The Labor Market Sucks for Younger Workers

Fatih Guvenen, Greg Kaplan, Jae Song, and Justin Weidner have another bombshell paper: 

"Using panel data on individual labor income histories from 1957 to 2013, we document two empirical facts about the distribution of lifetime income in the United States. First, from the cohort that entered the labor market in 1967 to the cohort that entered in 1983, median lifetime income of men declined by 10%–19%. We find little-to-no rise in the lower three-quarters of the percentiles of the male lifetime income distribution during this period. Accounting for rising employer-provided health and pension benefits partly mitigates these findings but does not alter the substantive conclusions. For women, median lifetime income increased by 22%–33% from the 1957 to the 1983 cohort, but these gains were relative to very low lifetime income for the earliest cohort. Much of the difference between newer and older cohorts is attributed to differences in income during the early years in the labor market. Partial life-cycle profiles of income observed for cohorts that are currently in the labor market indicate that the stagnation of lifetime incomes is unlikely to reverse. Second, we find that inequality in lifetime incomes has increased significantly within each gender group. However, the closing lifetime gender gap has kept overall lifetime inequality virtually flat. The increase within gender groups is largely attributed to an increase in inequality at young ages, and partial life-cycle income data for younger cohorts indicate that the increase in inequality is likely to continue. Overall, our findings point to the substantial changes in labor market outcomes for younger workers as a critical driver of trends in both the level and inequality of lifetime income over the past 50 years.”

I was pretty shocked by how stark these results are. Even after all the other news on inequality trends, this result still feels like a real blow. Some reactions on Twitter (e.g., Russ Roberts here) have emphasized that stagnating standards of living really aren’t plausible, and possibly the way we measure inflation is wrong. The inflation indices are quite probably wrong - hard questions are hard - but I think this view may be misjudging the magnitudes. Say you think we’re massively underestimating how much cheaper everything’s getting, e.g. CPI is off the mark by 2% every year (because it might not do a good job of accounting for new products being introduced and for people switching between the things they buy when prices change). Note that our best estimates suggest CPI is off by around 0.8%. Properly accounting for this might make the decline in median lifetime incomes go away, and you might in fact see a slight increase. But does that really alter your substantive interpretation of the paper? There’s a very real chance a large majority of workers haven’t seen meaningful increases in income in several decades. That feels like a risk worth worrying about, even if it turns out that the trend is slightly positive and not negative. There is uncertainty in empirical work, don't get distracted by the point estimate.