I don’t normally write about market ups and downs, but I thought now would be a good time to write because there is something about economics that I’ve been wrong about for some time. And now I have a great opportunity to explain where I and a lot of other economists have gotten off-track.

I used to tell people that wages haven’t risen since the late sixties or early seventies. That isn’t quite true.

Average hourly wages for non-management workers actually fell from 1972 to 1990. But they have been rising since 1990. And the rate at which they rise has been slowly increasing.

So why did people like me think that wages haven’t gone up since 1972?

Since increases compound, when you see the graphs it looks like wages haven’t risen at all for the entire 50 or so year period. But what actually happened is that there was about an 18 year “lost” period where workers not only didn’t keep up with inflation, they actually went backwards. You just have to be paying very close attention to the graph to see that point.

Also, this all started getting public attention around 2011 or so. At that time, the best years of wage growth hadn’t happened yet.

Well, this year, for the first time in decades, wages have risen as fast as economic growth. This was the norm from the early 1800’s until the 1970’s. Not only that, but wage growth is actually being driven by rising wages for the lowest-earning workers. This may very well be the result of so many battles to increase the minimum wage, since increasing the wages of the lowest earners puts market pressure on employers to increase everyone else’s wages too. Or, it may simply be the result of low unemployment, which forces companies to raise wages in order to attract workers.

But for me the important thing to note is that, contrary to what I used to believe, rising wages are part of a long term trend that has been gaining steam since 1990.

Right now, as I’m sure you’re probably aware if you’ve been looking at your investment statements, the US stock market is at an all-time high.

Whenever we have a long stretch of good returns people worry there is a bubble. There is never any way to predict when a crash is going to happen, so for all I know a market crash could come tomorrow. But at the moment I’m not exactly worried. Economic growth this time around is being caused by rising wages and technological improvement. That is the sort of economic growth that produces lasting good returns for investors, even if there are temporary crashes along the way.

Another way of saying this is that our situation right now is very unlike the situation in 2008, when a real estate bubble that had been well-known for at least two years was clearly being fueled by absurd speculation. And it is also different from the top-heavy economic growth of 1996-1999, when manic stock returns were being driven by only a few young tech companies (a couple of which, admittedly, did eventually realize their potential.)

For anyone who is widely diversified it is also worth noting that the returns to international stocks and small stocks have not been nearly as good as the returns to large US stocks. This means that you haven’t made as much money as a less diversified investor over the last couple of years. But at the same time, your investments still have a lot of room to grow. And even if we do see a crash, it is less likely that international or small stocks will get hit as hard.

So I am still feeling pretty optimistic right now. And I would encourage everyone to do the same thing as always–ignore the news, forget short-term market fluctuations, and remember that in the long run only optimism is rational.


*Note: Throughout this piece, wages refers to real wages and economic growth refers to real economic growth. In other words, I am leaving out increases that happened simply due to inflation.