THE INFLATIONARY YARDSTICK A Mutual Threshold Saturation Critique of Nominal Wage Growth as a Welfare Metric, 1925-2025

Abstract

This paper tests whether nominal-wage growth and real-purchasing-power growth have moved together across one hundred years of United States economic history. 

Using a continuous 1925–2025 dataset built from Federal Reserve and NBER Macrohistory series, and three derived metrics that operationalize welfare in labor-time units (Real Purchasing Power Hours, the Wage-Inflation Capture Ratio, and the Productivity-Real-Wage Decoupling Index), the analysis identifies two structural breaks at 1972Q4 (Bretton Woods collapse) and 1982Q4 (Blocker disinflation), partitioning the post-1947 sample into three regimes.

Within-regime wage elasticities are −2.80 (1947–1971), +1.32 (1972–1981), and +2.78 (1982–2025), with two of three pairwise cross-regime differences statistically significant. A threshold-interaction specification yields a significant interaction in the commodity-anchored regime (λ̂ = −5.06, p = 0.001) but not in the financialized regime, with the cross-regime difference also significant (z = −2.57, p = 0.010). A counterfactual using 1948–1971 productivity-distribution coefficients yields a cumulative gap of +105.5% by 2026 (95% bootstrap CI: +58.1%, +165.8%).

Findings indicate that the wage-welfare transmission has changed structurally, that the threshold mechanism operates as predicted in the commodity-anchored regime but has been substituted in the financialized regime by a credit-driven channel decoupled from consumer-price inflation, and that official nominal statistics do not register these regime changes. The paper argues that the welfare-measurement architecture itself is a compound-fragility pillar and that constructing official labor-time purchasing-power statistics alongside the CPI is a precondition for clear policy debate.

Analysis software is found at github.com/rjgreenresearch/real-purchasing-power-simulator

All data is open sourced from the Federal Reserve Economic Database (FRED)

Keywords: real purchasing power, macroecomics, welfare measurement, prouctivity-pay decoupling, structural breaks, compound fragility, mutual threshold saturation, nominal wages, inflation, metric-policy feedback

JEL Classification: E31, E24, C32, D31, E52, N12