Tuesday, August 28, 2018

Wage Stagnation and Globalization

William Gladstone wrote in the Wall Street Journal on August 14 that "wage stagnation is everyone's problem." I agree, but I strongly disagree with his analysis of cause and effect. Wage stagnation is a problem for the economy's growth and very much a problem for the people who find their wages stagnating. The challenge is doing something about it. Something that will work.

After looking at many possible causes of wage stagnation, Gladstone quotes a single Federal Reserve Bank of San Francisco publication that attributes 85% of the decline in labor's share to globalization. Since I know that there have been hundreds, if not thousands, of articles written about the many impacts of globalization, it made me wonder why he chose only one single article to support a very extreme claim. I promise I will read that article and get back to you. But today I decided to look at some relevant data and see what it says.

I didn't look at wage data because I know that wages are not the exclusive source of income for most workers. Most of us get benefits at work. Some grocery workers lift a banana now and then, and many of us have retirement and health benefits. When you combine wages and benefits, you get something called earnings. If a worker accepts a better health plan in lieu of a wage increase, one should count that benefit. So earnings is a superior measure of what the employee gains.

I also chose constant dollar earnings because that deflates the earnings figure for changes in the cost of living. The Labor Department deflates earnings with the consumer price index. With constant dollar earnings, we get a pretty good measure of how much the spending power of employees changes over time.

I chose the time period from 2001 to 2018 because Gladstone argued that most of the labor wage problems stemmed from that time period. The data found in the table below come from the US Bureau of Labor Statistics.

BLS loves to collect this kind of data. Among the many economic times series they publish, I found information about constant dollar earnings for a number of occupations and industries. I was hoping by looking at this information I could see if there is a strong case for a large impact of globalization on the earnings of US workers. It is well known and often cited that foreign countries have stolen jobs from America, especially manufacturing jobs.

The table presents data for various US occupations and industries. The numbers for June of 2001 and June of 2018 are called index numbers and represent the levels of constant dollar earnings in those years. The last column presents the cumulative change over those 17 years. At the top is the average for all civilian workers. The table shows that the buying power of wages plus benefits rose by 10.2% over those 17 years. The typical employee in 2018 could buy about 10% more than he could in 2001.

The next part of the table gives similar data for various occupations. The strongest real earnings growth was the 14% increase for the occupation called Office and Administration. The lowest increase was earned by the category called Management, Business, Finance. Other weak growth occupations included Production and Management Professional. While this occupation information has no direct bearing on which industries were impacted the most, it does show that a broad spectrum of employees had less than average earnings growth. Production workers were among that group with less than average buying power increases. But so were many office workers.

The bottom of the table shows changes by industry. Workers at Hospitals and those in Administrative industries did the best while those that produced Goods and Manufacturing did the worst. Aha, you say. See, globalization hurt production workers! But by how much? The average worker saw her buying power increase by 10.2%. Goods producing workers earnings expanded by 9.2%. That is a cumulative difference over 17 years. That means that the buying power of the average worker beat that of the goods producer by 0.06% per year. If the average worker had an increase of $100 in a given year, then the production worker had an increase of $99.40.

Workers in Public Administration firms saw their buying power rise by 16.8% over those 17 years. That is 7.6% more than workers at Production firms. That sounds like a lot but when you look at the average yearly amount the major difference disappears. The gap suggests an improvement of 0.45% per year. If a worker at a Public Administration firm had an increase of $100, then the worker at a Production company would have gained purchasing power of about $99.54.

I redid these calculations several times, and they are correct. The reason why we might disbelieve them is that an increase in the buying power of wages of around 10% over one year is great -- but over 17 years it is tiny. Thus the differences among industries and occupations are even tinier. Maybe globalization did impact production workers -- but the Labor Department tables suggest that average employees of none of these occupations and industries got rich.

I'm not sure globalization had much to do with all that but it is worth pondering the real causes. The US is a very large economy and trade is a relatively minor part. If employee earnings have grown too slowly, we might want to look a little harder at what is causing that. Check out this blog next week. I will offer one explanation then.

Constant Dollar Employment Cost Index
As of June in each year
2001 2018           Change
All Civilian Workers 94.5 104.1 10.2
Management, Professional 94.6 103.8 9.7
Management, Business, Finance 96.1 104.7 8.9
Sales and Office 94.2 104.3 10.7
Office, Administration 93.6 106.7 14.0
Natl Resource, Constrn, Maint. 93.8 104.4 11.3
Construc, Extraction, Farming, etc 94 104.3 11.0
Installation, Maintenance, Repair 93.6 104.5 11.6
Production 94.1 102.6 9.0
Transportation 95.5 106.6 11.6
Services 95.2 105.4 10.7
Goods 93.6 102.2 9.2
Manufacturing 93.3 102.1 9.4
Services 94.7 104.5 10.3
Education 93.5 103.9 11.1
Healthcare and Social Assistance 93.5 103.6 10.8
Hospitals 90.9 104 14.4
Public Administration 91.4 106.8 16.8


  1. I am waiting for next week. The jobs lost by globalization versus AI would be a good comparison. How much does it cost this country in lost wages or buying power for globalization v AI. How many jobs go wanting due to lack of trained people to fill them? Locally the fast food places are having difficulty because higher paying service jobs are growing...even though the pay scale is not but better than fast food. Lots of ads for what is now called FPP or financial analyses of the performance of various new financial and other related software programs.Of course not many are trained in this as is the same for many technical jobs that just sprung up over the past few years.

    1. I wish it was easy to answer your questions. Labor markets have never made everyone happy. Some people get too many job offers and others get too few. Some firms go wanting while others have trouble deciding among too many applicants. Long-run considerations unfold slowly over time -- such as industrialization, training, globalization, AI, education, drugs, government regulation, pensions, and more -- interact and determine the overall picture in any given year. One can try to estimate their individual impacts -- but that job is better left to people writing books and dissertations. Policy, sadly, has to confront all those trends.