Middle Class Stagnation


With the continuing debate surrounding our debt and our deficit, much ado has been made about taxes.  Who should pay ’em and who shouldn’t.  Embedded in that debate is the question of class warfare.

For a long time, a very VERY long time, the idea of class warfare has been one of the rich taking advantage of the non-rich for the rich’s personal gain.  These days, you have the opposite phenomenon.  You have people in America that feel there is a class war being waged, but not by the rich on the poor, but by the Left on the rich.

Fascinating.

In response to this accusation, the Left is quick to point out this data:

It’s clear, since 1975, the middle class has been squeezed.  Earnings and wages have been flat to say the least.  All the while, the rich have benefited at the expense of the middle class.

But is this true?

Happily, no.


What we see here is that the cost of employment has risen.  That is, the total compensation to employees from employer has risen even as wages may, or may not, have remained flat.

How does this work?

The three data series are in fact quite different in terms of how they adjust for inflation, what labor income each includes, which workers they cover and other measurement issues. In short, Figures 1 and 2 compare wage rates that are not really comparable-an apples-to-oranges comparison…

So, how can we make a more apples-to-apples comparison?

The first step in moving toward an apples-to-apples comparison is to deflate all series using the same price index. I’ve chosen the PCE deflator because it provides a consistent series back to 1975 and because it reflects the basket of final goods and services that people consumed each year.

And what does that look like?

Yowza!

Using the PCE deflator for all series therefore changes the growth rates noticeably. Average hourly earnings now increase by 10 percent rather than declining by 4 percent. Median hourly wage rises 20 percent rather than 12 percent. Almost a third of the difference in growth rates between the national labor income series and the two microeconomic wage series vanishes simply by using the same measure of inflation.

A totally different picture than is painted by the original data.  However, we’re not done.  Money is only a portion of the means of compensation.  Vacation, insurance, training and sick days are ALL methods that employers are able to compensate employees.  Does the picture change when we factor in those methods?

Yes.

Fringe benefits have become an increasingly important part of employee compensation over the past 30 years. The BLS estimates that benefits currently account for about 30 percent of employer costs for employee compensation. While the BLS does not provide similar estimates for 1975, other sources suggest that the benefit share of total compensation has risen substantially. For example, the Economic Benefits Research Institute estimates that health care as a share of total compensation rose from 3.3 percent in 1975 to 8.5 percent in 2005.

National labor income per hour, on the other hand, does include wage supplements (benefits) as defined by the Bureau of Economic Analysis national income and product accounts. NIPA wage supplements include employer contributions to employee pension and insurance funds and employer contributions to government social insurance, but exclude benefits such as paid leave that are included in the BLS estimate mentioned above. Wage supplements per hour rose a substantial 90 percent from 1975 to 2005 and increased as a share of total NIPA compensation, wages and salary plus supplements, from 14.2 percent in 1975 to 19.4 percent in 2005.

The next step in making the wage series comparable, then, is to add benefits per hour to the existing series on average hourly earnings and the median hourly wage. Unfortunately, precise data on benefits at the individual level are not readily available. To get a sense of the magnitude of the impact of including benefits, I estimate benefits per hour for these series based on NIPA data.

And what does this look like?

The compensation view is 60% higher when looking at earnings and 40% when looking at wages.

This overview is only the first in a series of reports from the Minneapolis Federal Reserve that looks at this topic.  There are more reports in the series and I’ll review each here.  However, the point is one that I have made over and over again.

The Left is lying when they tell you that the non-rich have been abused.  Life for the non-rich is much better today than it was yesterday.  And any statement to the contrary should be viewed with the skeptisism appropriate for politicians looking to coalesce power.

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2 comments
  1. the Economic Benefits Research Institute estimates that health care as a share of total compensation rose from 3.3 percent in 1975 to 8.5 percent in 2005.

    David Frum dismissed that argument thusly:

    Back when the Journal wanted to argue that incomes really had risen handsomely in the Bush years, its favorite trick was to aggregate wages and benefits. That made a nice-looking chart, even if it begged the question: “Am I really better off if my employer has to pay twice as much for knee surgery?”

    Obviously, the question of measuring inflation over time is a tough one to handle, and there’s no obvious “right” or “wrong” way to do it. I don’t remember the pros and cons of using PCE– did it exclude housing, thereby understating cost-of-living prices? I dunno.

    It seems to me that when you combine the various studies we have on wages, social mobility, and indebtedness, the big picture is stagnation for most Americans in the past 30 years.

    • pino said:

      Back when the Journal wanted to argue that incomes really had risen handsomely in the Bush years, its favorite trick was to aggregate wages and benefits.

      Except the argument and this rebuttal, track data all the way back to the 70’s. So it’s not just the Bush years we’re measuring, it’s many many more years.

      “Am I really better off if my employer has to pay twice as much for knee surgery?”

      Compensation is compensation. The narrow discussion is that wages stagnated during that measured period. And, I suppose, stritly speaking, they may have. But total compensation did not. It is no more the corporations “fault” that health care costs have gone up than it is their credit computer prices have gone down.

      It seems to me that when you combine the various studies we have on wages, social mobility, and indebtedness, the big picture is stagnation for most Americans in the past 30 years.

      It may seem that way, but I think the data shows it isn’t true.

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