In my March 21st, 2006, column for the Pittsburgh Tribune-Review I did my best to warn against allowing true statistics to mislead you into false conclusions.
(For some reason, all but two of my Trib columns from late December 2005 through early April 2006 are unavailable on-line. They appeared only in print. I thank the editors of the Trib for sending to me the texts of these columns.)
You can read the column beneath the fold.
Can everyone’s pay rise if average pay falls?
Official numbers tell us that the average, inflation-adjusted hourly wage of American workers has fallen over the past 30 years, from $16.79 in 1975 to $16.34 in 2005 (reckoned here in 2005 dollars).
In previous columns, I discussed problems plaguing attempts to adjust wages and prices to “cleanse” them of inflation. Although statisticians at the Bureau of Labor Statistics attempt heroically to deal with some of these problems, the result is that the rate of inflation remains overstated and, hence, monetary measures of wages understate the improvement of living standards over time. Put those problems aside. Assume that the average real wage earned today in America truly is lower than it was when Gerald Ford was president. Would this fact mean that ordinary Americans are worse off today than they were back then?
First, wages aren’t the only form of worker compensation. Employers also pay fringe benefits to employees as part of their total compensation. And the average real value of fringes — mostly health insurance and pension contributions — received by workers has increased by about 58 percent over the past 30 years.
Second — and more importantly — the concept of an average can easily mislead. Each semester give the following example to my students: Suppose, I tell them, that we calculate the average height of everyone in the classroom. We find that it’s 5 feet 6 inches. Now suppose that my 4-foot-6-inch-tal 8-year-old son walks into the room. The average height of people in the room falls. But it would clearly be erroneous to conclude that anyone has shrunk.
So it is with wages. Everyone’s pay can rise even though average pay stays the same or even falls. And I suspect that this is what’s happened. Suppose that your town has 100 workers with the average wage being $15 per hour. Let a new, extended family move to town — a family whose members work hard but are not highly skilled. They move to your town because the city where they used to live had no jobs for them. A half-dozen of these new citizens find employment in your town, each at a wage of $10 per hour, while the wages earned by everyone else in town remain unchanged. The result? The average wage in your town falls.
But who is worse off? No one. No one’s wages fell and the wages of the new workers in your town rose.
Over the past 30 years, three trends have introduced into the U.S. work force many workers whose pay is below average — thus keeping the average real wage down even though almost any randomly chosen American worker enjoys rising pay. These three trends are (1) women’s great entry to the U.S. work force; (2) increased immigration; and (3) a reduction in the real minimum wage.
Freed by electrical appliances from the drudgery of housework, many women 30 years ago sought formal employment. Most of these women in the 1970s had fewer specialized skills and less work experience than men, so the jobs women took were lower-paying ones such as clerical and sales positions.
And although women today are more likely than were their mothers to go to college or to enter the work force while their children are still in cradles — as well as to work as doctors and lawyers — women remain more likely than men to leave the work force or to take jobs with more flexible schedules. The consequence is that even today women are paid, on average, less than men. These lower wages paid to women — because of women’s career and family choices — pull down the average wage from what it would be if women returned to their kitchens and nurseries.
But this fact is hardly evidence of a failing economy. Much the same is true of recent immigrants. Because they are generally less skilled than native-born American workers, most immigrants work for wages lower than those earned by the typical nonimmigrant worker. The result is that the average wage is depressed even though the wages earned by most native born workers are rising.
A similar effect is produced by inflation’s reduction of the minimum wage (which hasn’t been raised since Bill Clinton was in the Oval Office). The higher the minimum wage, the greater the number of low-skilled workers excluded from the labor market. So as inflation reduces the real size of this wage, more unskilled workers find jobs. Of course, the jobs they find pay below average wages. Increased employment of such workers pulls the average down, even though wages of almost all other workers continue to rise.
For all of these reasons, almost everyone is better off even though the average real wage is lower.