Stagnant Wages?

The New York Times had a piece (actually an AP piece) in Thursday headlined "Survey Says Average U.S. Family Income Declines." What is interesting is the actual data as well as the Times spin on it. The data indicates that 1) average income is up 2) average "real" income (inflation adjusted) is down 3) median income is up. What's more the data compares 2004 to 2001. I also saw the piece in this mornings' SF Chronicle.

I find the report interesting. First of all it is by that left-wing institution - The Federal Reserve (that's an attempt at humor). But it looks at the data (comparing 2001 to 2004) is a manner to draw a sort of "worst case" point. While that my be interesting, the data is nonetheless valid. What is going on? Is the average American worker getting taken by "the man?"

One point is that the data uses average wages and says that median wages are up and average wages are down. Maybe I am losing it but that seems to me to imply that the folks at the top have seen wages fall more than folks in the lower half of the income picture. In short, the semantics are incorrect. You get a better picture of what is happening to the "average" guy by looking at the median not the average. The average adds everyone wage together and divides by the number of wage earners. The median looks for the income level such that 50% earn more and 50% earn less.

This topic is important because it addresses the question: How well is the average family doing? That is important both politically and economically.

One thing absent since 2001 in the inflation in equities. We now see American's net worth increasing because of increased value in their homes. This may be an illusion. The stock market stopped simply because values had growth so quickly. Absent buyers at those prices values had to fall. This is not a Ponzi scheme. Similar concern exists about housing but housing is a much different thing than equities. People need houses. Nonetheless that need will not sustain ever increasing values. What is need is a leveling off in values.

Getting back to the issue of compensation (and we have spoken of this before) there are two points to make to put this data into historical perspective. Real Wages have always grown very slowly. Nominal Wages have always just barely outpaced inflation.

To reiterate from a RateWatch of December:

Average Hourly Wage adjusted for inflation has been virtually dead flat for four years, that's appears to be bad news for workers. However the point of view of employers may be different. Employers have been paying rising cost of employees increasing medical benefits. While real wages have been essentially stagnant from 2000-2004 the dollar value of health care benefits has gone up 7.3%. If one factored in the untaxed income related to health care the picture for the American worker is not so bleak. One might opine: the average worker is not getting taken advantage of by "the man" but by his hospital.

In fact, this is nothing new. Real wages from 1960 to 2004 for good producing employees have gone (in terms of 1960 dollars) from $2.15/hour to $2.53/hour. If you find that confusing, think of it in terms of 2004 dollars. In terms of 2004 dollars wages were $13.72 in 1960 and $16.15 in 2004. For folks in manufacturing wages have, in fact, been relatively flat for a long time.

For all public and private sector employees, not merely folks in manufacturing, the picture is less bleak. In inflation-adjusted dollars, income from work has increased from $2.26/hour to $3.43/hour (in 1960 dollars), a 52 percent increase.

To reiterate: Average Hourly Wages have been steadily going up. Real Wages (the gross pay that folks get) has been flat lately and, in fact, for a long time. The picture is worse for folks in manufacturing than all workers in general.

The cost of this work to the employer has gotten to be a good bit greater because much of the increase in cost has gone to health care costs and, to some extent, pension benefits.

This is the Employment Cost Index for the past 25 years. This is the total cost of compensation to the employer:

 

Perhaps what we have is a situation where no one is happy. Employees are seeing flat pay. Employers are spending more but the difference is going to neither the employer or the employee. A worker does not go home to his/her spouse and say, "Good news, honey, the cost to the boss of the medical plan which we get has gone up 100 bucks a month. We really stuck it to the man!"

Nominal and real wages have been held down by several conspicuous forces. An oversimplification would be: globalization and Wal-Mart. Globalization has threatened American workers with the knowledge that if their wages go outside certain limits their work will be done elsewhere. Wal-Mart has created and end-to-end chain where low prices are a benefit to the retail customer and to Wal-Mart and, essentially, everyone in the middle has to settle for less than they would get without Wal-Mart. The irony is that the presence of Wal-Mart acts to keep prices lower everywhere. Retailers of a broad spectrum of products must be concerned about Wal-Mart. Wal-Mart keeps prices low at all grocery chains, traditional department stores, and electronics discounters. I suppose that only Neiman-Marcus is unaffected.

In summary: wages are up slightly, real wages are down slightly, compensation (counting untaxed medical benefits) is up slightly. The business about real wage growth being modest has been true for at least 45 years. The use of the average instead of the median is, in this case, disingenuous.

Comments

[Mike Sacauskis]

You comments about "employers" footing the health care increase isn't true, my employer passes the increase on to me. Both in terms of increases in insurance premiums and increased co-pays. My premiums went up about 4% this year, however my copays doubled thats 100% increase.

Mike

[Stan]

I get somewhat "bent out of shape" when everything I read keeps stating that inflation is basically non-existant or is under control. Who are these people saying this? I suspect they are the ones on high salaries & wage earners who in reality don't have to worry about inflation. They, (high salary & wage earners), make plenty of money and their salary/wage increases are sufficient to keepup and/or exceed inflation.

Given that....I wonder if any of them buy:
groceries / gas / utilities / clothing / automobiles / personal items / entertainment / and the list goes on and on.

If they had to economize "these inflation is under control people" would definitely realize that prices are skyrocketing to say the least.

They so called inflation data is somewhat bogus, that is the nicest thing that can be said of it.

[Mike Sacauskis]

Have to agree with Stan. Bringing up Walmart and health care in the same essay is almost humourous.

[Dick Lepre]

The point about health care cost was that employers pay a lot of it. BLS says that im 9/2005 the average expense per employee for health care was $1.97/hr. As for the inflation data, well, it is what it is. Saying that it is "somewhat bogus" amounts to saying that you don't like the answers. The issue about core and overall moving differently was covered in a previous post.

[Mike Sacauskis]

So do employees, but apparently they don't factor that into this. Nor do they factor in other expenses assoicated with healthcare such as increases in Copays.

[Tyler Guernsey]

Goodmorning:
Thank you for the statistics
it backs up my personal feelings. I am a small buisness owner for the past 22 years but started working hourly in 1969. My father taught me what was most important not how much per hour but how many hours can I work. In the early seventies I was involved with the union at my employer and at contract time the employes always wanted a raise so that they could get ahead. I told them then that the way to get ahead was to get a second job as higher wages and more benefits would just make them one of the pack.In my adult life I have tried to instill in my seven children is that if they wanted something extra that instead of cutting back on what they are spending to find a way to increase the size of their pot.
Thanks Again Tyler

[Stan]

You can work 24 hours a day 7 days a week but that doesn't stop the prices of basically everything, especially critical items), from rising. After working 7/24 and the prices keep rising how are you going generate more work time so you can put in more hours to make more money to pay for neccessities?

[Dick Lepre]

Maybe I made this too complicated. The most important point I was trying to make was that "real" wage growth since 1960 has been very slight. From 1960 to 2004 (in terms of 1960 dollars) the average wage of a good producing worker went from $2.15 to $2.53. Take (2.53-2.15) divide by 2.15 and divide that by 44 (number of years) and you find that the average wage growth (not compounded) has been 0.004% per year. My conclusion is that real wage growth has always been stagnant. Nominal wages track inflation.