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Insights from The Mind Money Spectrum Podcast Episode #142
Originally published on Tue, 15 Oct 2024 06:00:00 -0400
For high-performance professionals seeking financial security and freedom, understanding the dynamics of wage growth—or the lack thereof—is critical to building a sustainable wealth strategy. Despite decades of economic progress and technological innovation, real wages for the typical worker in the United States have remained essentially flat for over 40 years. Why is that? And what does it mean for your financial future?
In this article, we dive deep into the structural forces behind stagnant wages, share practical steps for professionals to protect and grow their wealth amidst this reality, and explain why relying solely on wage increases for your financial success is no longer a viable strategy.
Why Have Real Wages Been Flat for Decades?
When we adjust for inflation—meaning we look at purchasing power rather than just raw numbers—median household incomes today are barely higher than they were in 1980. In fact, according to Census data adjusted to 2023 dollars, the median household income rose from roughly $47,000 in 1980 to about $55,000 in 2023. That’s an annual growth rate of approximately 0.3%, a pace barely above inflation, which essentially means no meaningful real wage growth.
Meanwhile, incomes in the top deciles have grown significantly faster. The top 10% of earners saw their inflation-adjusted incomes jump from about $130,000 in 1980 to $200,000 today—more than triple the growth rate of the median. This divergence is due to multiple factors that have combined over decades to suppress wage growth for most workers while significantly enriching those with capital ownership.
Globalization and Labor Competition
One of the most influential developments since the 1980s has been globalization. The end of the Cold War and the opening of global markets exposed American workers to competition from countries where labor costs are significantly lower. Corporations increasingly outsourced manufacturing and other jobs to countries with cheaper labor, driving down domestic wage pressures.
In a hyper-competitive global landscape, companies are incentivized to compress labor costs as much as possible to maintain margins and pricing power. The labor market for many roles has effectively become a commoditized marketplace, where employees with comparable skills compete against a vast global supply, keeping wages pinned close to their marginal cost.
Policy Shifts Favoring Capital Over Labor
Economic policy changes have also played a crucial role. Since the late 1970s and early 1980s, there has been a significant shift in tax policy, regulatory environments, and judicial decisions that favor corporations and capital owners. Top marginal income tax rates dropped from over 70% to around 40%, and capital gains tax rates decreased as well. These changes incentivized wealth accumulation through asset ownership, stock appreciation, and investment income.
Simultaneously, pension plans gave way to 401(k)s, and union influence waned, reducing workers’ bargaining power. Corporate focus shifted toward maximizing shareholder value, often at the expense of wage growth and employee benefits.
Rising Costs in Key Living Expenses
While wages have stagnated, costs for essentials like housing, healthcare, and education have soared—often outpacing inflation by wide margins. For many families, these three categories now absorb a significantly larger share of household income than 40 years ago. This squeeze further erodes disposable income and financial well-being for wage earners.
What Does This Mean for High-Performance Professionals?
As a fee-only fiduciary financial advisor, my responsibility is to help you adapt your financial strategy to realities, not hopes. The takeaway from the stagnation of real wages is this:
- Do not rely on wage increases alone to build lasting wealth.
- Prioritize asset ownership and investment growth to participate in wealth creation.
- Plan for inflation and rising essential costs explicitly within your budget and long-term plan.
For professionals accustomed to focusing on climbing the career ladder to increase income, this can be a difficult reality to face. But a forward-thinking approach acknowledges that your paycheck may not substantially improve in real terms over your working life.
Practical Steps to Navigate a Future of Flat Wages
1. Embrace Equity Ownership and Investments
Wages have stagnated partly because productivity gains have flowed disproportionately into equity value rather than payroll. Stock markets historically have produced real returns of about 7% per year, far outpacing wage growth. This means that owning stocks—either directly or through retirement accounts—remains essential for growing your net worth.
As a high-performance professional, even if you receive stock options or equity compensation through your employer, it’s important to build an ownership mindset over your finances. Maximize contributions to tax-advantaged retirement accounts like 401(k)s and IRAs. Consider taxable investment accounts as well to complement your long-term growth portfolio.
2. Live Below Your Means and Budget for Rising Expenses
Healthcare, education, and housing costs are unlikely to fall. Managing these expenses and planning for their increases is critical. This means:
- Setting realistic budgets that anticipate these rising costs.
- Exploring insurance options strategically to control healthcare expenses.
- Considering housing choices carefully—balancing asset appreciation opportunities against affordability.
Maintaining discipline in your personal cash flow will provide greater flexibility to invest and prepare for the future.
3. Build Multiple Income Streams
Depending solely on W-2 income with no participation in profit or equity is a vulnerable position in today’s economic landscape. Explore ways to generate supplementary income through:
- Side businesses or consulting gigs leveraging your skills.
- Investments generating dividends or interest income.
- Rental properties, if aligned with your personal risk tolerance and financial plan.
While alternative investments like private equity or cryptocurrencies can be tempting, I caution my clients to stay focused on transparent, liquid, and cost-effective instruments like stocks and bonds for most of their portfolio.
4. Negotiate Compensation Beyond Just Base Salary
When evaluating job offers or raises, don’t just consider your base wage. Look carefully at total compensation, including bonuses, equity participation, profit sharing, and benefits. If possible, seek roles that offer alignment with company performance via stock options or restricted stock units (RSUs). Even a modest stake in your company’s growth can significantly enhance your total income over time.
5. Strengthen Your Financial Education and Planning
Understanding these structural dynamics arms you to make smarter choices. Work with a fee-only fiduciary advisor who prioritizes your best interests to develop a personalized financial plan that accounts for:
- Inflation-adjusted income needs.
- Comprehensive investment strategies.
- Tax efficiency and risk management.
- Retirement readiness that doesn’t depend on raising wages.
Financial security comes from planning and disciplined execution, not hopes that wages will suddenly surge.
A Realistic Yet Optimistic Perspective
It’s natural to want to believe that real wages will recover to the robust growth witnessed in the post-World War II period through the 1970s. However, the economic foundation supporting that era—high corporate tax rates, strong unions, limited globalization, and growing industrial capacity—is no longer in place.
While wages for many workers will likely remain flat in real terms, technology, automation, and artificial intelligence continue to lower costs of goods and services. This could partially offset stagnant income growth by reducing living expenses over time. There is also potential for emerging compensation models that better share profits with employees, though widespread change appears slow.
The good news? Those who proactively integrate investments and asset ownership into their financial strategy—leveraging stocks and bonds prudently—can still grow their wealth meaningfully. Your paycheck alone may not do the heavy lifting anymore, but your overall financial plan can.
Conclusion: Position Yourself for Freedom in a Flat Wage World
The reality is clear: Wages on a real, inflation-adjusted basis have been flat for decades and structurally face strong headwinds going forward. This is not a call to despair but a call to action. To achieve true financial security and freedom:
- Recognize the limits of wage growth.
- Accelerate ownership and investment participation.
- Manage expenses mindfully, with inflation-aware planning.
- Seek advice from fiduciary professionals who prioritize your best interest.
By adapting your approach now, you take control over your financial destiny rather than passively hoping for wage increases that may never come.
For those committed to intentional financial planning and disciplined investing, there remains opportunity for long-term growth and freedom—for yourself and your family.
If you’d like help designing a plan aligned to these realities, contact me. Let’s build a roadmap that meets your goals in today’s economy.
Stay informed. Stay proactive. Invest wisely.
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Need More Help?
If you’re ever in need of guidance, these blog posts may be of help. But be sure to contact a financial, tax, or legal professional for guidance and information specific to your individual situation. And as always you can reach out to me directly here with questions or concerns about your personal situation.