[This post by Kenneth Thompson was published at Angry Bear Blog.]
The flurry of messages earlier this month about the declining middle class (me, Lane kenworthy, Matthew Yglesias, Kevin Drum) got me thinking a bit more about how best to show what has happened since the peak in real wages in the early 1970s. While in my opinion there is no perfect measure, there is There are many choices to be made, and I argue below why real wages for production and non-management workers, with an adjustment for non-wage compensation, is the best single measure.
Choice 1: Household / family vs individual
Although we all live in households or families, over the past 40 years there has been a decline in the number of people per household (see Kenworthy) and an increase in income per household as the participation of women in the household. labor market increased. The decline in the number of people per household means that a household needs less income than in the past to have a fixed income per capita. The increase in income per household means that households had higher real income even as real individual income fell, as commentator Peggy Boston pointed out in the comments thread of the Drum article. In my opinion, this is partly causal; This is, because real wages have fallen, families have had to have more income to maintain their standard of living. Indeed, the fall in real wages has forced families to take on heavy debt, with non-mortgage debt reaching 1/3 of family income by 2005. Therefore, I think individual data is the right choice here.
Choice 2: Median income relative to production and income of non-supervisory workers
The median (mean value, with an equal number of observations above and below) has big advantages over the arithmetic mean in trying to show the typical situation in a distribution of values. It is particularly useful for income distributions, where the presence of very high income means that the mean is much higher than the median. In fact, the “decoupling” literature (see Kenworthy above) shows just how this is. But I think “production workers and non-supervisors” capture our intuition about who is in the middle class even better than the median.
This series, in Table B-47 of the President’s economic report, is an average of the earnings of persons employed in private (non-government) non-agricultural jobs. It comprises about 80 percent of the private labor force and 64 percent of the total non-farm labor force. Although this is an average, its exclusion of supervisors means that virtually any extremely high values that skew the average of the entire workforce are eliminated. This is essentially the average income of the poorest 80% of private workers. The biggest downside to this dataset is that it doesn’t include unguarded civil servants, but I think this is offset by its broader coverage of the middle class than the pure median income (or average quintile, as in Kenworthy’s post).
For the counter-argument, that changes in the composition of production and unsupervised workers can lead to distortions to which the median wage is not subject, see Dean baker (p. 9).
Choice 3: weekly or hourly
Baker mentions hourly rates of pay in some cases. As I mentioned in the comments section of my March 11 post, the drop in hours worked per week (from 36.9 hours in 1972 to 33.6 hours in 2011) suggests to me that we need a salary. weekly and not hourly.
Choice 4: What inflation data to believe?
Shortly after President Clinton’s first election, I predicted to my students that because his message of middle class stagnation (“It’s the economy, stupid”) depended on how inflation was measured, that the Conservatives would soon attack the official Bureau of Labor Statistics. inflation data. The problem is, if inflation is overvalued, the decline in real wages reported by the BLS could be overvalued or even nonexistent. Conversely, if the BLS data understates inflation, then real wages have fallen even faster than Table B-47 shows.
Unfortunately, I didn’t release this prediction, so you’ll have to take my word for it that I predicted the attack on inflation data that resulted in the Boskin Commission in 1995. I always thought it was a political rather than a scientific attack. My attitude has always been this trade theory (i.e. the Stolper-Samuelson theorem; see Ronald Rogowski’s great book Trade and coalitions for an explanation of this topic, which I intend to discuss in a later article) predicts that real wages in a relatively labor-poor country like the United States will fall as trade expands , and the data shows that real wages have indeed fallen: why do we need to question the data? Ultimately, however, the Commission concluded that inflation was overvalued by around 1.1 percentage points per year, and the BLS was tasked with adjusting its methodology.
Barry ritholtz takes an even more yellowed view of the Boskin Commission than me. Paul krugman, on the other hand, is not convinced that inflation is now largely underestimated, citing the work of the Billion price project. At the moment, I do not see a sufficient reason to reject the BLS data, despite the possibility that the Boskin Commission has distorted it.
Choice 5: wages vs remuneration
Martin feldstein and other economists argue that it is not enough to look only at wages, as the non-wage share of wages has increased in recent decades. As I mentioned before, total employee compensation includes everyone from CEOs to janitors, which ignores the fact that the richest 1% have almost all benefited from decades of economic growth. Nonetheless, it is clearly true that non-wage compensation has grown faster than wages, as we will see below. In fact, Yglesias suggests that the 2000s actually saw real growth in median earnings, but all in the form of health insurance benefits. Of course, there is debate over the real value of additional employer health insurance payments, as detailed in Baker’s article (p. 10).
A different way to factor in compensation that I had previously seen on the Economic Policy Institute website was explained to me in an email by Jared Bernstein and is documented in the footnote to his blog post. here. It takes the ratio of total compensation to total wages, both of which are in the national income and product accounts. Table 1.12 (you can tune it to a wider range of years, like I did). As he applies it to the median wage, I apply it to Table B-47 and I get the following results:
Note: Last two columns rounded from worksheet calculations
Sources: President’s Economic Report 2012, Table B-47, National Income and Product Accounts, Table 1.12, and author’s calculations
According to this measure, the pay of most workers in 2011 was still almost 6% lower than its peak in 1972. The advantage of this adjustment over the Feldstein procedure is that it removes the inequality of pay for workers. compensation data, although there is still an overestimation based on inequalities in non-wage compensation. Yet I think this gives us our most accurate picture of what is happening to the poorest 80% of working people.
That’s not to say it’s a perfect measure, even with these caveats. What happens at the top also matters. If top earners saw their incomes fall faster than middle class workers, then inequalities would decrease and we would probably be less opposed to what would then resemble the much-vaunted “shared sacrifice”. But of course, as Kenworthy notes, the share of the richest 1% more than doubled from 1979 to 2007, from 8% to 17%. As inequalities increase as they are, we now seem to be in danger of a consequence sudden change in political power at 1 percent, as MIT economist Daron Acemoglu told Pat Garofolo of Think Progress.
I look forward to your comments, mostly if I was wrong.
UPDATE: For comparison, here is Lane kenworthy graphic.
We can see that, according to median family income or household income in the 3rd quintile, incomes started to increase shortly after 1980, while in my table the real wages adjusted for wages continued to decrease until 1995. You can also see the divergence of median family income and third quarter household income between 2000 and 2007, as Yglesias notes. While the increase is entirely made up of non-wage compensation in the third quarter household income series, in my table at the individual level we have an increase made up partly of wages and partly of non-wage earnings.
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