TCS Daily

What the Real-Wage Pessimists Are Missing

By David R. Henderson - January 3, 2007 12:00 AM

Some economists and journalists—I'll call them "the real-wage pessimists"—have claimed that average real wages have fallen during substantial time periods over the last 30 or so years. Others have claimed that average real wages for the majority of the labor force have fallen during substantial periods over the last 30 years. These are claims that Alan Reynolds takes on in his new book, Income and Wealth.

As with the other parts of his book, Reynolds accomplishes his task by carefully looking at what exactly is measured by the data cited by what I shall call "the real-wage pessimists." If you want to know whether someone's real wage has increased, you would need to know that person's hourly wage rate, adjusted for inflation, plus the value to the person of any non-wage benefits. Right away, that suggests three things that you would need to be careful about: getting their hourly wage rate right, getting the inflation rate right, and estimating correctly the value of their non-wage benefits. Reynolds shows that the real-wage pessimists make mistakes on some or all of these three.

Start with the person's hourly wage rate. Many of the real-wage pessimists don't carefully estimate that but, instead, settle for looking at average weekly wages. But comparing average weekly wages over time will give a much more pessimistic view than is justified. Why? Part-time jobs as a percentage of total jobs have increased over time.

Reynolds quotes the statement from the Bureau of Labor Statistics that there have been "persistent long-term increases in he proportion of part-time workers in retail trade and many of the service industries have reduced average workweeks in these industries." Although the BLS is scrapping the average earnings figures because the categories into which they sort workers and are less and less relevant, Reynolds notes that the increase in part-time work is, in itself, enough of a reason to scrap these figures.

Moreover, although Reynolds doesn't mention this, there is another reason that average weekly earnings understate the growth in hourly wages: the average work week, even for full-time workers, has fallen steadily. As Michael Cox and Richard Alm, economists at the Dallas Federal Reserve Bank have written:

Even at work, Americans aren't always doing the boss's bidding. According to University of Michigan time diary studies, the average worker spends more than an hour a day engaged in something other than assigned work while on the job. Employees run errands, socialize with colleagues, make personal telephone calls, send e-mail, and surf the Internet. More than a third of American workers, a total of 42 million, access the Internet during working hours. The peak hours for submitting bids on eBay, the popular online auction site, come between noon and 6 p.m., when most Americans are supposedly hard at work.

This "leisure on the job" appears to have risen over time. If one then divides even a full-time worker's weekly earnings by the actual number of hours of work rather than by the number of hours in the work place, and tracks this number over time, one would get a higher wage rate and a higher growth of the wage rate (assuming, that is, that actual hours of work have fallen over time). In short, the growth in wages per actual hour of work is higher than numbers that assume that all hours on the job are work hours.

How about the inflation rate? If our data overstate inflation, then, again, the growth in real wages is understated. Reynolds notes that many of the real-wage pessimists point to 1973 as the end of an alleged golden era when real wages were rising so quickly. But Reynolds points out an obvious problem with data on real wages from that year and from years before and after: price controls. On this issue, Reynolds's reasoning is correct but much too terse and so let me fill in the gaps.

President Nixon's price controls, which began on August 15, 1971, froze prices for three months and then allowed small increases so that actual legal prices fell further and further behind the prices that would have existed without price controls. With the price controls increasingly binding, there were widespread shortages, the shortage of gasoline and, at times, beef, being the most memorable. But probably more important than the shortages were the other adjustments producers made, given that they could not legally raise prices as much as they would have.

The main such adjustment was a decrease in quality. So, for example, a producer of Matzoh ball soup would put in three Matzoh balls instead of the usual four. If memory serves, this is an actual example that Nixon's chief economist, Herb Stein [incidentally, one of the best bosses I ever had] gave at the time. Just as the Consumer Price Index is not good at accounting for quality improvements, it does not do well at picking up quality reductions either. Thus a given money wage would appear to have more purchasing power in 1973—when the price controls were relatively "mature"—than it really had. Then in late 1973 and early 1974, when the price controls were repealed in sector after sector, prices shot up. But the shortages disappeared also, except for gasoline, one of the few sectors in which price controls were kept. Presumably quality of various goods began to improve as well. Again, the CPI would not have picked up these subtle but widespread improvements in quality. So the data would show real wage rates falling even if real wages were actually increasing.

Moreover, notes Reynolds, "Attempting to compare today's price index with one from 1973 would require comparing computers with typewriters, digital TIVO with rooftop antennas, and contemporary cars with Chevy Vegas and Ford Pintos." In other words, when one looks at real wage rates over 30 years, one must contend with new goods that are so superior that they are beyond the level of simple quality improvement. The growth in the CPI will overstate the true increase in the cost of living.

The third factor typically left out by the real-wage pessimists is the growing fraction of compensation paid in the form of benefits. Reynolds points out that between 1973 and 2005, total compensation per hour (including health insurance, retirement, and other benefits as part of compensation), rose by almost 40 percent. Reynolds should have noted that this probably overstates slightly the growth of real hourly compensation because some of the shift in compensation towards non-wage benefits is due to rising marginal tax rates for middle-income workers.

From 1973 to 1981, marginal federal income tax rates for virtually all workers rose substantially because a brisk inflation put them into higher and higher tax brackets over time. Although most workers' marginal income tax rates fell a few percentage points between 1981 and 1984, due to the Reagan tax cut, and then again after 1986, due to the 1986 Tax Reform Act, their tax rates for Social Security and Medicare rose throughout the 1980s due to the phased-in increases in tax rates legislated in 1977. When employers and employees get around an increase in marginal tax rates by paying more in the form of untaxed benefits, employees are better off but they are not better off dollar for dollar. So, for example, if my employer and I can avoid a 40 percent hit on my marginal thousand dollars of income by his giving me that thousand dollars in the form of a slightly-more generous health insurance plan, then as long as I value the increased benefits at more than $600, I am better off getting the benefit rather than the cash. That is why the growth in benefits somewhat overstates the growth in real compensation.

Beyond these three factors—hourly wages, inflation adjustment, and value of benefits—that the wage pessimists tend to get wrong are two other factors, both of which Reynolds discusses. The first is that because of demographic changes, the growth of median wages, even if measured correctly, will not necessarily describe what happens to "typical" workers. The big demographic factor Reynolds points to is the addition of millions of low-wage immigrants. Their addition to the labor force will bring down median wages. Yet, notes Reynolds, that change "probably had no effect on those considered 'typical' (middle-income) except to hold down their cost of fast food or home and lawn care." And of course those low-wage immigrants are typically much better off at those low wages than they were in the situations they left in their native countries.

The final and most-important factor is the growth in consumption at all income levels. Reynolds writes:

Unless the top 10-20 percent could somehow consume unlimited numbers of houses, cars, shirts, and steaks, it is difficult to imagine how each American's [he should have said "the average American's] real consumption could have doubled if real wages and salaries had really been unchanged. The average size of new homes rose from 1,500 square feet in 1970 to 2,349 square feet in 2004, and the national home ownership rate rose from 62.9 percent in 1970 to 69.2 percent by the end of 2004. How could so many people be living in so much larger houses if only 10-20 percent had significant increases in income?

The above quote is not in itself a slam-dunk argument. Even though the average size of new homes increased a great deal, the average size of all homes would presumably have increased less. But Reynolds makes it a slam-dunk by citing data from the aforementioned Cox and Alm and from Kirk Johnson showing that the average poor family in 2001 did as well as or better than the average family in 1971 in ownership of motor vehicles, air conditioners, color TVs, refrigerators, VCRs, personal computers, and cell phones. Of course, the last three didn't exist in 1971, but that's part of the point. When poor families can afford what even middle-income families couldn't imagine having 30 years earlier, aren't things working out pretty well?

Next week, I'll consider Reynolds's demolition of the claim that the lion's share of the economic gains of the last few decades have gone to the top 1 percent and of the claim that CEO pay is 500 to 1,000 times the pay of average workers.

David R. Henderson, is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School in Monterey, Calif. He is author of The Joy of Freedom: An Economist's Odyssey and co-author, with Charles L. Hooper, of Making Great Decisions in Business and Life (Chicago Park Press, 2006).



One of the factors contributing to the higher standard of living is the low price of imported consumer products. I predict even lower prices in the future due to a different reason. One of the major changes of the early 21st century will be the emergence of retail manufacturing. Machines will manufacture products in the store from parts and raw materials. Retail manufacturing will have a tremendous effect on the world economy, and eliminate most imported consumer products from the marketplace. It will also make a much larger variety of products available. A series of machines can produce apparel, electronic appliances, or other retail products. Stores where retail manufacturing is used will have a big advantage over competitors who purchase finished goods and stock inventory. By stocking only raw materials and purchased parts, a retail manufacturer can offer a much wider assortment of products at a lower price. For example, clothes can be made to order by machines while the consumer waits. Consumers could order articles of clothing from the store on the internet or from a catalog on the phone, and pick-up the order at the store.

Of course those pessimists got that part of the economy wrong too. It could be because liberals want to match their accuracy rate all around; meaning they're wrong about everything else too. So even though people are getting richer, they try to come up with this crap to try to convince people the opposite is true. These are the same guys who don't want kids to pack your groceries at the supermarked because they think it might hurt their self-esteem somehow.

culture wars - - -

Right on, D. One must then ask, why do these mendacious hysteric distortions to the down-side exist in the national psyche?

Why, we are in a national cultural civil war, as well as an international military one. The Bushhaters, which includes left-wing "economists" and the MSM know all these things as well as the article's author, but they prefer power grabbing to truth. I wonder how they can face themselves when they look in the mirror. Cheers.

What is MSM?
Honestly, I don't know what MSM means.

to Don re culture wars
They have different motivations for lying, deceiving, distorting. It's enough for politicians just to get the power. For other liberals it's enough because of their self hatred. They think it just cant be right that even poor people can get rich in the US, even without unions and welfare and govnmt handouts. And then when they see them get richer, they figure it just isn't 'fair' that they are still poorer than all the new multi-millionaires like the Google kids, etc. And they particularly hate it that capitalism is the best economic system. They've invested their whole lives believing in the secular religion of socialism so it's just too much to give up.

To Charles re MSM
It means the main stream media, which means the left wing anti american media like the NYT, and the (biased)BBC, who I just heard yesterday saying that it's an american myth that people can work themselves up by hard work. Their journalists are usually so clueless about the real world that they are the types who you hear saying things like: " how could Bush have gotten in, I just don't know anybody who voted for him? Or, "why would enyone want to own a gun, I simply don't know anyone who has a gun".

re MSM
"and the (unbiased) BBC, who I just heard yesterday saying that it's an american myth that people can work themselves up by hard work."

Now even those commies at the Economist are at it now, godamnit:

It's a conspiracy, I tell ya, a conspiracy. The fall of the iron curtain was just a ruse. Al Quaida's just another commie front organisation. The communists are taking over. Everywhere! But even dubya's a commie, too. etcetera, etcetera

re: biased BBC
Do you mean that the anecdote is not true, or they didn't say it, or that you agree with it? You didn't mention. I listen to BBC radio, and its TV station all the time and it pretty much supports most left wing causes like; anti-israel, american bashing etc. In fact there is even a web site called 'biased bbc' check it out.

re: biased Dietmar
"I listen to BBC radio, and its TV station all the time and it pretty much supports most left wing causes like; anti-Israel, American bashing etc."

And so do I and I therefore know that your claims are the rantings of someone who's so far right he makes Ronald Reagan look like Fidel Castro.

Or, if you prefer, that mad old battle-axe Margaret Thatcher look like Tony Benn. Take your pick.

If you don't like the BBC, you can always watch France24 instead.....

Not a conspiracy...
...but "the people doing fine economically" does not get viewers to tune in for film at 11. It works for both parties as "terroist threat over blown" does not get viewers to tune in for film at 11 either.

Remember It is all about selling ads.

Works for the Politicians too, they must convince us people that we they have problems that the Politicians can solve else we tend to not vote or worse vote for the other guy.

By any OBJECTIVE measurement
The MSM, including the BBC, has a leftwared tilt. The ability to classify another party, in this case the BBC as "left" should be obvious.

If you think one's personal perspective disqualifies them from making an objective judgment, look in the mirror. You just made the statement, "your claims are the rantings of someone who's so far right he makes Ronald Reagan look like Fidel Castro."

On the contrary, YOUR dismissal of the bias of the BBC and classification of somebody else as hard right "are the rantings of someone who's so far left he makes Fidel Castro look like Ronald Reagan.

If you really want to indict British politics.. Neil Kinnock and Neville "peace in our time" Chamberlain come to mind.

It's more than that
liberals see other people getting ahead, while they are not.
Despite the fact that they know themselves to be vastly superior, intellectually, morally, and probably asthetically, to those who getting ahead.

From this the liberals conclude that there is something rotten in any systems that advances others, yet leaves them behind.

If the average college professor were paid what the average CEO is paid, you would find a lot more support on campuses for capitalism.

What the Real Wage Pessimists are Missing
The people who consistently do their socializing on the job are thieves. I worked with someone who took a 20 minute break each of the 3 segments of the work day every day. She was in effect stealing the equivalent of approximately $35 per week. (This was in a meat packing plant 27 years ago.) The employers aren't the only ones that get hurt, but fellow employees bear an extra burden; it also drives production costs up and increases the cost of goods and services. I am a strong advocate of perhaps giving one warning, then firing people who do this kind of thing. It's time American workers returned to the work ethic. Perhaps then we can all have a LIVING WAGE.

Video camera surveillance of employees might solve the problem.
The use of video cameras might make inherently dishonest people work like honest people. They might not try to steal, if they know they'll get caught.

Main Stream Media
New York Times
Washington Post
Fox News

well, you get the idea.

Market forces
College professors make what the market deems their worth. Since liberals seem to deem their worth a far above the market they denegrate capitalism. Sort of like how the prevailing market wage fails to support the teenager so we get a minimum wage to "correct the market place" when in reality all we do is deflate the value of the dollar when the market correction takes place. Funny, I can never get any liberals to tell me why then we shouldn't raise it to 50 bucks a hour...

to Wayne Rooney
Could it be that you don't think they are left biased because that matches your own bias? But what's that about Marg. Thatcher? Are you really angry because she sold off some of those crappy council flats? Or is it because you were in the coal miners union that was holding the country hostage that she finally broke? And do you say I'm 'so far right' because I advocate things like: legalizing all drugs, gay marriage, polygamy marriage, man-boy love a la Michael Jackson, transvestitism, legalizing prostitution, etc. I don't have any more finger to list more.

liberal professors
Right, and those guys are mostly like govnmt beaurocrats just feeding at the public trough, rent-seekers. They are sore losers that they don't get paid what they think they should get. And I like the funny story about who you would prefer to lead the governmt; the top 100 profs around boston, or the first 100 names in the telephone book. The later have common sense and would be a better bet than the first group. Imange noam chomsky as the ruler of a country.

I agree completely
My point was about the self interest of these professors.
If the market valued them as highly as they value themselves, they would support the market. Since it doesn't, the market must be disposed of.

Actually I never thought of that angle until you mentioned it. In fact, perhaps that expalins all liberals? It seems they, at every turn, favor perversion of some market force to create some illusion of equlity. We already have equality of opportunities. They seek equality of outcomes. My father taught me that you cannot elevate the least successful to the most succesful since they simply cannot function at that level. Thus the only way to reach equality of outcomes is to suppress the successful to the level of the lowest common denominator. Well if you observe socialist in action that is exactly what they do. Thus smart kids get bored in schools designed for kids who will not learn (most by choice) and taxes are structured to redistribute wealth from the producers to non-producers. While compassion mandates, I think, that we indeed help those who truly cannot help themselves, I think those represent a real minority of the group that feeds at the public nipple. In my humble opinion one has not only the need but a obligation to stand on their own. In stead we have inner cities that essentially subsist on federal money, drugs and crime because they have been taught nothing about self reliance all the while getting the typical hand up from guilt ridden white liberals who claim they care. TO me true compassion is helping someone get up and stay up. I find no satisfaction is giving money away. I do find satisfaction is showing people the way to success and self reliance. Perhaps if we made business leaders and great inventors heros again instead of rappers and sport figures? Perhaps if we taught economics and job skills instead of Molly has Two Mommies? Perhaps if we taught skills to start businesses. After all, the business of America is business.

Chomsky and Marx
Both were men who essential have loser mentalities. It appears to me that they both, having realized the real lack of any marketable skills other than theories, felt compeled to fuel the fires of discontent by publishing works of idealistic theories on how to create societies that simply cannot work. In fact, is not communism socialism in general just sound boring? Were all little worker bees going to our little worker bee job assigned to us by the state? We get everything from the little state worker bees according to his needs? How boring when you think that anyone willing to in this nation can step up and start he next FedEx. Worker bee or next Bill Gates. Which sounds like more fun? Personnaly I have some very high order needs and Marx can just plain bite me.

The Peter Principle
The Peter Principle states that in any organization, people rise to the level of their incompetance.

In other words, the company assigns you a job. If you succeed at that job, you get promoted. Once you stop succeeding you stop getting promotions.

To put yet another way, once you find a job you can't do, that's where you stay.

One has only to read the stories out of the UK lately to see the tilk in the media. They are so whacked out over there they cannot advertise rasins or ketchup on kids TV as it might lead to kids over eating. The UK is a lost cause. We saved them from Germany so that they could consume themselves in waves of socialist led self destruction.

I agree to a point. I worked 20 years as a proffesional employee and never reached beyond a point simply because I tend to rub people the wrong way (I don't tow the line and act like a quiet little worker bee). Hence I reached my ceiling and perhaps in the corporate system I reached my level of incompetance. So I got fed up, started a business and now run it. Thus I created my own job and now do all the things that they thought I incapable of doing. Hence the theory is just a theory?

Left-right, left-right etc

"The MSM, including the BBC, has a leftwared tilt. The ability to classify another party, in this case the BBC as "left" should be obvious."

One set of nutters accuse it of being left-wing and anti-Israeli, another set accuse it of backing being right-wing and backing Bush/Blair and being pro-Israeli.

I'd say that means it's doing as good a job of presenting the news and current affairs in as unbiased way as fallible human beings can do.

to Dietmar. Oh-dear!
"Could it be that you don't think they are left biased because that matches your own bias? But what's that about Marg. Thatcher? Are you really angry because she sold off some of those crappy council flats?"

Err no. She really is a mad, old bag these days.

"I advocate things like... man-boy love... I don't have any more finger to list more."

That's more than enough fingering for my liking, thank you very much.

Fox News?
I thought Fox News was regarded as the solitary fighter for truth, justice and the Australian, I mean American, way among the so-called MSM?

Re: It's more than that...
"Liberals see other people getting ahead, while they are not. Despite the fact that they know themselves to be vastly superior, intellectually, morally, and probably asthetically, to those who getting ahead."

Now you're beginning to sound like a Randy Newman song.

"If the average college professor were paid what the average CEO is paid, you would find a lot more support on campuses for capitalism."

And why not?

M. Thatcher & M. Jackson
Isn't that an ad-hominem argument when you criticize Thatcher, and these days when she's not in power, and avoid my points about the council flats and breaking the unions for holding the country hostage? And you said I was ring-wing, then I gave you examples of left wing issiues I agree with, and you don't like that either; and I meant that I don't have enough fingers to count more of the so-called left wing issues. But I don't mind if you advocate less freedom than I do, and if you want to persecute Michael Jackson.

Thatch and whacko-Jacko
WRT Thatch, I'd've probably voted for her in 1979 and 1983, but *all* governments of *all* colours/ideologies/whatever are like underpants: unless they are changed and changed often they start to smell bad - surprisingly quickly in some cases (yes Mr Bush and Mr Blair, I'm looking at you two).

WRT council houses and unions, I couldn't really care less. However, I could care less about, what you call, "man-boy love" and which others might call child abuse. More freedom? Freedom to abuse others, more like.

It's quite sad that when you scratch a libertarian what you so frequently find is someone who objects to 'government regulation' because they inhibit them from abusing others.

abusing others
I don't see how I'm abusing others if M. Jackson wants to pay a lot of money to kids and parents of kids to play with them. Looks like they're all volunteers to me. My preferences are quite 'normal' in comparison. Indeed, my wife is fat, old and ugly probably just like yours.

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