December 23, 2005
Wages and compensation: a correction
Thanks to my readers Movie Guy, Joe Rotger, and Spencer (as well as Dave Altig in personal email communication) for helping to clarify a misunderstanding I may have helped promote with my post earlier this week on wages and total compensation.
The two BLS series I plotted there, average hourly earnings and total compensation, are not strictly comparable, because they apply in part to different groups of people. Average hourly earnings only refers to production workers, construction workers, and nonsupervisory workers, whereas the BLS compensation series includes all wage and salary workers as well as a compensation imputation to proprietors. Thus the divergent trends between falling wages and rising compensation in part reflects the phenomenon I referred to (an increased share of compensation going to nonwage income), and in part reflects the growing wage gap between nonsupervisory workers on the one hand and supervisors or proprietors on the other.
The answer to the question I posed-- should we worry about the declining trend in real wages-- should I think be a stronger "yes" than I originally suggested.
Posted by James Hamilton at December 23, 2005 07:34 AMdigg this | reddit
I try not to think too much about real wages. This can get depressing.
Enjoy the weekend!
Posted by: nate at December 23, 2005 08:48 AM
Globalism is often blamed for the decline in wages. I tend to agree intuitively. Any data to support this claim?
Posted by: John at December 23, 2005 09:26 AM
I do not 100% buy into the globalization argument for the decline. Doesn't comparative advantage lead one to believe that there should be gains from trade? So intuitively I do not think it is globalization.
Maybe we need to work on transition in the U.S. It maybe inadequate policies and programs for transition and portability that has led to the situation.
It does not help when you have catastrophic losses concentrated in a geographic area or "surprise", somewhat-epic bankrupties such as Worldcom and Enron.
Posted by: nate at December 23, 2005 09:37 AM
"may be" not "maybe"
Posted by: nate at December 23, 2005 09:38 AM
I, in turn, don't buy into the comparative advantage argument. It was a nice academic exercise in the 1800s when capital was relatively immobile between nations, but now capital follows the highest profit which is usually determined by the lowest offshore wage rather than being reinvested in the home country. Globalization means that wages are equalized downward and profits are equalized upward. The high wage earner loses. If this seems like an anti-capitalist argument, I don't know about you -- but I work for a living and I like my high wages.
Posted by: John at December 23, 2005 10:51 AM
With globalization, from the US point of view, unskilled labor becomes more abundant relative to high skilled labor, so low skill real wages in the US fall, exactly the story told by the larger gap between AHE and Compensation
Posted by: JM at December 23, 2005 11:38 AM
Global competition has had an affect on wages, but it is far stronger than a trade off of production being moved to China.
For the lst forty years every manufacturer has been faced with international competition. Japan, Mexico, now China. In addition, the glorification of a college education has led to disinterest in the industrial arts and the elimination of those jobs. OSHA has banned high schoolers from taking summer jobs in factories, or on construction sites because these are dangerous occupations.
The results of all of these forces is that there are fewer skilled workers, and that minimization of labor costs is in the continuing forefront of manufacturing. Thus, domestic manufacturing has turned to automation and we have replaced skilled workers running crude machines with unskilled workers tending the OFF button on complex equipment.
Forty years ago, we expected a manufacturing plant to run with production wages at near 40% of sales. Today, to maintain vitality we operate with production wages at half this level. Wages for the highly skilled have not been cut, but the balance of the work force has changed dramatically.
Now, we can rue this change, but the reality is that most of our products are far cheaper today than they were in 1960 and the products are better. Yearh, we don't build them like we used to, and we now throw away a radio that doesn't work rather than taking it to the shop to be repaired. That is not a question of reliability, it is a product of the fact that the unit is so cheap it is more economical to replace than it is to repair.
For those of you who wish for the good old days, I suggest that you buy a house that was built in 1920.
Posted by: Bill Ellis at December 23, 2005 12:38 PM
The low skill/high skill argument is rather misleading. Some low skill labor competes globally and wages in these areas diminish as the jobs disappear. Other low skill labor is based on presence and doesn't compete globally and is not impaired. High skill labor faces the same conditions. Some compete globally and even more easily than low skill labor and thus have falling wages, while others are insulated from globalization and thus do not.
High skill occupations usually include healthcare and pensions which have increased while low skill occupations frequently do not, but unemployment has risen and labor participation have fallen among the high skilled over the last recession while the low skilled have continued working as they must, a difference in distributional effects.
Posted by: Lord at December 23, 2005 01:35 PM
It would be interesting to compare "social security" (payroll taxes) type systems in countries such as India, China, Russia, Brazil and the U.S.
It would also be interesting to compare across these countries:
-the cost of doing business due to environmental regulation
-the current state of the environment
-the environment trends and projections
Posted by: nate at December 23, 2005 01:54 PM
While globalization is beneficial for most, that doesn't stop many from being hurt. There are gains from trade but also impediments, such as currency pegs. More jobs in China and even more cheap imports for us. It is bad for exports to China and for jobs here however.
Posted by: Lord at December 23, 2005 01:56 PM
What about the massive U.S. negative trade deficit? Does it not support my point that capital flows to the country with absolute advantage where wages are lower? Yes, much of this capital is reinvested back into the U.S., but not all. Apart from the commissions to the financial services sector, this capital is not going to U.S. workers; it's financing the massive federal debt and lining the pockets of bond traders.
As for the disposable radio argument, America makes good disposable radios -- or used to.
Posted by: John at December 23, 2005 02:24 PM
you have to look at productivity in addition to wage level. cheap labor is not a bargain if it is inefficient.
Posted by: nate at December 23, 2005 02:51 PM
Thanks for the article ... I suggest a few other questions/considerations.
1) We know that there is a difference between the average and the mode?, e.g. all the wages divided by the number of employees, and the wage of the average (middle) person. I have felt that a society that increases, if ours does, the average while if decreases the wages of the lower paid, is questionable.
2) I also wonder, even if the compensation was adjusted to only include the wage earners, why it probably is "increasing" faster than wages. Is it good if our compensation is increasing due to faster than "reasonable" health costs, increased SS payments, etc. So the question is are the wage earners better off if their disposable income is decreasing while their employer is paying more to support the Medical community and the population bubble.
3) Finally I'd be interested in asking how these two measures match the GDP/person change over the same period. If, as I expect, the wage and compensation grows less fast than the individual GDP, then it would also show that the countries wealth is being shifted from the wage earner
Posted by: Mike Liveright at December 23, 2005 03:13 PM
I believe that the US ran rather large trade deficits in the mid to late 90's precisely because capital was flowing into the country. Trade deficits occur when imports are greater than exports, and indeed capital is a good that can be imported.
Now those imports have turned to mostly consumption goods, which is problematic.
Posted by: Adam Sacarny at December 23, 2005 04:46 PM
I’m still rather confused by this.
"The two BLS series I plotted there, average hourly earnings and total compensation, are not strictly comparable, because they apply in part to different groups of people."
That bit I get.
But have we also seen a change in the composition of those groups? I can’t find the stats at the BLS but I wouldn’t be at all surpised to find that there has been a change in the composition of the workforce. That, in a move to a service economy, more people are being paid salaries than are being paid by the hour, and that thus what we’re seeing is a difference in composition between the two groups rather than the assumed stagnation or falling of real wages.
Posted by: Tim Worstall at December 24, 2005 03:46 AM
Plaudits to Movieguy, Spencer, Joe Rotger, and Jim Hamilton for some excellent leg work.
Deeply appreciated from north of the border.
Happy holidays all.
Posted by: Stormy at December 24, 2005 06:33 AM
Tim -- I have doubts that the shift to a service economy cause more people to be paid salaries rather then hourly wages. I do not have any data on this, but the portion classified as average hourly earnings sector remains very consistent at about 80% of employment.
But I can also see reasons why this may be true.
Posted by: spencer at December 24, 2005 06:41 AM
Tim, there may be lots of differences between these groups and possibly changes in the fraction of people within each group over time. One of the ways that rising wage inequality is demonstrated is by looking at wages for those in the bottom 10% (which have fallen relative to inflation) compared with those in the top 10% (which have risen relative to inflation). The growth of the gap is really very big.
Although I don't have the particular data, what I'm thinking we'd find if we had total compensation for the exact same group as the BLS earnings series, this has increased relative to inflation, but not by as much as the BLS compensation series. Likewise, if we had the earnings for the exact same group as the BLS compensation series, we'd find that it went up, but not by as much as the compensation. Using the two series as reported by the BLS, as I originally did, confounds these two effects of the shift to more compensation and rising income inequality between the groups.
Posted by: JDH at December 24, 2005 07:37 AM
It is surprising to me that the portion of workers classified as hourly has remained the same. I've worked for large corporations for most of the past 30 years. I've seen an explosion of computer-oriented professional jobs and a corresponding decline in clerical jobs. As an example, the hourly wage position of "typist/clerk" in large companies has been eliminated. So has the position "keypunch operator". In the factories, many human skills have been replaced by machines controlled partly by computers but also by a few very skilled operators.
Incidentally, anyone who has worked in an automated plant knows that the operators do much more than control the OFF button.
Skills may not have been tallied consistently over the years. Consider the positions of food preparers, housecleaners, and day care workers. Did the liberation of women from household work lead to an increase in these hourly jobs? If so, then did the true number of these workers really increase? Or did we just not count the position of housewife in the statistics?
Posted by: JohnDewey at December 24, 2005 07:43 AM
Thanks for clearing this up, Jim.
Merry Christmas and Happy New Year.
Posted by: Movie Guy at December 24, 2005 10:56 AM
The average wage has moved to the right of the median--and I suspect it will continue to do so--, indicating that there is a growing disparity of wealth. Additional compensation in the form of nice benefits and salaries are flowing the top of the food chain.
The problem is that the bottom of the pyramid is growing. At the same time, that bottom of the populace will be under increasing pressure from housing, health, flat wages, and a credit crunch.
Take a good look at Delphi and the comments of its CEO if you want to have a glimpse of where all this is going.
If the bottom, which is over half the populace, collapses--and it might--, we are in a hell of a mess. Furthermore, the pressures of globalization are moving more and more people towards that bottom.
At some point economists will look at more than their well-heeled buddies. All the facts are there; economists just do not what to put them together.
Have a good new year.
Posted by: Stormy at December 24, 2005 06:45 PM
Rewrite: "...economists just do not want to put them all together."
Posted by: Stormy at December 24, 2005 06:47 PM
"should we worry about the declining trend in real wages-- should I think be a stronger 'yes' than I originally suggested."
Or maybe not. The BLS is phasing out this survey as dubious and misleading.
"The limited scope of the production and nonsupervisory worker series makes them of limited value in analyzing economic trends. Just as important to this decision, the production and nonsupervisory worker hours and payroll data have become increasingly difficult to collect, because these categorizations are not meaningful to survey respondents."
A commentator expands on the problems with it...
...this data series is so misleading it is finally being phased out by the Bureau of Labor Statistics (BLS).
BLS explains: "the production and non-supervisory worker hours and payroll data have become increasingly difficult to collect..."
An accountant in a manufacturing company should not be counted as a production worker, for example, but an accountant in a bank should be counted as a non-supervisory worker. Non-supervisory is defined to exclude supervisors, yet include "supervisory workers."
Such arbitrary distinctions make responses "increasingly difficult to collect," suggesting the estimates depend on an increasingly dubious sample of older firms...
... average earnings do not measure "blue-collar" earnings or wages among "the lower 80 percent" (in fact, half of U.S. employees earn no wages -- they earn salaries). Non-supervisory workers include "physicians, lawyers, accountants, nurses, social workers, research aides, teachers, drafters, photographers, beauticians (and) musicians."...
Average weekly earnings are derived from the voluntary survey of payroll employment at 155,000 businesses. The BLS adds up all the dollars spent on payrolls and divides by paid hours (including vacations).
This "differs from wage rates," the BLS warns, and is "not the earnings average of 'typical' jobs or jobs held by 'typical' workers."
"Average earnings" is an arithmetic average -- a mean not a median -- and it includes part-time jobs. As a result, taking part-timers and low-income workers off the payroll has the paradoxical effect of raising average earnings among the rest, though it surely doesn't make anyone better off.
Average weekly earnings can therefore rise in hard times because many part-time and/or low-wage workers lose their jobs.
And average weekly earnings can fall in recoveries because previously unemployed low-wage workers -- or a flood of unskilled immigrants -- find jobs...
Since 1973, as the BLS explains, there have been "persistent long-term increases in the proportion of part-time workers in retail trade, and many of the service industries have reduced average workweeks in these industries."
Millions of previously nonworking spouses and students sought and found part-time work, which diluted average earnings, particularly on a weekly basis....
The latest figure still makes real earnings appear lower than in 1973 ... measured real consumption per capita has nonetheless doubled since 1973. Unless the rich could somehow consume unlimited numbers of houses, cars, shirts and steaks, it is difficult to imagine how American's real consumption could have doubled if real salaries had actually been unchanged.
Could anyone believe that all those shopping malls that have sprung up since 1973, and all the new homes and restaurants, are really catering to just a fortunate few?
The BLS has half a dozen superior measures of labor earnings -- the Census Bureau, Social Security Administration and Bureau of Economic Analysis have others. Real compensation per hour, for example, has risen 43.6 percent since 1973. So how could the real wages of 80 percent of the workforce have "fallen in most years" since then?...
Posted by: Jim Glass at December 25, 2005 10:07 AM
Readjust your telescope: Try looking at the data from 2002 on.
Posted by: Stormy at December 26, 2005 06:35 AM
"Readjust your telescope: Try looking at the data from 2002 on."
Sure. Four million people have been added to payroll -- and their previous $0 wage was not included in the average wage number, of course.
If we make the heroic assumption that persons newly entering the job market have below-average wages on net, then including their wages in an arithmetic average of all wages obviously works to *reduce* the number for average wage
by statistical artifact -- even though every single person may have a higher wage at time two.
Concluding from that new average wage number that workers as a whole have seen their wages fall is as logical as computing the average age of the members of a family after the birth of a new baby and concluding that the baby's parents and siblings have all grown younger.
One of the (several) reasons why BLS is discontinuing the series.
(And when my telescope tells me a data stream has been implausible on its face for 32 years I don't block out the first 29 from view to preserve my faith in the last three.)
Posted by: Jim Glass at December 26, 2005 07:59 AM
Gee, Jim. Maybe we should sit around and talk about what happened from 1973-1976 for the next year.
Stormy is correct. The issue is where we are headed based on matters of income, pensions, healthcare, and other sources of household income. The median income data, often overlooked, answers the mail. We're going backwards.
Next, someone will try to dismiss the facts that worker health care coverage has continued to decline for the fifth straight year, that pension dollar coverage is declining, and that real hourly compensation is down YTD for 2005.
The U.S. Government does not focus much attention on real hourly compensation. You have to dig for some of that information.
Care to explain away median income analysis? And identify your hard data sources?
Posted by: Movie Guy at December 26, 2005 12:27 PM
Doesn't demographics play a big part in the declining real wage?
As I suggested above, the increase in women in the workforce from 1960 to 2000 could account for the long term trend:
- percent of working age women in the workforce increased from 37% to 61% since 1960;
- non-paid work of housewives has been replaced by low wage workers in food service, housecleaning, and day care;
- women have tended to enter lower productivity, lower compensated professions;
- the supply of overall labor increased through their greater participation.
Could the plateau in wages the past decade - interrupted by demand of the overheated economy 5 and 6 years ago - have resulted from the baby boomers reaching and moving beyond peak earnings years? I know that most of my 50-plus age friends are nowhere near as ambitious as they were 20 years ago.
Posted by: johndewey at December 27, 2005 09:26 AM
That may be true of most women, I dont know, but in every medical, dental, pharm and optic school most admin programs mandate that 50% of the class is female. While this policy may seem noble, women do tend to work less due to societal and gender constraints than their male counterparts. One reason why costs in healthcare will continue to rise at breakneck speed is the reduction in the workforce due to 50% of the healthcare education space going to a group that primarily favors part-time work.
So they're not just going into daycare/food service etc, but also high compensation positions, while maintaining a part-time status
In 2010 the number of retiring dentist will outnymber graduates...however...the population is growing ad 1/2 of the class size is going to a group that in general have no intentions of owning their own practice or working full-time. This will put upward pressure on fees, reduce ins part by the Drs, and leave an entire class of working poor in the lurch. The wealthy will always have access.
Posted by: kirk at December 27, 2005 11:06 AM
Sorry, Kirk, I shouldn't have said "professions". Highly paid professional and supervisory workers are not included in the BLS hourly wage data Professor Hamilton provided.
Here's the hourly occupations chosen by the most women, the weekly wage, and their share of that occupation (from the BLS household data survey):
* does not include RN's, who are probably not included in BLS hourly wage data.
How does that compare with the male hourly occupations?
transportation laborers...1.1 million/$457/85%
retail salespersons.......1.1 million/$597/59%
construction laborers.....1.0 million/$492/98%
*includes auto/truck mechanics
I really think women shunned the high-paying hourly jobs. But that wasn't what I was arguing, anyway. What I meant was this: as women moved out of the house into the workforce, many low-paying jobs were created in food service, daycare, and housecleaning. Regardless of who performed this work, the creation of such low-value jobs should drive down the average hourly wage. But - and I think this is important - had we included the former housewives' $0 wage rate in all periods, we may not have seen a longterm decline in the hourly wage rate at all.
Posted by: JohnDewey at December 27, 2005 12:19 PM
I'm looking at the data on wage and salary workers paid hourly wages -- the data is only available on an annual basis. Its share is somewhat cyclical, but it rose from about 58% at the bottom in 1982 to 62% in 1995 before falling back to 59.6% in 2004.
Some of the comments made above seem to work for some industries, but may be offset by developments in other industries. In manufacturing, for example the outsourcing abroads of parts of the production process should mean that a greater share of manufacturing employment goes to nonproduction, or professional workers in manufacturing.
Jim, I watch total employment and total hours worked in retail. They have virtually identical growth rates and this should imply that the share of part time workers in retail has remained constant rather then increasing as you say? this is a question, not an attempt to disagree.
The other side of the equation where this comes into play is when you look at income inequality. Over the last 30 years real family income has increased 30%. But for the top quintile the increase was 60% and for the bottom it was only 5%. For the middle quintile it was 30%. But the dominate reason for this growing inequality is that the real wages and salaries of the lower quintiles have lagged far behind the top income groups. There are obviously many reasons for this, but the biggest reasons have to center around the returns to education and the rapid expansion of the supply of relatively uneducated workers -- women and immigrants -- and the sectoral shift in employment. the massive increase in CEO compensation also plays a significant role in this.
John Dewey, unpaid work is generally not counted.
So the contribution of housewives to our economic wellbeing is not included in the data.
but this also means that part of the increase in what we count may not represent real growth. For example as more women work we eat out more and restaurant meals are counted in real gdp and employment while the value added by a housewife in preparing a meal at home is not included in gdp or employment. so does eating out more realy represent an increae in our well being or what ever you want to call it? difficult question.
Posted by: spencer at December 27, 2005 12:42 PM
Thanks for the comment. I did realize that unpaid work is not counted. That's the point I was trying to make, that low-paid counted domestic jobs had replaced zero-paid uncounted domestic jobs. Today's hourly wage rates are thus not entirely comparable with those of the 60's and 70's.
I'm not positive, but I think application of comparative advantage did increase our overall well-being. Many talented women, who would have been efficient but underemployed domestic workers, are now managers and computer programmers and dentists. Their former functions are being performed by unskilled workers - some from Mexico but some who are citizens.
Posted by: JohnDewey at December 27, 2005 01:07 PM
I see your point John, Thanks. It sounds very reasonable that homemakers migrated into the lower-paying jobs simply because they required less training/education/skill. I wonder if this change has really benefitted our country and children or truely harmed them. Our neighbors son(10yrs old) has expensive gadgets that I don't even buy for myself, yet flies solo from 3pm-6pm because mom and dad are busy working(ironically one in finance and the other as a fornt-desk dental receptionist).
One earner has a job that is a product of the greenspend credit bubble, the other has a glass-ceiling job without benefits in healthcare.
Posted by: kirk at December 27, 2005 03:21 PM