Questions about real wages should rely on real data

Posted Jan. 27, 2010, at 5:28 p.m.

Paul Krugman, the prominent economist and New York Times columnist, has written that “the stagnation of real wages — wages adjusted for inflation — actually goes back more than 30 years.” Nonsupervisory workers, he wrote, have never earned as much per hour as they did in the 1970s.

Frank Levy and Peter Temin of MIT, two other respected economists, have asserted that workers’ incomes have not risen significantly since 1980. And a number of economists, other analysts and bloggers have made similar claims.

So have American workers’ earnings fallen or stagnated in recent decades? No, they have risen — and claims to the contrary are incorrect.

Examining these assertions is complicated, because the writers have used highly respected data series. Most have used data from the U.S. Bureau of Labor Statistics’ Current Employment Statistics, CES, program. These data show, on the surface, that real wages have risen only 7 percent since 1979.

The big problem is that the CES data are unsuitable for some purposes. The writers noted above have implied, or even baldly stated, that these data provide good evidence on long-term changes in the average compensation of all U.S. workers. But it takes very little probing to show that the CES provides no such evidence.

First, the CES wage data cover only 80 percent of private sector employees — only “production workers and nonsupervisory employees” — and no government employees. Even in the private sector, the data do not cover supervisors, many white collar workers who are not supervisors, farm workers or the self-employed.

Worse, the CES program does not include some types of compensation even for the workers it does cover. The CES excludes some commissions and bonuses and all tips from its earnings data. Worse, the CES excludes all employer payments for workers’ benefits, such as health insurance, retirement plans, Social Security and unemployment insurance. Significantly, these benefits have been increasing much more rapidly than other types of compensation.

Bottom line: Trends in the CES wage data do not shed light on changes in total compensation of all employees.

Several other sets of statistics — also published by the Bureau of Labor Statistics — show much larger increases in employee compensation than the CES data. For example, one set of BLS data shows a 25 percent increase in hourly compensation since 1979, and another a rise of 39 percent, both after adjustment for inflation. The first figure comes from a quarterly census of more than 8 million private and government workplaces, while the second rests on calculations of total private sector compensation. Both data sets cover more types of workers than the CES; and both include commissions, tips, bonuses and at least some employer-provided benefits.

Clearly, then, over the last three decades, average employee compensation has risen more rapidly than many analysts have acknowledged.

What about real employee compensation during the current miserable recession? Surprisingly, it has risen modestly since late 2007, when the recession began. Several BLS data series, including the CES data, show increases of between 1 percent and 3 percent. Of course, these increases provide little comfort to the millions of people who have no job.

Finally, an important caution: Despite the rise in average compensation, the long-term compensation trends reveal some very disturbing developments. First, the rise in average compensation since 1979, though positive and significant, has been much slower than between 1945 and 1979, a period of unusually rapid advance. Also, inequality has increased significantly in recent decades — the gap between the earnings of high-income and low-income workers has risen sharply. And further, employee compensation has grown much more slowly than labor productivity. All these unfortunate developments are well documented.

I should note that several analysts who have written inaccurate reports about average compensation trends have written accurately about these other developments. But of course accuracy about some important issues does not justify inaccuracy about others.

The analysts who have created incorrect impressions about average compensation have not helped the cause of intelligent public debate. The public deserves better.

Edwin Dean, an economist and seasonal resident of Vinalhaven, writes monthly about economic issues.

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