Let's kill the "Stagnant Wages" myth

Every time I watch the Democrats debate each other, I can count on at least two things:

1. Unanimous agreement among the candidates that "wages have been stagnant" since the year 2000.

2. No pushback at all from the moderators, the audience, or the post-debate analysts.

Why is everybody letting the candidates get away with that misleading half-truth? 

"Wages" versus "Compensation"
To illustrate, let's say a friend of yours came to you for some advice as to which job offer she should accept:

• Job offer 1: Wage is $20.00 per hour; no benefits.

• Job offer 2: Wage is $20.00 per hour; benefits are health insurance, plus a matching 401K retirement savings plan. 

Assume all other aspects are equal.  Given that the wages are identical, which job offer do you advise your friend to accept?  Why? 

Obviously, "compensation" is more than just wages alone.  Compensation also includes the benefits.  (In 2007, the average worker enjoys $41 in benefits on top of every $100 collected in wages.)  So, that begs the question, Has workers' real compensation been stagnant since the year 2000? 

Fortunately for us (and for the presidential candidates), the Bureau of Labor Statistics (BLS) can help us out.  They've indexed real compensation (i.e., adjusted for CPI inflation) quarterly for the last 24 years, through Q4 2005, and published it on their data-rich website.  Their index uses Q4 2005 as the base quarter for calculating the index.  Here's how the BLS describes their compensation data: "The Employer Costs for Employee Compensation product is a quarterly survey that shows the employers' average hourly cost for total compensation and its components."

I charted the BLS numbers, and calculated the change in real compensation for the six years from Q4 1999 to Q4 2005.  A pleasant surprise: real compensation per hour has been the opposite of "stagnant"; in fact, it grew by 6.7% in the 2000-2005 interval.  That's better growth than any six-year period in the last twenty years, including 1995-2000. 

Click to enlarge:

Now that we've discovered that encouraging data, I optimistically anticipate that one of the following two things will happen, any time now:

• The Democratic candidates will correct their rhetoric, and begin praising the trend in workers' compensation since the year 2000; OR...

• The candidates will change nothing, sticking with half-truth talk about "wages"—but will be properly embarrassed by moderators, or audience members, or post-debate analysts who will ask them follow-up questions about the robust growth in workers' compensation since the year 2000.

Which of those two do you think will happen?  [It's a good thing I'm not a pessimist, or I'd have to lean towards a third possibility: The candidates will change nothing, and nobody will call them on it.] 

====================
Data sources:

• BLS web page (see "ECI Constant-Dollar historical listings, SIC basis").

• BLS text file with several cuts at the data; I used data from Tables 3 and 4.

Comments

[TDM]

The one stat I look at is that wage taxes have been growing as fast as GDP since 2000. Wage taxes, which do not include benefits and are flat except for excluding most of the income above the cutoff, have been growing much faster than any measure of jobs, wages, and hours. Workers are reporting far more income to the IRS than employers are reporting to the BLS.

[Bob]

Okay, I'll be the pessimist and go with a modified third possibility. No pundit or member of MSM will call them on it. A Republican candidate may serve it up as a counter in a debate but that's it.

Sorry, Steve. It is what it is.

[Grodge]

Living up to your name, you optimistically lump non-healthcare benefits into the "benefits" that have risen lo these past few years, when in fact you know that the rise in the compensation is almost 100% due to the astronomical rise in the cost of health care.

So, while it may look like the average American worker is enjoying greater benefits, the fact is that they are getting the same benefits (or less), only it now costs more.

This is not an increase in benefits. Wages are a much better way to look at the true state of the American workers' lifestyle, an to be even more correct we should consider that those same dollars in our paychecks are now worth 15% versus the dollar index.

I'm all for being an optimist, but let's try not to be too panglossian.

[Ironman]

You are correct that the (D) candidates, which one assumes to be their average grade in economics, are only focusing upon earned income that does not incorporate the benefits portion of real compensation in any way, shape or form.

Not to mention completely discounting the history of the U.S. since 2000, we can safely assume that (D) is their average grade in history as well. Somehow or another, they appear to think that comparing inflation-adjusted incomes at the height of the previous economic and employment cycles (2000) with the current day is appropriate, conveniently forgetting that we had a full-up recession in 2001, complete with a lagging peak in unemployment in 2003.

Oh, and they're also missing the changing demographics of income earners in the U.S. - pretty sure that's another (D) somewhere....

What's remarkable is that the distribution of income didn't change much from that peak despite these factors. And you don't have to take my word for it. Using Census income data, which is likely what they're basing their arguments upon) and adjusting for inflation, I animated the change from 2000 to 2006 by age group - here are the links:

Age 15-24: http://tinyurl.com/2kfd9a
Age 25-34: http://tinyurl.com/3x5rmc
Age 35-44: http://tinyurl.com/2sabrn
Age 45-54: http://tinyurl.com/2s323v
Age 55-64: http://tinyurl.com/2dm34p
Age 65-74: http://tinyurl.com/yrlp7k

You can see a remarkable shift in 2003, coinciding with the post-recession unemployment peak - most notably at the lowest age ranges and the Age 15-24 group in particular, as it delayed the entry of these youngest income earners into the workforce.

You can also see the effect of the aging of the baby boom generation as they've moved upward into the older age ranges.

And you also see that despite all the economic bad news, even when it comes to inflation-adjusted incomes, we find that the U.S. in 2006 is at least as good as it was in 2000, the peak year in the previous economic and employment cycles.

And that's not even tracking the same individuals over time - where we find that upward income mobility is the same or better than its ever been:

http://tinyurl.com/2ae9s6

[Steve]

Grodge:

The compensation index is adjusted for CPI inflation, and the BLS takes health care costs into account in its CPI calculation. They explain it at this page: http://www.bls.gov/cpi/cpifact4.htm .

That doesn't mean their adjustment for healthcare inflation is perfect, of course. If you have a better way to take healthcare inflation out of the compensation numbers, I'd like to see it, and I bet the BLS would, too.

[Grodge]

From your reference: "Although medical insurance premiums are an important part of consumers' medical spending, the direct pricing of health insurance policies is not included in the CPI. As explained below, BLS reassigns most of this spending to the other medical categories (such as Hospitals) that are paid for by insurance. The extreme difficulty distinguishing changes in insurance quality from changes in its price forces the CPI to use this indirect method."

Just because there is no better way to measure health care inflation, does not mean that the current method is accurate. It's not.

American workers are paying higher prices for health care insurance which is reflected in "higher compensation", while the health care product they receive is not necessarily better. I'll repeat: Wages are a better way to judge the financial condition of the American worker.

I appreciate your point-of-view on the issue that American workers are "better off" with this "higher compensation", but I would respectfully disagree.

And beating up (D) candidates over the issue is disingenuous while the (R) candidates do nothing to ameliorate the situation: Reference the Medicare part D boondoggle.

[workindev]

I've actually had this discussion with left-leaning individuals before, and there response is typically a combination of the following:

1) The CPI is a sham, so those numbers are bogus (no alternative given to CPI)
2) Some mumbo-jumbo about the falling "civilian population-to-employment ratio", while simultaneously claiming that the rise in household income is due to more household members working (no explanation given regarding this contradiction)
3) The poverty level rose for a couple of years, so everything MUST be horrible (ignoring that the poverty level is still lower than it was for most of the 1990's)
4) BUSH SUCKS!!!!

[Steve]

Grodge:

Also from the reference: "Currently, the index employs an indirect method for measuring price changes for health insurance premiums... the weights for most of MCS indexes reflect out-of-pocket expenditures plus allocated health insurance benefit payments."

The BLS has an imperfect algorithm for taking inflation out of health insurance premiums, and has provided indexes of worker compensation resulting in part from that imperfect algorithm. Your argument is "It's wrong because it's imperfect." I agree with you: it's imperfect -- but I have to assume that it's just as likely overstating inflation as understating it, until a new, better set of indexes is published by someone who has a better algorithm.

Regarding which side's candidates I choose to beat up: it doesn't depend on the side (D vs R), it depends on the fallacies in the arguments of the individual candidates. R's who insist on a balanced budget amendment, and R's who subtly infer that all illegal immigrants are brown-skinned people who sneaked across the Mexican border seeking welfare money, will get similar treatment from me, as they have in the past. (Exception: I will probably continue to ignore Dennis Kucinich regardless of what he says; Dennis Miller aptly summed him up as continually playing "the moron card.")

[Grodge]

Your original argument was that the Dem candidates are disingenuous for talking about wages and not about compensation. Wages are stagnant. Wages are a better indicator of the well-being of workers, unless they are getting something more for their increased non-wage compensation.

For whatever reason, the cost of health care benefits have gone up, and I would surmise it is not because the product is significantly better. The mumbo-jumbo about 401(k) matches as part of the non-wage compensation increase is meant to obscure the real fact that it's the health care costs which are determining the increase in compensation.

Dem candidates are pointing out that wages, and thus workers' lifestyles, are stagnated. Why is this a flawed argument?

[The Practical Skeptic]

The Fed's manipulation of the money supply makes any wage increase virtually irrelevant.

It devalues the dollar by printing more money thus erasing the benefits of wage increases.

Neither the Republicans nor the Democrats -- with the exception of Republican and libertarian Dr. Ron Paul -- ever address this issue.

The real debate ought to be whether we continue to allow a private banking cartel to manipulate the nation's money supply or whether we return to a system of "real" or "hard" money as was the case prior to 1913 the year the Fed was created in secret by a small cabal of wealthy European and American bankers bent on controlling the nation's money supply.

Income taxes on wages are spent by the government to pay down interest on the debt not for so-called "essential" government services which is why 1913 is also the same year the Federal Income Tax became law.

Wage increases or lack thereof are used as a political football by Republicans and Democrats alike to make the general public believe they want to affect real change.

[The Practical Skeptic]

The Fed's manipulation of the money supply makes any wage increase virtually irrelevant.

It devalues the dollar by printing more money thus erasing the benefits of wage increases.

Neither the Republicans nor the Democrats -- with the exception of Republican and libertarian Dr. Ron Paul -- ever address this issue.

The real debate ought to be whether we continue to allow a private banking cartel to manipulate the nation's money supply or whether we return to a system of "real" or "hard" money as was the case prior to 1913 the year the Fed was created in secret by a small cabal of wealthy European and American bankers bent on controlling the nation's money supply.

Income taxes on wages are spent by the government to pay down interest on the debt not for so-called "essential" government services which is why 1913 is also the same year the Federal Income Tax became law.

Wage increases or lack thereof are used as a political football by Republicans and Democrats alike to make the general public believe they want to affect real change.

[mark]

I don't know who or what to believe. Even Brian Wesbury has two conflicting articles. His Monday morning outlook on 10/15 says wages are up 8.4% over the last two years. But his Data watch article on 11/15 says wages are flat vs a year ago. Of course he may be talking about two different "wage" statistics.
There must be some reason 2/3s of the country disapprove of the President (R) and Congress (D). And if was all about the war I would think the Democrat controlled congress would get a better approval rating.

[Go Ron Paul]

There are lies, damn lies and statistics.

[PseudoNoise]

The reason we (Democrats) say this is because it's true when you look at the median worker.

http://www.epi.org/content.cfm/webfeatures_snapshots_20070905

This, by the way, is the reason people don't object when Democrats say "your real wages are falling". For most people, it's true. For the average of all workers, it's false. We all know how that's possible: the gains are concentrated in a small population & large enough to offset the total losses in the rest of the population.

It's a fine time to be wealthy in America, but it kinda sucks for most people.

[Jeremy]

Grodge;

"Wages are a better indicator of the well-being of workers"

This is a fairly meaty assumption. Let's assume that your other assertion is correct, that the 6.7% increase in total compensation is (almost) solely due to rising health care costs. If employers chose to increase wages instead of increasing compensation (and health care costs increased the same amount), would wages continue to be a 'better' indicator of well-being?

Steve;

The gains appear to be concentrated in the early 2000s. Any insight on the more 'sluggish' recent quarters?

J

[Grodge]

Steve,
You ask, "If employers chose to increase wages instead of increasing compensation (and health care costs increased the same amount), would wages continue to be a 'better' indicator of well-being?"

Obviously, it depends on how much wages are increased; if the increase is ample, then the offset of higher wages could make up for any reduced benefits outlays.

We are not questioning the generosity of employers. We are looking at the efficacy of looking at wages versus compensation for the discussion of how workers are doing in this economy.

[Jeremy]

Grodge;

That was me (Jeremy) not Steve, I addressed him seperatly, but I can see how the seperate address would appear to be a 'signature'.

"We are looking at the efficacy of looking at wages versus compensation for the discussion of how workers are doing in this economy."

And that was precisely my point.

You assert that the increase in compensation is due solely to increases in health care costs. Let's assume this is true.

Case #1: Employers pay for rising health care costs.

Steve measures compensation and shows it has risen to match the costs of health care. 'Well being' has kept pace with rising costs.

You measure wages and show they remain the same. This indicates that 'well being' as well has remained the same.

Case #2: Employees pay for rising health care costs.

Now consider if employers had increased wages INSTEAD of increasing compensation. So that 6.7% increase in compensation instead is applied solely to wages.

Steve measures overall compensation and shows it has risen 6.7% to match increased health care costs. Since overall compensation includes wages. 'Well being' again keeps pace with increased costs.

You measure wages and find they have risen 6.7%. Using wages as a measure of 'well being' you would conclude that 'well being' has increased. When in fact it has kept pace with increased costs.

Steve's method of using overall compensation to measure 'well being' is more accurate than using wages alone.

J

[Grodge]

Jeremy,
Sorry about the name mix-up.

Steve said "...who will ask them follow-up questions about the robust growth in workers' compensation since the year 2000."

As you said, the 6.7% increase in compensation made up for the rise in health care costs-- you use the word "match"-- so I don't see how the take-home benefit for the workers can be described as "robust."

The Dem candidates are recognizing the "match" between the rise in compensation and health care inflation, which leaves wages as the best measure of well-being assuming such a "match."

Thank you.

[muirgeo]

"Regarding which side's candidates I choose to beat up: it doesn't depend on the side (D vs R), it depends on the fallacies in the arguments of the individual candidates."

Steve

From John Edwards web page;

"Middle-class wages have stagnated in recent years even as the economy has grown."

So were is the fallacy. The democratic candidates are ussually refering to middle class wages or median wages. YOU are the who has some what covertly changed the subject to total compensation and it appears you include the great increases that go to a small minority on the top of all inclme earners.

Real median wages have been stagnant as savings are down, cost are up and compensation is down. While the wealthiest 1% have taken in most of the wage and compensation increases.

http://www.nytimes.com/2007/08/29/us/29census.html?_r=1&oref=slogin

[Dean Abbott]

Grodge:

If I'm not mistaken, Jeremy is not saying that there has been 6.7% increase in compensation to match health costs, but is conducting thought experiments to describe the irrelevancy of wages as a sole measure of worker prosperity.

Jeremy is merely pointing out that IF health care costs increased by 6.7% AND the employer were to match that increase in the compensation package, whether that increase occurs in wages or in benefits is irrelevant, and likewise, stagnant wages COULD be a poor measure of worker prosperity IF benefits rose more than the actual costs of health care.

I don't know the answer, and am enjoying the interchange. I also hope that y'all don't just keep talking past each other.

[Steve]

muirgeo:

So, to you it's all about wages, and benefits mean nothing. In other words, if all benefits were eliminated, and converted to wages, it would make all the difference to you and John Edwards. I take it you would support outlawing employer-paid health insurance, forcing a conversion of that cost to money wages.

It might sound odd, but I might be able to agree with you and John Edwards that employer provided health insurance benefits should be eliminated by converting it to money wages. To you, benefits are nothing, wages are everything. To me, it would solve two problems: it would eliminate your complaints about stagnant wages, and would also give the healthcare recipient (now earning a much higher wage) total responsibility for paying the healthcare bill, which would foster a more efficient system.

Regarding your point about inequality: I presume you would place union workers in the middle class. As the chart indicates, union workers enjoyed a 10% improvement in real compensation from 2000-2005, half again as much as the 6.7% overall gain. That means the non-union group had to be averaging less than 6.7% improvement. Not sure what that implies about "the rich," but it doesn't appear to support your hypothesis about them.

[Grodge]

I'll concede that Jeremy is correct: increasing non-wage compensation is important in determining the well-being of workers.

Steve's original post, however, is taking the Democratic candidates to task for concentrating on wage stagnation while overall compensation has increased.

If not health care inflation, then what accounts for non-wage compensation growth? Are workers enjoying better health care or greater benefits elsewhere for this increase in compensation? What is the point of the post?

Democratic candidates may be disingenuous for failing to mention the "robust" increase in compensation in favor of the stagnated wages, but if that is the case then why aren't the average wage earners buying this argument that they are all so much better off? Is the MSM and the liberal cabal that powerful in deluding Joe Sixpack of his great fortune?

Methinks not. I'll leave the last word to y'all.

[muirgeo]

"So, to you it's all about wages, and benefits mean nothing."
Steve

Steve not about wages but about MEDIAN wages or if you have numbers for MEDIAN compensation that'd work too.

Compensation increases I believe are again going mostly to top paid executives and CEO's.

I'm a doctor and my patients health care benifits have been decidely cut with high deductible policies and high co-pays.

I think your numbers are more dis-ingenous then what the democratic candidates are claiming.

You perspective is illustrated as follows. 10 guys in a bar with an average compensation of $40,000 and a median of the same. Bill Gates walks in and you're all excited about how well the average workers compensation has increased while the median didn't budge.

[Luis Busquets]

Well, that is a nice discussion of what has happened to wages in relation to the USA economy, but, what has happened to the wages of US workers in relation to global economy?
http://es.finance.yahoo.com/currency/convert?from=USD&to=EUR&amt=1&t=5y
Taking into consideration that the USD vs EUR from 2003 until today has shanged from 1 to 0,67, that means that the USA workers wages have decreased a 33% in European terms. If you get the data for 2000 you will find out an even more dramatic decrease. On the other hand, if you tell me that a strong currency is not good, please remind that the European economy is performing more or less the same way. Nevertheles, the Eurozone economy is nowadays nearly twice more important in relation to the USA economy than in 2000.

[Aaron]

Luis,

The Euro-USD rate only affects American workers who are paid in dollars and then use those to buy something made in Europe or take a vacation, etc.

Meanwhile, if I work for a US exporter, I'd be pretty stoked by the extra sales my company would be getting.

I'd say a strong currency helps the consumer, while a weak currency helps the producers - its a trade off.

Muirgeo, The average can be very different from the median, but it may not be in this case. Bill Gates makes a lot of money, but there are so many people in the median that the average will still be close to the median.

Also, compensation is more likely to increase than wages since wages are taxed while benefits are not. If wages are the all important issue, then those who desire increased wages will support tax reform that taxes benefits.

In fact, if all compensation was converted to cash, and workers could choose their own health plans, many would choose a less expensive one than is offered by their employers. (high deductible policies and high co-pays)