Earnings play a special role in many debates, including conclusions drawn about income distribution. Recent studies have been published yet lead to more than one conclusion about income growth. This is because there is more than one way to measure income. Some data include government workers. Others don’t. Some data include employee benefits while others don’t. Some data include social benefits and taxes while others do not include these. Most studies look at households at a point in time. Other longitudinal studies trace households over time. So it is pretty clear that depending on the income indicator you choose, you can come away with some very different conclusions about who earns what.
Today I want to focus on a popular indicator published regularly by the US Bureau of Labor Statistics (www.bls.gov ) – Average Hourly and Weekly Earnings of all employees on private non-farm payrolls. These earnings include wages, salaries, and benefits of workers – workers in what we generally consider to be the business sector of the county. It does not include workers in government or on farms but it does encompass both manufacturing and services employees. How much do these workers earn in total? How much of those earnings are from company benefits like pensions and health insurance? How have these earnings changed over time? What implications can be drawn from past changes?
Two tables at the bottom show us changes in earnings during the 10 year period from 2003 to 2013. The first table shows the data in nominal terms. The second focuses on the buying power of these earnings by removing the impact of inflation on earnings. But before we get into all that – as of December 2013, earnings were:
Wages and Salaries $21.77 per hour
Paid Leave 2.21
Supplemental pay .77
Retirement & Savings 1.53
(e.g Social security) 2.45
Total Earnings 31.77 per hour
My post looks at a decade of changes in these earnings per hour figures. The tables below divide the changes in three time periods with respect to the last recession -- before, during, and after. Earnings in the private sector show that the recession hasn’t ended. In real terms, total earnings have been stagnant during the recovery while wage and salary income per hour has declined. The leading component of earnings is health benefits. Is this stagnancy the result of the recession or other longer-term factors?
Surprising is that not much has changed in the buying power of earnings in the private sector. While it is true that in terms of nominal value earnings took a hit in the recession – so did prices and therefore the post 2007 time period does not look much different than the booming period that came before it. Real wages and salaries declined by about 1% per year during the strong growth years before the recession and continued that pace in the 6 years thereafter. So even when things seemed to be good for labor – they weren’t.
The only part of earnings that differs from this static pattern is health-related benefits. While total benefits were growing at 0.3% before the recession, real health-related benefits were growing by eight times that much or 2.4% per year. After the onset of the recession total benefits grew by a little less than 0.2% per year while health-related benefits were increasing by almost 2% per year. The recession did not slow the pace of health benefits.
The economy was blazing before the recession. On April 1, 2007 the unemployment rate bottomed at 4.5%. It previously peaked at 6.1% in 2003. The 4.5% shows that despite many adverse long-run trends, the US economy was capable of creating jobs. As recently as 2007, there was little national priority or serious concern about the employment effects of globalization, industrialization, and demographics. It was all about the economy stupid! From 2003 to 2007, the annual growth rate of the economy averaged more than 3 percent per year. Similarly from 1992 to 2000, the US economy grew rapidly and the unemployment rate fell to 3.8% in April of 2000.
The key takeaway is that we always have long- and medium-term headwinds – but the key driver of unemployment in the USA has for a long time been the strength of the economy – economic growth. And the same goes for earnings in the private sector. Since 1986, the growth of earnings has been essentially trendless with an average growth of about 3% per year for almost 30 years. Earnings growth picked up to almost 4% per year when the economy was growing rapidly –at the end of the 1980s, end of the 1990s, and around 2007. Earnings then slowed considerably during slow growth periods and recessions – falling below 3% growth in the early 1990s, early 2000s and then more recently.
As our data below shows, employment has been slow to resume growth and with that has come subpar improvements in earnings. The reason is that this recovery has had strikingly anemic economic growth. The past data suggests that once economic growth returns to normal, so will employment and earnings. So while raising the minimum wage sounds hopeful the truth is that this will have little impact on earnings or economic growth. What we really need is a pro-growth economy hitting on all cylinders.
But even growth won’t solve all earnings problems when measured in buying power. Real wages have barely budged in the last 30 years. The problem in that regard is inflation. Since high employment and strong growth often bring higher inflation – a higher earning does not necessarily buy more. Between 1980 and 2013 earnings grew by 194%. Prices as measured by the CPI grew by 183%. The Fed says they are not worried about inflation in the US now. But it seems to me that stronger growth coupled with low inflation might be the best thing they could do for the average private sector worker. Unfortunately policy is not headed in that direction. The Fed seems to be saying that inflation is too low right now. We'd be better off if Janet Yellen took her foot off the pedal and allowed earnings to rise relative to inflation.
Tables. Earnings in Private Industry
Average Annual Rates of Change, 2003 to 2013
Before, During, and After the Recession
In current Prices
03-07 07-09 09-13
W&S 3.3 1.9 1.8
Non-Health 3.8 1.0 2.4
Health 5.8 3.8 3.5
Total 3.7 1.9 2.0
In Constant Prices**
03-07 07-09 09-13
W&S -0.1 0.4 -0.2
Non-Health 0.4 -0.5 0.4
Health 2.4 2.3 1.5
Total 0.3 0.4 0.0
**CPI 3.4 1.5 2.0