The Cost of Living Crisis

The cost of living crisis facing American middle- and working-class households is not primarily a story about wages -- though wages for most workers have stagnated in real terms since the late 1970s. It is a story about the divergence between wage growth and the cost of the goods and services that define a middle-class life: housing, healthcare, childcare, and higher education. These four categories have all risen dramatically faster than wages over the past four decades, making the basic economic trajectory that previous generations could reasonably expect -- home ownership, healthcare access, college for children, retirement security -- increasingly unavailable to median-income Americans.

Housing is the most dramatic case. The median home price in the United States in 1970 was approximately $17,000 -- roughly 2.4 times the median annual household income. By 2022, the median home price had risen to approximately $430,000, while median household income had risen to approximately $70,000 -- a ratio of 6.1 times annual income. The down payment required for a conventional mortgage (20% of purchase price) rose from roughly half a year's income to more than one year's income over this period, while mortgage payments as a fraction of income rose even more sharply as interest rates fluctuated and prices outpaced income.

Healthcare costs have followed a similar trajectory. US healthcare expenditure per capita has risen from roughly $350 in 1970 (in current dollars) to over $12,000 in 2022 -- growing far faster than both GDP and wages. The share of this cost borne directly by patients through premiums, deductibles, and copayments has also increased as employers shifted costs to employees. A significant fraction of personal bankruptcies in the United States -- estimates range from 25% to 66%, depending on methodology -- involve medical costs as a contributing factor.

The costs that matter most to middle-class families -- housing, healthcare, college, childcare -- have all risen dramatically faster than wages. A generation ago, one income could buy a house, raise children, and send them to college. Today, two incomes often cannot.Adapted from Elizabeth Warren & Amelia Warren Tyagi, The Two-Income Trap (2003)

The chart below indexes median home prices and median wages to 1970 = 100. The divergence is visually striking and economically consequential. Housing wealth, which has grown dramatically, is captured primarily by those who already own homes -- those who entered the housing market in earlier decades when prices were lower. Those who attempt to enter the market now face prices that have outpaced their wages by a ratio of roughly three to one over the past fifty years. This dynamic produces an intergenerational wealth transfer from renters to homeowners and from younger to older generations that operates largely outside public policy debate.

Childcare costs present a similar structure: the median annual cost of full-time childcare for an infant in the United States exceeds $15,000 in most major metropolitan areas -- more than the cost of in-state college tuition in many states, and a significant fraction of the median household income. Unlike most peer nations, the United States provides no universal public childcare system, leaving the cost to be borne by families at the precise moment in their life cycle when they are most constrained financially. The result is both a cost of living crisis and a labor force participation distortion that falls disproportionately on women.