The Wage That Vanished: A Second-Order Money Illusion in the Labor–Wealth Exchange

This paper documents a sustained decline of 50 to 86 percent in the asset-relative value of U.S.labor since 1971 — measured against gold, housing, and equities — that is entirely invisible inconventional CPI-deflated wage series. Crucially, wages measured against consumablecommodities show no such decline: the collapse is specific to wealth-storing assets, establishingit as a distributional shift rather than a general loss of purchasing power. This divergence arisesbecause the CPI basket and wages are both falling in asset terms — consumer prices drivendown by productivity growth, wages driven down by exit-option asymmetry — and their ratioappears stable precisely because both are declining at similar rates. The result is a second-ordermoney illusion: workers who successfully adjust for CPI inflation remain unaware of theirdeteriorating position relative to wealth, because the deflator itself co-moves with the quantityit is meant to benchmark.The paper proposes exit-option asymmetry between capital and labor ( ) — the institutional φgap between capital’s expanding ability to relocate and labor’s constrained mobility — as acandidate fundamental cause of this shift. Building on Cauvel and Pacitti (2022), it shows that ifis accepted as the upstream structural determinant, the five standard proximate explanations φfor the declining labor share emerge as simultaneous downstream projections, and the over-explanation problem diagnosed by Grossman and Oberfield (2022) becomes a predictableartifact of estimating correlated projections of a common cause. A numerical demonstrationshows that the elasticity of substitution, the contested parameter at the center of thetechnology-driven explanation, is nearly irrelevant once exit-option channels are modeleddirectly. Preliminary international evidence from Japan, Brazil, and India suggests that asset-relative wage decline is not confined to the United States.