us already thought things were pretty bad.

If so, the persistent stagnation in wages will be a serious drag on Americans' long-term plans for expenses such as college and retirement. What can the individual do to swim against this current?

There are a few strategies, but none are especially easy.

Conventional measures show that between 1970 and 2010 median earnings for men ages 25 to 64 fell by 4%, adjusted for inflation, according to the blog's authors, Michael Greenstone, an MIT professor and director of the Hamilton Project, and Adam Looney, Hamilton's policy director. Both men are also senior fellows at the Brookings Institution.

But that 4% figure, as unsettling as it is, is also misleading, they add, because it doesn't account for the fact that in 2010 only 81% of men in that age range had jobs, down from 94% in 1970.

"When we consider all working-age men, including those who are not working, the real earnings of the median male have actually declined by 19% since 1970," Greenstone and Looney write. Key factors are unemployment, rising incarceration rates, more men enrolled in the Social Security Disability Insurance program and the country's inadequate investment to improve work skills and productivity, Greenstone and Looney say.

Women have done better, with wages increasing by 71% over that period. But since they started so much lower, they still make far less than men. Their move from the home to workplace counts for much of the gain.

Of course, if you are working, these nationwide figures may seem irrelevant. But the trend does affect you because you must compete with people who will work for low wages. And because all those who earn less are also America's consumers, their reduced buying power is a drag on the economy, which probably affects you as well.

Poor prospects for wage gains can upend long-term plans. Most retirement calculators, for instance, ask the user to make assumptions about wage gains over time, and many people key in a figure of 4% or 5% a year, assuming they will beat the average inflation rate of around 3%. These expected wage gains have a snowballing effect, allowing one to put more into the retirement fund year after year, earning more in interest on interest. But if wages adjusted for inflation are actually falling rather than rising, the worker will fall further and further behind as the years pass, ending up with far too little.

What can you do? Breaking down the figures shows that the more education you have, the better the prospects for earning inflation-beating raises. Drop out of high school and you may be doomed; get a college degree and things will be much better - assuming it's in something like engineering, not art history.

People who can pick up and move for a better job are likely to do better than those who cannot. And it's best to look at your employer's business prospects with a cold eye. If the ship is sinking, get off sooner rather than later.

The list of other remedies is becoming familiar: spend less, save more, invest more in stocks rather than bonds and cash, buy a modest home rather than an expensive one, plan to work to 68 or 70 if possible, plan to spend less in retirement.

It's bitter medicine, but look on the bright side: If you take it you'll be ahead of the game if economic conditions turn out better than you expect.

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