Wednesday, July 01, 2009

Wage stagnation?

You have may heard that wages have stagnated in the country over the last 30 years, with the only people to see their incomes rise being the rich. There are a few catches, however, as economist Thomas F. Cooley notes:
The microeconomic data on wage rates from the Bureau of Labor Statistics (BLS)--that is, real average hourly earnings or median (the middle) hourly wages--show little or no growth from 1975 to 2005, a finding consistent with the stagnation view. But aggregate data--national labor income per hour from the Bureau of Economic Analysis (BEA)--grew 39% over the same period, quite a different picture.

The difference is largely due to three things: differences in coverage--the BLS covers a narrower category of workers (non-agricultural non-supervisory workers); differences in the choice of deflater (the price index used to adjust for inflation); and the inclusion of fringe benefits. When a common deflater is used, the average hourly wage increases by 10% over the period and the median wage rises by 20%.

When benefits are added to the average and median wage series, they show growth over time of 16% and 28% respectively. These are still less than the growth rates of 39% in the aggregate data and are far from what you would consider robust growth--but it doesn't quite qualify as stagnation. The finding that much of the increase in compensation shows up as increases in fringe benefits is important. Fringe benefit increases reflect in part the rising costs of health care. Also, these benefits are not discretionary income, thus the fact that they have increased is not likely to make workers feel "better off."
As this graph illustrates the bite taken by health insurance is considerable:

Eliminating the link between employment and health insurance would give everyone an instant raise. It would also eliminate a disincentive to businesses hiring workers and would encourage workers to switch jobs to potentially more productive employment if they no longer had to worry about the loss of health insurance.

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