Catering to Ignorance

by Russ Roberts on August 28, 2006

in Standard of Living

I suppose it’s a dog bites man story—I shouldn’t be upset when the New York Times news division writes an intellectually dishonest story that plays to the biases of its readership base. But today’s front-page above the fold story on wages depresses and surprises me anyway. Maybe it’s because one of the authors, David Leonhardt, is a good reporter with good economic intuition. (I can’t speak for the other author, Steven Greenhouse.) But I suspect the source of my dismay is simply the knowledge that this article, despite its inadequacies will be met with nods of agreement around the breakfast tables of America.

Here’s how the article opens:

With the economy beginning to slow, the current expansion has a
chance to become the first sustained period of economic growth since
World War II that fails to offer a prolonged increase in real wages for
most workers.

That situation is adding to fears among Republicans
that the economy will hurt vulnerable incumbents in this year’s midterm
elections even though overall growth has been healthy for much of the
last five years.

The median hourly wage for American workers
has declined 2 percent since 2003, after factoring in inflation. The
drop has been especially notable, economists say, because productivity
— the amount that an average worker produces in an hour and the basic
wellspring of a nation’s living standards — has risen steadily over the
same period.

Let me repeat the key sentence:

The median hourly wage for American workers
has declined 2 percent since 2003, after factoring in inflation.

That’s a very strange sentence for many reasons:

1. Why would you use a measure of compensation that ignores benefits, an increasingly important form of compensation?

2. Why would you use 2003 as your starting point when the recession ended in November of 2001?

3. There are no government series that I know of on median earnings. Where did those data come from?

There’s a chart accompanying the article. It tells the reader that the median hourly pay data are from the Economic Policy Institute. The Economic Policy Institute has a policy agenda. Their main issue is the alleged stagnant or falling standard of living of American workers. They support a higher minimum wage and the strengthening of labor unions.

The Bureau of Labor Statistics does calculate real hourly compensation for the nonfarm business sector, a measure that includes benefits. Let’s see what those numbers look like:

What these numbers show is that for every year since the recession of 2001, real hourly compensation has actually increased. It’s up since 2003 as well. And this year it’s up quite dramatically.

Any of these measures are at odds with the Times’s conclusion. It would have been nice for the Times to include a measure like this as a counterpoint but it’s missing.

The article continues:

As a result, wages and salaries now make up the lowest share of the
nation’s gross domestic product since the government began recording
the data in 1947, while corporate profits have climbed to their highest
share since the 1960’s. UBS, the investment bank, recently described the current period as “the golden era of profitability.”

the last year, stagnating wages were somewhat offset by the rising
value of benefits, especially health insurance, which caused overall
compensation for most Americans to continue increasing. Since last
summer, however, the value of workers’ benefits has also failed to keep
pace with inflation, according to government data.

There are two claims here. The first is that labor is getting an increasinly small share of the economic pie. The second is that taking account of compensation (which the authors have ignored till now and are mentioning here in passing) isn’t enough to keep workers ahead of inflation.

Both of these claims are puzzling. The first claim, about labor’s share of the pie ignores benefits. As I have mentioned here before–the standard claims you hear about labor’s share declining come from using wages without other forms of compensation. When you include benefits, labor’s share is virtually a constant at 70% of national income and has been steady since the end of World War II, as this St. Louis Fed report shows:


Yes, there are some ups and downs. Yes, it may be the golden age of profitability. And yes, CEO and upper management compensation may mean this is a distorted picture of how the average Joe is doing. Yes, these data end in—it looks like—2003.

But it’s hard to use these data to support the claim of the Times that labor’s share is at an all-time low relative to 1947.

The second claim about recent years is hard to square with the BLS data on real hourly compensation which shows that real compensation is growing not shrinking. Later on in the article, the authors make a definitive statement about compensation including benefits:

Total employee compensation — wages plus benefits — has fared a little
better. Its share was briefly lower than its current level of 56.1
percent in the mid-1990’s and otherwise has not been so low since 1966.

This percentage, taken from Commerce Department data, is the ratio of compensation to GDP. If this ratio is indeed lower today than it was in 1966, my guess is that it isn’t much lower and that it tends to bounce around very little like the data I show above.

The second point is that my quick look at the Commerce Department numbers shows that total compensation received by employees as a ratio to GDP is HIGHER today than it was in 1966. I’ve emailed the Times. I’ll let you know what they say in reply if it’s relevant.

The article discusses the reasons for the alleged wage stagnation:

Economists offer various reasons for the stagnation of wages. Although the economy continues to add jobs, global trade, immigration, layoffs and technology  — as well as the insecurity caused by them —  appear to have eroded workers’ bargaining power.

unions are much weaker than they once were, while the buying power of
the minimum wage is at a 50-year low. And health care is far more
expensive than it was a decade ago, causing companies to spend more on
benefits at the expense of wages.

I would love to see a measure of workers’ bargaining power. What could that possibly be? Unions have been weaker for fifty years, a time of great increases in our standard of living.

What keeps my wages high (and yours) is our alternatives. Is there any evidence that workers have fewer alternatives than they once had? If anything, workers are more mobile today than ever. What sets workers wages are the wages of those alternatives. That depends, generally, on our skills, our knowledge and our drive and discipline—human capital and how well we are able to apply it. Workers are better educated than ever. That is why I believe that compensation, properly measured, is higher than it was five or ten or twenty or thirty years ago.

By the way, the New York Times quotes one economist in this entire article. That would be Jared Bernstein of the Economic Policy Institute.

Update: Greg Mankiw takes a calmer look at the whole question of wages and productivity here.


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