MW Why is everything so expensive? America has a wage problem - not a price problem.
By Mihir Torsekar
Cheap imports broke the middle class and curbing inflation won't fix the wage gap
Close to 75% of American workers say they struggle to afford more than just basic living expenses.
Wage growth is concentrated at the top, while median wages stagnate. That is the affordability crisis.
America's cost-of-living crisis is being misdiagnosed. Yes, housing is expensive. Health-insurance premiums are punishing. Childcare costs rival a second mortgage. But the core problem isn't runaway prices. It's that wage growth for the middle of the country has been structurally weak for decades.
For years, policymakers celebrated cheap consumer goods as proof that globalization was working. After China entered the World Trade Organization in 2001, U.S. corporations shifted production overseas at an unprecedented speed. The result was a surge in imports and a collapse in the price of tradable goods such as electronics, apparel and furniture.
Consumers benefited in the checkout line. But workers paid for it elsewhere.
The research paper "On the Persistence of the China Shock" found that import competition accounted for more than half of the decline in U.S. manufacturing employment in the 2000s. Roughly 3.4 million factory jobs disappeared. Most displaced workers did not transition into equally productive, equal-paying employment. Many left the labor force completely.
Manufacturing had long functioned as a wage anchor - not just for factory workers but for entire regions. It linked productivity growth to broad-based pay gains. When that anchor broke, wage growth became concentrated in a narrow band of high-skill service sectors such as technology, finance and professional services.
Corporate profits surged. According to Federal Reserve data, after-tax corporate profits have increased by roughly $2.8 trillion since 2000. In contrast, real median weekly earnings have risen only modestly during the same period. The gap between productivity and pay that began widening in the late 1970s accelerated after China's industrial expansion collided with America's deindustrialization.
That divergence matters for one simple reason - essential services are structurally expensive.
Economist William Baumol described the problem decades ago. In labor-intensive sectors -such as healthcare, education, childcare, and housing services - productivity gains are limited. It takes roughly the same amount of time to teach a class or care for a patient today as it did years ago. Wages in those sectors must rise to compete with higher-paying industries elsewhere in the economy.
In a healthy, balanced economy, that dynamic is manageable because productivity growth is broadly shared. Rising wages in tradable sectors give households the purchasing power to absorb rising service costs.
But when wage growth is concentrated at the top and median wages stagnate, the transmission becomes one-sided. Service prices reflect the wage levels of the most productive sectors, while the median paycheck does not.
That is the affordability crisis.
If the United States wants to solve its affordability crisis, it must rebuild the wage base that once supported the middle class.
Recent surveys show that close to 75% of American workers say they struggle to afford more than just basic living expenses. This strain is not confined to low-wage households. A growing share of middle-income workers report taking on debt or relocating to lower-cost housing simply to stay afloat.
Blaming this situation entirely on inflation misses the structural point. Even if headline inflation moderates, the relative price of essential services will continue to rise over time. The question is whether wages keep pace.
That is where trade and industrial policy re-enter the conversation.
Tariffs are often portrayed solely as a price shock. But their primary economic effect, when targeted properly, is to strengthen wage growth in tradable sectors where productivity supports higher pay.
Consider the Section 232 steel tariffs imposed in 2018. According to the U.S. International Trade Commission, steel imports fell by roughly 17% between 2017 and 2021, while domestic production increased. Capacity utilization rose above 80% in 2021, a level historically associated with profitability and new investment. Since 2018, U.S. steelmakers have announced nearly $22 billion in new investment and significant capacity expansions.
Similarly, Section 301 tariffs on Chinese imports reduced import penetration across heavily affected sectors and were associated with increases in domestic production in several industries.
These policies did not eliminate service inflation. That was never the goal. They improved margins and tightened labor markets in manufacturing, the very sectors capable of delivering productivity-linked wage gains.
If the United States wants to solve its affordability crisis, it must rebuild the wage base that once supported the middle class. That means restoring the link between productivity and pay in tradable industries-manufacturing, energy, advanced materials and strategic supply chains.
Affordable housing and cheaper healthcare are worthy goals. But without stronger, broader wage growth, those efforts amount to cost management in a structurally imbalanced economy.
America does not have a price problem. It has a wage problem. Until policy addresses that reality, the cost-of-living crisis will persist regardless of the next inflation report.
Mihir Torsekar is a senior economist at the Coalition for a Prosperous America.
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-Mihir Torsekar
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March 21, 2026 11:37 ET (15:37 GMT)
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