How do academia and graduate advisors deal with the fact that the cost of living is dramatically higher but graduate wages is stagnant?

This might prove controversial but I'm going to reverse the question: why do PhD students accept being underpaid? As long as academic institutions find candidates willing to be underpaid, they have no reason to raise the wages. If the PhD students themselves don't defend their claim to a better compensation, who will?

In some countries PhD students are staff with a proper employment contract (I'm aware of at least Germany and France, probably others as well). The advantages of this system from the PhD student perspective are:

• Access to health, pension and unemployment benefits in accordance with the country regulations
• The PhD counts as a professional experience
• The salary is usually indexed on some public employment salary scale
• Symbolically improved social status, e.g. when being vetted for an apartment or a mortgage.

Obviously this option is more costly for the academic institutions, which means that they had to reduce the number of PhD students hired in order to increase the salary.

In France, the transition from student stipend to work contract happened at the beginning of the 2000s. The movement originated from the PhD students themselves and was driven by the Confédération des Étudiants Chercheurs (students researchers federation, later appropriately renamed as the Confédération des Jeunes Chercheurs, junior researchers federation). The central claim was that even if PhD students are researchers in training, they actually carry out productive research work, as illustrated by the fact that 50% of scientific publications have a PhD student as first author. Therefore legal cases were brought that their work qualifies as regular employment, and that the student stipend system was simply illegal according to labor laws. Institutions and funding bodies reluctantly complied over the next decade or so, for fear of legal challenges and/or bad publicity.

Cost of living differs dramatically from city to city and country to country. So the problem you describe is not as uniformly present as your question suggests. The way the payment is organized (stipend versus salary, tax rules that apply, health insurance, etc. etc.) differs a lot from country to country and over time. Such changes could easily lead to a (hard to see) improvement of the situation of PhD students, instead of the deterioration you report.

However, it is generally true that as a PhD student you will earn less during their studies than if you started to work immediately. However, those with a PhD degree tend to get on average slightly better labor market outcomes (slightly higher pay, less unemployment, etc.).There is some indication that a PhD degree on average pays of in terms of life time income, but I don't think the advantage is large. Again, this differs a lot from discipline to discipline and country to country. Depending on the specific circumstances you could easily be one of the persons that would have earned more during their entire life without the PhD degree. So if you are doing this for the money, then it is not quite as bad as you describe, but there are probably better investments you could have made. However there are other advantages: For example, if you want a career at a university or a research position outside university, then a PhD degree is pretty much required. Those are the things that you "buy" by excepting the lower payment now. Whether or not that is a worthwhile "purchase" depends on the kind of jobs you want to pursue.

Following is a US only perspective.

In most fields, advisors have no control whatever over the conditions of either their grad students, nor the general economy. In a few scientific disciplines in which advisors hire their students, usually from grant monies, this can differ, but university policy may still put limits on what can be paid.

What an advisor may be able to do, is to try to make the length of the doctoral program as short as is feasible, getting people out more quickly. But, since scientific breakthroughs can't be scheduled, this is an aspirational policy only.

Universities may also be limited in what they are able to do, for complicated financial reasons. Legislators have not been especially generous in funding education in the US at any level (actually it is rotten). Funds are limited for most disciplines and the funds increase slowly if at all. But a certain number of grad students are needed to provide TAs to make the undergraduate education system work at all. The tradeoffs are difficult to manage. We could pay graduate students better if there were fewer of them. But then (a) you wouldn't be likely to get a slot in a grad program and (b) the undergrad program would also suffer. Hard choices and no effective way to overcome them.

But if you are in a doctoral program for any reason but love of the discipline and a burning desire to live your life there, then you are probably not in the right place. Money is seldom the main driver of those who seek PhDs.

As other here note, the living cost in many places in the US is insane. Near Stanford it is so expensive to live that it is difficult for the university to attract faculty, much less graduate students. But the value added by an education there is worth it for many. And note that it is also true that Stanford had something to do with creating the conditions that led to that cost of living by fostering the rise of major tech firms. This is one reason that young faculty can be (many places) judged primarily on their ability to attract grant money that keeps the whole system in (delicate) balance.

Long term (lifetime) if you want to make a difference, support spending public funds for education at all levels. The alternative is to guarantee a poorer future for everyone. An uneducated populace isn't an especially productive one.