Some economic statistics are very important in the world of politics.
When President Obama’s so-called stimulus was in effect, critics (including me) kept pointing to higher-than-predicted unemployment rates. President Trump, meanwhile, mistakenly thinks America somehow is losing because of the trade deficit. And the GDP numbers are the subject of considerable discussion on all sides.
Another very important piece of data is wage growth, especially since Trump wants to claim his policies are generating big results. I take a jaundiced view on such claims, but the issue is very important, so let’s take a look at two interesting columns.
Michael Strain of the American Enterprise Institute, writing for Bloomberg, starts by noting that some folks on the left think workers are being screwed.
Are wages determined by market forces, or do businesses get to decide what pay they offer to workers? …Why has wage growth been so sluggish for so many years? …you might answer that employers have made the decision to boost profits at the expense of raising wages. …it is common to hear some prominent analysts and organizations on the left argue that the link between wages and productivity for most workers has effectively been severed.
Not so fast, he writes.
Businesses don’t pay employees less than the value of their productivity — the amount of revenue workers generate for their employer — because doing so would result in their workers taking another job where they would get paid what they’re worth. In this sense, employers don’t “decide” what wages they pay. Instead, wages are set in markets. …worker productivity remains the dominant force in setting wages. …Market forces are powerful. A recent paper by economists Anna M. Stansbury and Lawrence H. Summers of Harvard confirms this. They find that over the last four decades, a one-percentage-point increase in productivity growth is associated with a 0.73 percentage point increase in the growth rate of median compensation. That’s a strong link.
I have two thoughts on this. First, productivity is the key to our prosperity. I’m in full agreement with Paul Krugman’s observation that, “Productivity isn’t everything, but in the long run it is almost everything.”
Second, as illustrated by this chart, we get more productivity with greater levels of investment.
The problem is that government often undermines productivity growth.
Governments have thrown a wrench in the market machine through the absurd proliferation of occupational licenses, reducing wages for workers who can’t get a license and restricting the mobility of licensed workers. A recent study finds that the rate of migration across state lines for individuals in occupations with state-specific licensing requirements is over one-third lower than among individuals in occupations that don’t have such rules.
Amen.
And there are plenty of additional policies that have a negative effect as well.
In a column for the Wall Street Journal, David Henderson says the data on wage growth tell an incomplete story.
Standard wage data show that between the spring of 2017 and the spring of 2018, real wages in the U.S. increased only 0.1%. But there are three major problems with these data. First, they don’t account for fringe benefits, which are an increasing proportion of employee pay. Second, standard wage data use an index that overstates the inflation rate. Third, each year the composition of the workforce changes, as older, higher-paid workers retire and young, lower-paid workers enter the workforce.
He digs into some of the data that have been shared by the CEA.
…the White House Council of Economic Advisers addresses these three biases and concludes that real wages grew by 1% in 2017-18, not the measly 0.1% reported in the wage data. …including benefits would add 0.2 percentage point to the 2017-18 figure. …An alternate measure of inflation, the personal- consumption-expenditures price index, while also imperfect, is a better measure of inflation. Economists at the Federal Reserve prefer the PCEPI to the CPI. Using the PCEPI adds 0.5 percentage point to the 2017-18 growth of real wages. …The Census Bureau estimates that 3.57 million people turned 65 in 2017, compared with 2.68 million in 2010. Taking account of the decline in older, higher-paid workers and the increase in younger, lower-paid workers, the CEA estimates that this “composition factor” added 0.3 percentage point to real wage growth from 2017-18.
I have two thoughts about this data.
First, I don’t pretend to know the ideal measure to capture inflation, but I definitely know that we’d have lower prices in the absence of government intervention.
Second, the CEA definitely is right about fringe benefits being an ever-larger share of total compensation (mostly driven by government intervention).
And these observations apply, regardless of who’s in the White House.
This is not a partisan point. The same methodology would show that real wages grew more than was reported during much of President Obama’s time in office. …there is, in this context, one relevant difference between the Trump and Obama administrations: the 2017 tax cut. Real after-tax wages increased 1.4% between 2017 and 2018, according to the CEA study.
I obviously like the part about tax cuts being helpful, but I’ll reiterate my concern that this effect will evaporate if GOPers don’t get serious about spending restraint.
And I’ll close with the essential observation that there is no substitute for across-the-board pro-market policies if the goal is improving people’s lives.
[…] In reality, of course, the higher costs get built in to the price of health insurance, which then means less take-home pay for the people who thought they were benefiting. But since they don’t understand that this is what’s happening, they decide their employers are too greedy or that compensation is stagnant. […]
[…] I want higher wages. […]
John,
Oh. I see. You mean the retiring baby boomer statistical bulge slightly changing the overall composition of the workforce towards a younger workforce average. Now makes sense.
“However, it’s true on a total economy basis. It’s not necessarily true for every industry and every company. ”
That is an excellent observation. I’d add that the way this manifests itself is through competitive pressure for demand and supply from other industries and activities. A certain profession may become obsolete (e.g. automation) freeing human capital to tackle higher value challenges and activities, and that in itself increases overall productivity.
The alleged underpayment complaint has little to do with rational high growth economics. I bet that if you took a poll eighty percent or more of people would say they are underpaid. That would be the result from eastern Kentucky to Silicon Valley. People are not underpaid, but they sure are undergrowing. But they only have themselves to blame. For electing politicians who promise to rectify this “underpayment” injustice by allocating wealth and pay according to politics rather than competence. For most people accepting that they are more or less paid what they are worth is a bitter pill to swallow. Hence the electorate attempts to override this reality through politics. The ensuing economic distortion lowers the growth rate, and then, the simple arithmetic of compounding ensures the entire country’s slide in the prosperity ranks. With time the once relatively prosperous country becomes a failure as it cannot keep up with a much faster rising world average; sort of an Argentinian trajectory.
Mike,
The point that worker compensation tracks productivity is very true. Maybe not perfectly 1:1 and maybe not in the same exact timeframe, but over time, it’s just a fact.
However, it’s true on a total economy basis. It’s not necessarily true for every industry and every company. The steel industry has unique issues and challenges. Even if it’s not true for steel, that doesn’t invalidate it for the total economy.
Zorba,
The age-based composition of the workforce matters if you’re calculating the change in the overall average wage rate. It’s a demographics thing. Old workers tend to cost more than young workers. In the US, the Baby Boomers represent an unusual age ‘bulge’ in the current age range of 54-72 years old. So, it’s possible that more old workers than normal have been dropping off payrolls over the past decade, or even more. This lowers the overall avg worker age, and thus the overall average wage rate.
Dan (the commenter):
You can complain about CEO’s making more money RELATIVE to workers if you want, but it’s untruthful to say that workers are paid 1980 wages. AFTER adjusting for inflation, average compensation per hour in 2017 was 58% higher than in 1980.
And you need to look at total compensation, not just the hourly rate. As mentioned in the article, fringe benefits have become a much larger share of total compensation. Part of that is government-driven inflation in healthcare, but that’s not all. Also up are paid leave, bonuses, and retirement benefits.
You might want to take a look at the steel industry.
It is not long ago that it took 10 man hours to produce a ton of steel. Now – it takes 2 man hours.
And what has happened to pay?
Growth isn’t productivity growth but it almost is. In the end, growth is all productivity growth, and as time goes by most of prosperity comes from compounding growth, not the initial prosperity starting point.
From the study:
“…Third, each year the composition of the workforce changes, as older, higher-paid workers retire and young, lower-paid workers enter the workforce…”
I don’t see how that is a factor. Yes, lower paid young workers replace older higher paid ones, however the entire rest of the workforce advances in seniority thus making up for the young low pay to old high pay disparity at the workforce entrance and exit points.
Perhaps companies are finding cheaper workers overseas, thus relegating the europeanizing American workers to the stagnant roles of their brethren across the Atlantic. I suppose American workers could Europeanize further and demand majoritarian wage increases by government fiat, and transition to European unemployment and underemployment rates.
I agree that across the board pro-market policies is the key to improving people’s lives, and I would add that in a competitive world even a small margin of advantage in pro-market policies can lead to big growth divergences, and thus gigantic prosperity disparities after the compounding of time.
Leftists see that as an evil winner take all injustice, but it is actually quite just. A society with a five percent growth rate will have descendants that are vastly more prosperous than one with a three percent growth rate. More importantly, that enormous growth disparity will be fueled by technological advancement disparity. Technological advancements that cure cancer, prolong life, perhaps sooner rather than later retard aging etc. and are also capable of delivering superior rewards to citizens.
When one looks at the future, there’s a lot of differential misery and actually outright differential death rate in slow growth. The difference between a five percent growth world and a three percent growth world is the fact that in the first a cure for cancer is found by 2040 while in the second it has to wait until 2060. The billions who will die from cancer between 2040 and 2060 are essentially victims of slower growth; and that is just for one malady. …. So, for example, the sustainability crowd (the core totalitarian vehicle of our times) and its goal of slower growth is essentially campaigning for the sustainability of misery. Yes! Compared to the wonderful future ahead our current lives represent a wretched existence. Getting to that future as fast as we can should be everyone’s top aspiration.
At points, your article reads that employers are regarding employee income as not so important and profits more important on money that has lost MOST of it’s value. A person only worth $10 in 1985 is worth $25 today just because of inflation and reduction of the value of the same dollar. Yet good workers are still in the $10 – $12 per hour income. This is literally OUTRAGEOUS since the upper managers and CEOs are making BIG BUCKS, as much as a million a year, “due to inflation”. Excuse me but the WORKERS, the ones DOING THE WORK, are paid 1980 prices. It is time for a reset. Then we wonder why it takes both parents and sometimes a 3rd person to make ends meet.
Reblogged this on James' Ramblings and commented:
Reblogging for future reference (not necessarily agreement).
I can tell you very succinctly why I now support a somewhat severe “protectionism.” And why I hate the results of “free trade.”
Because what you free trade fanatics call “protectionism” discourages consumption and tends to encourage production.
Fat lazy stupid Americans, all corrupted by socialism and communism and the welfare/warfare State, CONSUME TOO DAMN MUCH!!!
AND PRODUCE TOO DAMN LITTLE!!!
Even if the “protectionism” does not compel more production, at the very least it will impede consumption. And I believe that people who do not produce should not consume.
Does this mean a reduction in the “standard of living?”
You bet your sweet ass it does.
And I believe that such a reduction is good and just and fair and right, because fat lazy slothful slobs who don’t produce do not deserve a high standard of living.
Like the Bible says, quite clearly, those who will not produce should not consume.
II Thessalonians 3:
10 For even when we were with you, this we commanded you, that if any would not work, neither should he eat.
11 For we hear that there are some which walk among you disorderly, working not at all, but are busybodies.
12 Now them that are such we command and exhort by our Lord Jesus Christ, that with quietness they work, and eat their own bread.