TCS Daily

Are Workers Really Being Left Behind?

By Josh Hendrickson - March 8, 2007 12:00 AM

The House of Representatives recently passed a bill that would remove the right of employers to request that workers take part in secret-ballot elections before a union can be recognized. The passing of the bill comes at the behest of Democrats who argue that workers are not benefiting from the economic growth experienced in the past several years. Regardless of one's opinion of the merits of the legislation, the fact remains that its introduction is based on a false premise.

Many of those who trumpet stagnant earnings are too focused on hourly wages. In contrast, when one looks at total hourly compensation, the stagnation begins to disappear. This phenomenon is as a result of rising premiums on health insurance - a form of compensation provided by employers. As the cost of health insurance rises, companies are not as likely or as able to provide substantial, additional wage increases. There is no doubt that many have heard this argument before, but there is more to this fallacy of the perilous worker.

The opportunistic politicians who have attached themselves to this mantra claim that over the last few years productivity has increased, but workers' earnings have not followed suit. Yet this occurrence is factual for every business cycle. Productivity is a leading indicator of economic growth, while real wages and compensation are lagging indicators. Therefore the current complaints are equivalent to complaining at noon that sun has not yet set, despite the fact that it had risen that morning.

Ever more important is the failed policy prescription to this perceived problem. Many of these politicians hope that disallowing the secret-ballot elections will make it easier for unions to gain membership and therefore lead to higher wages for workers. However, even this hypothesis is at odds with the data. Since the mid-1950s, real hourly compensation has increased considerably. At the same time, hours worked have remained relatively constant and union membership has steadily declined. Although it is possible that union contracts succeed in smoothing the fluctuations real compensation, it can hardly be suggested that organized labor is the main force behind higher wages.

It should come as no surprise to see wage increases in the absence of widespread unionization. Employers have a natural incentive to find the best possible worker. As far back as Henry Ford, employers have offered what economists call efficiency - above market -- wages to promote hard work, deter shirking, and to attract the best available workers. Over the last several decades, as the economy has become much more reliant on highly educated and technologically savvy individuals, the efficiency wage has become ever more prevalent.

Despite the fact that workers' compensation is actually rising faster than inflation and that unions are not the main driver of wage increases, the effort to restrict secret ballots persists. As with many public policy issues, the griping about stagnant wages and the workers who are being left behind likely has more to do with politics than it does economics. The Democrats recently won control of Congress and thus are dutifully trying to help expand organized labor, which has provided them steadfast support for decades.

In the coming weeks, pundits and politicians are likely to laud this new bill as a great victory for the worker and the middle class. In reality, however, this is merely rhetoric. Real wages have begun and will continue to increase as the economy progresses through the current business cycle. They will do so even without increased unionization.

Josh Hendrickson teaches economics at Wayne State University. He also maintains the blog entitled The Everyday Economist.



Health Care Premium Inflation and Relative Compensation Increases
All other things being equal, health care premium inflation is improving the overall compensation of lower wage employees more than higher wage employees. Consider the following example of compensation increases for two wage earners in the last 3 years. The figures approximate data for an actual company…details omitted to protect the innocent/guilty:

Worker 1
5,000 wage increase (from 45,000-50,000)
1,500 employer premium increase (from 4,500-6,000)
% yearly wage only increase: 3.70
% yearly wage including premium increase: 4.38

Worker 2
10,000 wage increase (from 90,000-100,000)
1,500 employer premium increase (from 4,500-6,000)
% yearly wage only increase: 3.70
% yearly wage including premium increase: 4.06

Enhancement of overall percent wage increase resulting from employer premium contributions:
Worker 1 18.18%
Worker 2 9.52%

In percentage terms, lesser compensated employees may be often getting bigger raises (percentage wise) than their more highly compensated colleagues due to health care premium inflation.

Is this the silver lining of health care inflation?

can't continue
Total compensation always trends back towards marginal utility.

If a company has to hold down raises for top earners because it is having to subsidize health care for lower wage earners, then the top earners will get upset. And rightly so, because they are now being paid less than their marginal utility. They express this displeasure by looking for a company that will pay them what they believe they are worth.

There are two ways that companies can find to boost the pay of the top earners. They can either cut the takehome wages of the low end earners, to get their total compensation back in line with their marginal utility. Or they can find a way to do without the lower wage earners.

The companies that figure out how to do this first, will reap a windfall by being able to hire the best workers, who are now leaving their less nimble competitors.

Just as in the minimum wage fiasco, you can't push a person's total compensation above their marginal utility.

Compensation Practices and Inflation
Many companies give relatively uniform wage (percentage wise) increases, and pay the same insurance premium for all employees on the same plan. There is a market distortion built in. Some would cheer that it is a step towards an inevitable socialist civilization. Right now in the US, this phenomenon (among others) mostly manifest in incremental upward pressure on inflation. Which of course the FED must fight with tools that do not and cannot address the source of the inflation. Thus, we have a slowing and underperforming economy accompanied by unmitigated inflation. Not the ideal picture of a free market economy.

I'm not disagreeing with the fact that increases in health care cost redirect relative incomes
I'm just pointing out why this trend is unstable.

Far from being unable to control inflation, the Fed is the sole source of inflation. When the Fed allows the money supply to rise too fast, we get inflation.

Increasing energy costs might look like they are causing inflation, but that is only because of the poor quality of the instruments that we use to measure it.

When people spend more on energy, they have less money to spend on other things. The decrease in demand for those other things causes drops in prices for those other things.

If you go back 40 years and chart inflation and energy prices, one thing that you will find, is that there is zero correlation between the two curves.

However if you chart money supply growth and inflation, you will find a near perfect match. (With a six to 9 month lag)

Unintended Consequences
The FED, acting alone, cannot achieve Optimal growth AND Optimal inflaction levels. If they choose, they currently can control inflation at the expense of growth. As the economy becomes more globalized, even their control over inflation may weaken.

In order to optimize growth and inflation, it is necessary to have government policies that support competition and choice. Certain government regulatory and trade policies substitute other values for the the greater good of competition and choice. The cummulative impact of all poor government policies lead to market distortions (stock and real estate boom/busts) and to overall lower levels of innovation, productivity and growth. The FED cannot fix this by themselves, they can only prevent the unintended consequences of poor policy choices from leading to unacceptable levels of inflation.

Bit of an understatement
"The passing of the bill comes at the behest of Democrats who argue that workers are not benefiting from the economic growth experienced in the past several years."

Past several years? It's been the case since 1980. America has seen unprecedented prosperity for nearly three decades, virtually all the profit from same has accrued to the top and you say we need more patience?

Productivity arises from the efforts of workers working better, managers managing more efficiently and technology making work go faster. The efforts of capital have little to do with the process. Yet during this period the workers have seen hardly any gains in constant dollars, while capital has realized almost the entirety of it. All labor is asking for is a bit of equity in the sharing of the benefits.

If we look, as the author suggests, at total compensation let's begin with the fact that back in 1980 most companies offered a defined benefit retirement plan to their career employees. They've certainly gotten a free pass on that in more recent years.

I would challenge the notion that workers have gained commensurate with what they have added to the economy in the form of an increase in their productivity.

Unions are just getting desperate as people reject their goodness.
As far as I can tell, unions are selling the following: More pre-paid healthcare, commonly called insurance, more strigent work rules, seniority based pay and a pre-defined benefit plan.(A conventional pension.)
I get this great health care package at the expense of MO MONEY? Health care ain't that great.
I get strigent work rules about firning lazy workers that I have to bail out constantly. I don't think so... (AT GM THEY PAY PEOPLE FOR NOT WORKING?) and these bums get paid the same amount as I do due to seniorty.
And from the previous responder the goodness of a PENSION? I feel so secure with the company and union teaming up to "manage" (I prefer loot) my retirement savings.

Basically there is nothing a union can do for me that I can't do for myself. So until the unions figure out a way to actually help the folks like myself they are mostly headed for extinction.

I forgot to mention: The union never tells you how much of the money they get from you goes to political campaigns. I bet this is as good of a deal as the pension.

And the be

Did you Read?
Beanie, did you even read the article? It clearly states that when benefits are considered, total compensation as gone UP!

Furthermore, the real problem is that the reported "inflation" is not real, and the purchasing power of individuals has greately increased. People can buy a lot more product for their dollar, and that is not reflected in the statistics. Effeciency and productivity improvements don't always lead to higher wages, they often lead to cheaper products.

For example, people complain that cable bills have gone up, but at a cost per channel, they have probably gone DOWN. We paid about $15 per month 15 years ago for, what, 30 channels? I get a couple of hundred now for $50 a month. From $0.50 per channel to less than half that. Pretty good.

DVD players, CD players, etc. went from hundreds of dollars to less than a hundred dollars, computers whent from thousands to hundreds, and TVs, although they cost more (not a lot more), are so much better than before, that there is no comparison. In fact, a few years ago, I found a newspaper add behind a mirror in my house, dated in the fifties, with televisions going for about $500 and up. Compare that to today.

The current wages have more than kept up with the TRUE costs of living. But the lefties have to cry and cry about how "bad" things are.



you would have a point
if anything you said were actually true.

Everybody has benefited since 1980.

The cost per channel has gone down.
But the cost per channel that I give a flying flip about has gone up.

Who to believe?
"Beanie, did you even read the article? It clearly states that when benefits are considered, total compensation as gone UP!"

Hob-- I did in fact read the article. And it said exactly what you said it said.

Only trouble is, I've read a number of other articles that've come to another conclusion-- that total comp in fact has stayed flat over the past thirty years. Actually most of them say we've realized about a one percent gain over that time, against about a 19% gain in investor returns. So they appear to be saying the people most responsible for our boom have enjoyed the least share in it.

This brings us to the question: if some people are saying one thing, while other people are saying the exact other thing, do we have the right to decide that one is telling the truth, while the other is flat out wrong, merely based on our prior beliefs and assumptions?

Or does it indicate further, critical, reading is required, so we may comparison shop among the opposing philosophies and come to our own decision as to whether either are telling us the straight story?

You are correct that true wages have "kept up with" the true costs of living. We have been treading water and staying in place-- while the "economy" (the gains for investors) have enjoyed record advances. I look forward to reading more about this crucial subject, to see whether I can find a data set that makes the tie breaker.

But... make the mistake that so many of your ilk do. You try to differentiate the "investor class" from the working class. That doesn't work anymore. Rare is a worker who does not own stock, whether in his 401(k), or his pension plan, or via his life insurance policy.

Thus, the very people that the lefties claim are left out are actually BENEFITING from the gains.

Furthermore, investments gain what they do for two reasons. One, to make up for the risk of investing (not all investments increase in value), and the other is to attract the necessary capital. Banks pay about 5% for cash these days, so obviously, if equity didn't pay more, it wouldn't attract any money. Thus, there is no comparision between wage gains and investor gains. They are different things.

Besides the fact that the investments make the new jobs that grow our economy. Some of those gains must go to the NEW employees that are out there, not just to existing employees. Thus, again, you compare apples to oranges. Take into account the growth in jobs, and you will see that much of the growth goes back to workers (but they are NEW workers).

The articles you read, beanie, twist the facts to make the leftist point. Any analysis that takes ALL of the important factors into account will show that workers have gained a lot, just not in wage inflation (but they HAVE gained some). But, of course, because they prove that workers have not been left out, you will call that propaganda for the "rich" or "conservatives" or something along those lines. But the numbers don't lie, and those that claim workers have fallen behind DO NOT take into account the other factors mentioned above and in the article. I have read them, too.


And don't forget the Mafia
Want to see your money disappear in Don Corleone's pocket -- join a union!

No wonder Democrats are in bed with unions. The Dems like running protection rackets too.

Left behind
This is a famous old argument, one familiar even to someone of my ilk.

Yes, half the country or better has some money invested in a mutual, or in their 401(k). But it's a drop in the bucket. 90% of the money in the financial markets is owned by the top couple of percent of wealth possessors.

Many of those holding a couple of hundred bucks in funds shouldn't even be there-- because they owe money on their revolving charge cards. They're paying 19% interest on these consumer loans while they're holding stocks that might appreciate 8%. These are the people made to be fleeced. They're losing their homes now because they borrowed to the hilt, and then prices started to decline. I think there's a name for it, when you owe more than you're worth.

So what I'm saying is that the benefits from their market investments do not form a very great proportion of either their total net worth nor their cash income. In fact, their holdings tend to be very illiquid, so do not count in any way toward their income.

On the other hand, their paychecks form approximately 100% of their income. So to say they are winning in the markets, while only losing in their paychecks (technically, winning around one percent here over the past thirty years), would to me be disingenuous.

Is that the way you crunch their numbers as well?

No pain, no gain
"...there is no comparision between wage gains and investor gains."

I'll say. The investor takes whatever extra money he has, after meeting all his household expenses, and gambles with it. The laborer, on the other hand, earns his by the sweat and time he puts into working for the company. I don't see the symmetry of rewarding the one who doesn't work, while not rewarding the one who does.

When they measure productivity, do they compare the value of the output against the cost of the labor that went into it? Why do they measure it that way, do you think?

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