Econbrowser

An obvious question about the rapidly rising cost of health care is what portion of that cost increase represents an improvement in medical care and what portion simply represents a medical inflation factor above that of the CPI. I would guess that it is more the latter since it would be hard to explain 10% annual increases in heath costs by people getting 10% healthier each year. This means we need to get a grip on why Americans spend twice as much on health care each year than most other industrialized nations, yet have poorer outcomes by most measures. Looking at it from the wage earners point of view, if wages are declining and he is getting no better health care, he can't be happy about the situation.

I'm not sure how much an "average" tells us about what is happening in various segments of the labor market.

Also, Social Security "Compensation" isn't actually compensation to an individual -- its a transfer to the government. What goes in and what comes back is not the same across generations -- nor is it the same for folks of different demographics. Black males for example aren't being "compensated" via the Social Security system to the same tune as are white females. You can't "count your chickens before they are hatched" as we all know -- so for some this "compensation" is never realized.

Parking is the most fought-over non cash benefit I have seen at a university. Parking which has 'no cost' (and therefore the tendency is inevitably to give more permits than there are spaces-- by making a resource free, you guarantee its scarcity relative to demand-- think highway congestion at 5pm). I have seen Business School profs on $250k a year have screaming rows about whether they can park in front of their office, or at a lot a block away.

The other 'non cash' benefit is pensions. Where universities (and local and regional governments) have a strong incentive to treat pension concessions as 'less expensive' than salary concessions. Since these bodies are among the last providers of 'gold standard' defined benefit pension schemes, the fact that the accounting rules do not force them to fully recognise the future costs of those schemes is a severe moral hazard. I could name you the Universities in Canada that have been living off their 'pension fund surplus' which is actually simply the result of unrealistic and indefensible assumptions of future returns-- something Warren Buffett has spoken about very stridently.

I am not sure how this interfaces with TIAA/CREF in the US. Do college professors bear the full risks of their pensions themselves (defined contribution/ money purchase)? Or are the schemes defined benefit?

There was an article in the NYT magazine by Roger Lowenstein about how state and local governments were doing the same thing. The current accounting laws do not force them to recognise the future deficits on their schemes-- and policemen, for example, retire at 50.

The ultimate John Law (Louis XV's France and the invention of 'paper money' and its subsequent collapse) case of this I have seen was Illinois, which borrowed $18bn (? on the amount) at 6.5% (I think), and 'solved' its pension fund deficit (assumed return on the fund of c. 10%). Any economist would instantly recognise the 'money machine' principle at work here-- for the same risk level, Illinois' return rate cannot be different from its borrowing rate. Ponzi would be proud.

GM pulled a similar trick. Eventually, via the Pension Benefit Guarantee Corporation (or local taxation in the case of Illinois), the taxpayer will pick up the can. Which given the ethnic makeup of the US in 30 years time (white retirees and a 'minority' dominated workforce) could be entirely explosive, politically.

I would like to ask, if the two graphs are really comparable? Do they have the same basis (the same set of employees)? Do the the non-wage benefits include also bonuses and options? It is known that the top 10% gets increasing share of their compensation in this form, so it should show in the second graph - and so it seems. On the other hand we know that the share of workers with no medical insurance has increased - but it doesn't show here. We could think that the income increase in the second graph is really a sign of growing income inequality.

Joseph, there hasn't been any "medical inflation." Expenditures for medical care have been rising primarily because of the cost of new technologies, but these technologies are *more* efficient at producing health, not less. If you don't believe me, ask yourself this: if you got cancer, would you rather have $25000 of medical care in 1960 (adjusted for inflation so it would be less than $4000 in 1960 dollars) or $25000 of todays medical care? I know which I would choose...

"It seems there is a universal assumption of the noneconomists on this committee that the more benefits we get, the better off we are, as if the money were coming out of nowhere and had no implications for the budget for salaries. If professors act this way, I'm inclined to entertain the possibility that those who negotiate contracts for labor unions may have a similar mindset."

Professor Hamilton, I think I can respond to this from two perspectives. For several years my father negotiated contracts for petrochemical workers in Louisiana. He was a smart man, as are most union negotiators. Dad understood exactly where the money for benefits came from. I've heard him explain to his union how they might need to trade wages for benefits, and he regularly solicited their input before negotiating.

I worked with company negotiators at a major airline for a couple of years. They believed the union negotiators understood the economics of wages and benefits. But the company negotiators thought the average union member was ignorant of such economics. That's what the union negotiators sometimes implied. It's not always in the best interest of a union to let the company know how informed the members are.

My opinion is that union members understand compensation packages and company positions very well - much better than many educated professionals. I think that's because their representatives keep them well informed.

Ed, you say there is no medical inflation, but how do you explain 9% to 15% annual increases in health care? It has almost doubled in the last seven years. Are we really getting twice as good health care as seven years ago?

The point being, although the cost of benefits to employers has increased rapidly, it has not resulted in that much benefit to employees.

Or even the benefits that have occurred have benefitted fewer and fewer employees.

One problem with benefits is the individual has relatively little say over cost and care. They can't choose last years care at last years cost even though I expect most would be fully satisfied with it. Perhaps segmentation into first 50k or 100k, and subsequent care would allow those who really want expensive care to pay for it and allow those who don't a less expensive option.

Joseph, expenditure on computers has also gone up a lot over the last couple of decades. Do you think that means computers are getting more expensive? How do you answer the question I posed about what you would prefer if you got cancer, todays care at todays prices, or yesterdays care at yesterdays prices?

If you really want to hit the point, would you rather be treated for cancer in 1960 with $100,000 (in 1960 dollars) or in 2005 with $100,000 (in 2005 dollars)? Without controlling for inflation of 1960 dollars you would still choose to spend money in 2005.

the two charts "real wages" and "real compensation" represent different things

"real wages" are "real" (money given to a person in exchange for something) while "real compensation" is not "real", it is a lot of different things, an abstraction

sesame street uses a device "which of these things is not like the other" to teach children to differentiate between classes of objects

"wages" and "benefits" are two different classes of objects

salary and bonus are the same kind of object - money that is given to a person in exchange and which the person has the power to use independently

"employee benefits", "health benefits" - "salary plus benefits"

benefits is an important and powerful concept

a person benefits from membership in the company or institution by being provided with health insurance

this health insurance is exactly what it is - health insurance

it is not compensation - it is a "benefit" - all workers regardless of renumeration rate get the same benefit - it something good that accrues to you because you belong to the group

in the US it has been the case that if you work for a company or institution you get the benefit of health insurance, state and federal law and insurance company marketing practices dictate this situation

if you do not work you do not get the benefit of health insurance unless you qualify for government spnosorship of a health benefit,

if you are self-employed you have historically had problems finding a way to purhase health insurance at a reasonable rate and the government has done little to support your benefit cost with tax relief - you are not a part of the group

fdr used the postal workers to develop the concept of health insurance and the practice of employer-sponsored health insurance, it caught on and became a major structure of our society

but this is changing

increasingly workers are being asked to divert some of their "wages" to pay for their "health insurance benefit"

increasingly workers are being offered employement arrangements in which there is no "health insurance" benefit

this is a major shift in the structure of work arrangements

economists distort reality when they represent the "health insurance benefit" as being in the class of objects called "wages" or "compensation"

should we be concerned if average wages are declining and more and more workers are paying part of their wages to support their health insurance benefit" or are not getting a "health insurance benefit" at all?

yes

What do you say we just put the facts on the table.

Employer Costs for Employee Compensation
BLS data
As of September 2005
ftp://ftp.bls.gov/pub/special.requests/ocwc/ect/ececqrtn.txt

The following information is a summary for all workers in the U.S. workforce. Other tables are available in the same text file which provide percentage and costing breakdowns by major occupational group and other rollups. The details are readily available.

Percent of Total Compensation Per Employee

Total compensation:
- Wages and salaries - 70.2%
- Total benefits - 29.8%

Benefits Summary:

- Paid leave - 6.6%
- Supplemental pay - 2.5%
- Insurance - 8.0%
- Retirement and savings - 4.3%
- Legally required benefits - 8.2%
- Other benefits - .1%
- * not accounted for - .1%

Benefits Details:

- Paid leave
-- Vacation - 3.3%
-- Holiday - 2.3%
-- Sick - 1.0 %
-- Other - .3%

- Supplemental pay
-- Overtime and premium - .9%
-- Shift differentials - .2%
-- Nonproduction bonuses - 1.4%

- Insurance
-- Life - .2%
-- Health - 7.6%
-- Short-term disability - .2%
-- Long-term disability - .1%

- Retirement and savings
-- Defined benefit - 2.7%
-- Defined contribution - 1.6%

- Legally required benefits
-- Social Security - 4.5%
---- Old-Age insurance
---- Survivors insurance
---- Disability insurance
-- Medicare - 1.1%
-- Federal unemployment insurance - .1%
-- State unemployment insurance - .6%
-- Workers' compensation - 1.9%

- Other benefits - .1%
-- severance pay
-- supplemental unemployment benefits

* (an additional .1% error in SS and Medicare rollup)

--------

All workers - Cost per hour worked
BLS data
As of September 2005
ftp://ftp.bls.gov/pub/special.requests/ocwc/ect/ececqrtn.txt

The following information is a summary for all workers in the U.S. workforce. Other tables are available in the same text file which provide costing and percentage breakdowns by major occupational group and other rollups.

Total Compensation Cost Per Hour

Total compensation - $ 26.05
- Wages and salaries - $ 18.28
- Total benefits - $ 7.77

Benefits Summary:

- Paid leave - $ 1.72
- Supplemental pay - $ .65
- Insurance - $ 2.10
- Retirement and savings - $ 1.13
- Legally required benefits - $ 2.13
- Other benefits - $ .04

Benefits Details:

- Paid leave
-- Vacation - $ .80
-- Holiday - $ .59
-- Sick - $ .25
-- Other - $ .09

- Supplemental pay
-- Overtime and premium - $ .23
-- Shift differentials - $ .06
-- Nonproduction bonuses - $ .36

- Insurance
-- Life - $ .04
-- Health - $ 1.97
-- Short-term disability - $ .05
-- Long-term disability - $ .03

- Retirement and savings
-- Defined benefit - $ .71
-- Defined contribution - $ .42

- Legally required benefits
-- Social Security - $ 1.17
---- Old-Age insurance
---- Survivors insurance
---- Disability insurance
-- Medicare - $ .30
-- Federal unemployment insurance - $ .03
-- State unemployment insurance - $ .15
-- Workers' compensation - $ .48

- Other benefits - $ .04
-- severance pay
-- supplemental unemployment benefits

PRODUCTIVITY AND COSTS
Third Quarter 2005, revised
Bureau of Labor Statistics
http://stats.bls.gov/news.release/prod2.nr0.htm

The seasonally adjusted annual rates of productivity growth in the third quarter were:

5.4 percent in the business sector
4.7 percent in the nonfarm business sector
3.4 percent in manufacturing
3.2 percent in nonfinancial corporations

REAL HOURLY COMPENSATION:

Hourly compensation includes wages and salaries, supplements, employer contributions to employee benefit plans, and taxes.

Real hourly compensation takes into account changes in consumer prices.

1. Business Sector Productivity

"Real hourly compensation, which takes into account changes in consumer prices, fell 0.8 percent in the third quarter and [fell] 4.0 percent in the second quarter."

2. Nonfarm Business Productivity

"When the rise in consumer prices is taken into account, real hourly compensation declined 1.4 percent in the third quarter of 2005 and [declined] 3.1 percent one quarter earlier."

3. Manufacturing Productivity

"When the increase in consumer prices is taken into account, real hourly compensation for all manufacturing workers fell 1.9 percent in the third quarter."

"Real hourly compensation dropped 0.4 percent rather than rising, after revision", in the second quarter.

4. Nonfinancial Corporations' Productivity

"When the rise in consumer prices is taken into account, real hourly compensation fell 0.6 percent in the third quarter."

"Hourly compensation also was revised down, from 3.7 to 0.8 percent", in the second quarter. Real hourly compensation declined 3.2 percent during the second quarter.

All part of the revised American economy under the advanced global trade model.

Economic Hydrology Theory is alive and well.

This is perhaps one of the best BLS real hourly compensation charts which portrays wage and benefits trends.

[Jim, this chart would make a nice addition to your post. It clears up a few points.]

Percent Changes in the Employment Cost Index for Wages and Salaries and for Benefits, Private Industry, First Quarter 1981-First Quarter 2005
BLS Chart
June 29, 2005
http://www.bls.gov/opub/cwc/cm20050624ch01.htm

Aside from the negative real hourly compensation data from the past two quarters, there are adequate indications that downward pressure will continue to be applied to employer-provided provision of health care and pension funding as a percentage of total costs. Signals from Delphi, GM, Ford, Verizon and other major employers, including the airlines, indicate a general dismantling of available levels of employer-provided dollar support for health care and pension benefits.

It is my judgment that we will see what I have named the Delphi Effect being applied to various industries employee costing considerations in the near term future (1-5 years). Many corporations and companies are being provided with sufficient political and trade relations cover to reduce employee benefit packages. Health care and pension costs should be noted as prime candidates for further corporate cost reduction.

Moreover, data from 2000 forward indicates that a substantially lower percentage of the overall workforce is covered by health care insurance. As noted by EPI, 58.9% of workers had employer-provided coverage in 2000, whereas only 55.9% of workers had coverage in 2004. The BLS March 2005 survey indicates that coverage has further declined to 53%. This represents the fifth consecutive year that health care coverage has declined. The decline in coverage does not represent a direct correlation with available employer-provided health care plans. The rising share of costs being absorbed by employees may be driving the lower participation rates above and beyond the curtailment and benefit reduction of available health care plans by employers.

----

Share of private sector workers receiving employer-provided health insurance coverage, by industry, 2004
EPI
October 20, 2005
http://www.epi.org/content.cfm/bp167

55.9% - All Workers

Industry:

26.0% - agriculture, forestry, fishing, and hunting
30.5% - arts, entertainment, recreation, accommodation, and food services
42.5% - construction
60.1% - education, health, and social services
65.2% - financial, insurance, real estate, and rental and leasing
70.2% - information
71.8% - manufacturing
79.0% - mining
39.2% - other services (excluding public administration)
55.8% - professional, scientific, management, administration, and waste management service
66.9% - transportation and utilities
52.8% - wholesale and retail

* * In order to qualify as employer-provided insurance coverage, workers had to receive health insurance from an employer who paid at least part of the health care insurance premiums.

----

Similarly, the reduction in corporate pension financing resulting in a growing shift in the burden to employees may be less than the declining participation rate or dollar substitution contributions by employees. While some corporations are failing to continue existing levels of financial contributions, the question again falls to the level of contribution offset provided by employees, or participation by employees. The declines in defined benefit and defined contribution pension plans participation rates and corporate funding should be noted with concern, as general real wages of employees continue to move in negative territory.

Do check out the BLS chart if you have time. No disappointments. The downward real hourly compensation move is very much in play.

Is this a trick question?

The charts are not adding up...

Let's say we compared 1974 to 2004,

From the charts,

Real AH Earnings (E).............. 9.0(74).....8.4(04)
Real Comp NF (C)....................85(74).....117(04)

From Movie Guy's BLS numbers for 03/2004,

Total compensation (excl farm):
- Wages and salaries E for 2004, E%(2004) = 67%
- Total benefits B for 2004, B%(2004) = 33%

So, the equations are,

C%(2004) = C%(1974) *117/85
E%(2004) = E%(1974) * 8.4/9
C%(1974) = E%(1974) + B%(1974)

If C%(2004) = 100, and E%(2004) = 67, then

E%(1974) = 9/8.4 * 67 = 71.8%
C%(1974) = 85/117 * 100 = 72.6%, hence

B%(1974) = 72.6 -71.8 = 0.8% ??

Or the benefits for 1974, according to the charts and data were almost nill, 0.8%??

Something is definitely not adding up,

In conclusion, the second chart, real compensation for non farm workers, which has an unexplainable disproportionate increase in total compensation, does not only not smell well, it doesn't fly either...

BTW, thanks MovieGuy for the reference BLS data.

Nicely done, Movieguy. As usual you put the facts on the table.

Too bad most economists still resort to old bromides or to faculty benefits at UCSD or to a graph provided by Macroblog that provides no evidentiary support.

I would really like one of them to step up and address the information you have presented.

I guess the workers at Delphi and Verizon are quite mistaken that their benefits are rising. But, hey, that is my anecdotal evidence to counter that at UCSD.

And your presentation does raise serious questions about that spurious Macroblog graph.

Yes, the Hydrology Theory is alive and well.

Very good Movie Guy. but the other point that need to be made is that the average hourly earnings data is only for production workers --
roughly, think hourly wage employees -- while the other data series are for all employees.

So part of the explanation for the divergence is the growing income inequality. When CEO's have massive pay increases or educated professionals get large wage gains it is not included in the average hourly earnings data while it is included in the other data series.

Roughly, average hourly earnings is for about 80% of employment, but it is the lowest income
segments of the labor compensation pie.
When you look at the census data on growth of income by income quintile you see that there has o be a big and widening spread beween the pay of salaried and hourly wage employees.

When you talk about the benefits of receiving fringe benefits vs wages you need to look at the tax implications. A company can buy you an insurance policy for $6,666. But if you are in a 33% tax bracket the company has to pay you $1,000 for you to buy the same $6,666 health insurance package. So when you bring this into the calculations a dollar of fringe benefits can be much more valuable then a dollar of salary.

I worked for a British firm in the 1970s when this tax impact was so big that a great deal of compensation was provided in the form of fringe benefits rather then wages. It included such things as free meals, cars, etc..

Spencer,

Excellent point. Yes, the income divergence is becoming massive. That particular problem, while occasionly lamented, is never addressed directly. And, yes, the perks are particularly nice at the top.

It would be interesting to break out compensation by income level.

Real Hourly Compensation - More Links

Labor Productivity and Costs
http://www.bls.gov/lpc/

Labor Productivity and Costs - archives
http://www.bls.gov/schedule/archives/prod_nr.htm

Compensation Cost Trends
http://www.bls.gov/ncs/ect/home.htm

United States Economy at a Glance
http://www.bls.gov/eag/eag.us.htm

BLS Presentations of Interest with Charts:

Percent Changes in the Employment Cost Index for Wages and Salaries and for Benefits, Private Industry, First Quarter 1981-First Quarter 2005
http://www.bls.gov/opub/cwc/cm20050624ch01.htm

Compensation Cost Trends - Twelve Month Percentage Changes
Constant Dollars Analysis, September 2000-2005
http://www.bls.gov/opub/ted/2005/oct/wk5/art01.htm

Measured in "constant dollars," it is estimated that annual compensation costs for private industry workers decreased 1.6 percent for the year ended September 2005, compared with a 1.2-percent over-the-year increase for September 2004.

Private-sector wages declined by 2.4 percent in constant dollars from September 2004 to September 2005; benefit costs rose 0.1 percent.

Civilian Workers, Changes in Wages and Salaries, and Benefit Costs, 1996-2005
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?request_action=wh&graph_name=EC_ectbrief

Civilian Workers, Total Compensation Analysis, 12 Month Percentage Changes, 1996-2005
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=ECU10001A

Private Industry, Total Compensation Analysis, 12 Month Percentage Changes, 1996-2005
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=ECU10002A

Consumer Price Index for all Urban Consumers, 1995-2005
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?request_action=wh&graph_name=CU_cpibrief

Producer Price Index for Finished Goods, 1995-2005
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?request_action=wh&graph_name=WP_ppibrief

I acknowledge that I am focused on the recent developments and trends regarding real hourly compensation.

I need a magnifying glass to see edge of the real hourly compensation downturn on Dave's macroblog chart. The issue is 2005, not previous years.

You don't need a magnifying glass to see the evidence of the downward movements on the above charts from the BLS links. The direction at the moment is clear. It's down.

It's a shame that no full 1st qtr, 2nd qtr, and 3rd qtr 2005 data is being posted on main blog posts to reflect the most recent change in real hourly compensation.

But that info is available in the comment links above.

if you got cancer, would you rather have $25000 of medical care in 1960 (adjusted for inflation so it would be less than $4000 in 1960 dollars) or $25000 of todays medical care?

I would prefer 1960s as it would have covered everything possible. It wouldn't even been to cover the cost today.

Spencer

Very good point. What is interesting is the culture of company benefits has continued here in the UK to some extent, despite radical changes in the tax law.

In particular the 'company car' is well embedded in corporate culture. People derive their status from the company car they receive-- one way to piss off a sales force is to give a new rep a car which is above that which the others receive.

Firms have been buying out the benefit from employees, because of the costs of such schemes, which are now heavily taxed. But from a straight economic viewpoint, they would have gone long ago-- but this hasn't happened.

Another benefit which is dying is the pension scheme. Firms have discovered that employees value headline salaries, not contributions to some defined benefit scheme they don't expect to benefit from (because they don't expect to be there in 30 years time). the average employer contribution to a defined contribution (money purchase) scheme is something like 5%, vs. 12% for a defined benefit (final salary) scheme.

Lord

I think you have missed the point. In the 60s the therapeutic options were very limited-- they operated, then you lived or died. Cancer survival rates for many adult cancers are now more than 50% due to better drug treatments. Lifespan post diagnosis has multiplied several times over.

In the 1960s, childhood leukemia was a death sentence. Now the survival rate is something like over 80%.

I agree the US helathcare finance system seems very wasteful and irrational, at least to those of us who use 'single payer' tax-based insurance systems.

No, I didn't. The options are certainly greater, but the cost is immensely greater, so we as a society are not really better off although some individuals may well be. While there has been significant progress, much of it is still experimental prolongation of death. We do learn, but it is very expensive learning. The difference is I recognize there are limits to what is worthwhile, and however much we spend, life must come to an end sometime, Kurzweil noted.

Spencer,

I agree with the points that you raised.

Jim -- main post -- "Should we worry about the declining trend in real wages? At least a little, I should think."

I am concerned about the overall recent decline in workers' real compensation.

We should be concerned about declining real wages, declining percentages of workers and families (two different statistical measures) covered by employer-provided health care insurance, and declining percentages of contributors and levels of offset contributions to employer-provided pension plans.

All of these considerations will have effects on the standards of living for workers and their families.

If there is good news forthcoming on the real compensation employment front, perhaps someone should identify it.

Good gravy.

This is possibly the least coherent discussion of the issue that I have seen outside of the Wall Street Journal editorial pages.

1. I am glad to see that the problem with using averages has been recognized.

2. I am also glad that some have recognized that other countries are able to supply substantially the same level of medical care at substantially lower cost, suggesting that there is medical inflation.

3. The limitation of using hourly wages has not been recognized. The composition of the hourly wage market has shifted substantially. It used to include lots of high-wage blue collar jobs. Now, very few hourly blue collar jobs pay good wages.

4. There is some recognition of the problem of using "compensation," especially as an average has been partially explored. However, one should point out that stock options are "compensation," and if the measure is an average, it lumps in Exxon's CEO walking away with the store with the janitor's medical benefits.

5. As far as I can tell, no one has done demographic corrections for earning power. The median age rose by ca. five years over this period. One would expect wages to rise by this effect alone.

6. One cannot confuse technological advances with wages. Those technological advances are generally obtained by the common sacrifice, especially taxes used to fund university research. Not to denigrate corporate science, but it's focused on development. Once a good idea is found, they are willing to make money from it.

7. Every economic argument should do a reality check by looking at the whole picture. If wages have risen, then would think assets and savings would have risen. Or maybe more Americans are enjoying leisure time. If medical and pension benefits have risen, then one might think more people would have them or that, for example, there would be fewer cases of exhaustion of medical benefits.

When one looks at the whole picture, Americans are behaving like people whose wages are declining. They save less. They work more. Their pensions are insecure; indeed, prior to ca. 1980, it was unheard of for a pension fund to go bust.

Yes, it is now possible for the typical person to live 10 or 15 years after retirement, sucking up those lavish Social Security payments and enjoying high-roller treatment from Medicare and Medicaid. It's also increasingly likely that those five or so extra years are not going to be spent on fishing trips in the Winnebago, but working at Wal-Mart as a greeter.

Is that a great deal or what?