It seems almost axiomatic these days that policymakers decry slowly rising wages. The slowly rising wages mantra is one part of the overall story about income inequality. But today's post is not about income inequality. It's more about labor income which includes what we earn through our labors and not what we gain from investments.
To investigate wage change I chose to use time series from the Bureau of Economic Analysis of the US Department of Commerce. I had lots of choices but after noodling around I decided I would use the BEA data. For those of you who like to noodle such things you might have also used statistics from the US Bureau of Labor Statistics.
I chose the BEA data because it comes with an integrated comprehensive set of data that show how much workers in the private sector received in (1) wage and salaries, (2) employee supplements (pension and insurance funds), as well as how much was paid to workers for government social benefits (Social Security, Medicaid, Medicare, Unemployment insurance, and Veterans Benefits).
In total, this data set covers most of the income workers receive as part of what is often referred to as personal income. The date is available from 1970 to 2020 and I chose to examine changes in decade increments.*
I then made two adjustments. We know that we use income to buy things -- and we know the power of our income depends very much on how much prices are changing. One adjustment, then, is to subtract from the income changes the changes in the price level. We thus convert the data from current values to real values.
The second adjustment is to subtract the employment changes from these real values. In that way we get data that refers to the average employee -- or what we call per employee real income changes.
Making these two adjustments, we get a better picture of changes in the buying power of the average worker. One example helps. From 1970 to 1980, wages and salaries increased in nominal aggregate terms by 149 percent. Once we adjust for inflation and employment changes, the resulting increase was 24 percent. That 24 percent represents how the spending power of the average worker changed during that decade. The 149 percent is simply the change in total amount paid to the sum all private sector workers to keep up with inflation. Between 1970 and 1980 the inflation rate was 97 percent and employment increased by 28 percent.
Reading the table -- each number below is a percentage change over ten years. The number for 2020, for example, is the percent change from 2010 to 2020. Divide by 10 if you want the annual change of that 10 year period. The number 21.4, for example, means that item grew by about 2% per year.
The data in the Table below show a great degree of stability. Except for the time period from 2000 to 2010, the real percentage changes per worker are stable -- wages and salaries oscillating by decade from a low of 11 percent (2010 to 2020) to a high of 31.3 percent (1990s). The 11 percent change between 2000 to 2010 was mostly the result of two recessions. For example, that was the only decade when employment fell during the decade.
If you instead examine total income -- personal income also includes company benefits and government social payments -- you get a similar picture of stability. The 1970s found income growth of 47 percent and that was high compared to the 27.1 percent of recession bound 2000 to 2010 but we also see a partial return in the following decade to 28.5 percent. It helps that the government benefits increased by 60.1 percent from 2010 to 2020, making up for a drop in company supplements.
I know this is a lot of data to swallow. But sometimes the truth is not so easy to discover. Wages and incomes are never helped by major recessions or slow growth time periods. But this look at a half-century of data suggests that there are no clear trends that mitigate against the average worker. When we put together a comprehensive set of income data, my recommendation would be to find ways to promote long term economic growth and employment without inflation. That's the best way to make sure our wages and income stay strong.
Table. Elements of Person Income*
Decade Percentage Changes, 1970 through 2020
Real Percentage Change Per Worker
1980 1990 2000 2010 2020
Private Wages & Salaries 23.6 26.0 31.3 11.0 21.4
Company Supplements 120.7 67.0 25.8 31.0 11.4
Government Social Benefits 152.7 37.8 36.9 97.3 60.1
Total 47.0 33.1 31.3 27.1 28.5
Nonfarm Employment 28.4 20.1 21.5 -1.4 8.9
PCE Deflator 96.7 53.5 23.3 22.4 16.1
*Personal Income in 2020 was $19.7 trillion. The three components above totaled $15.7 trillion. The remainder of PI not discussed in this post were proprietor's income, rental income, interest, and dividend income.
One of the interpretations that these data suggest to me is that the significant fall off in Company Supplements, with at least only a partial offset by increased government benefits, puts pressure on the steady increases of wages/salaries to be spent on benefit replacement strategies. I would guess that this optional approach to long term savings is not as effective and that this shift away from employees to $$ that goes to shareholders further widens both the short and long term wealth gap over this period. In a perfect world, where all consumers have the same level of investment knowledge ( which , of course, can't happen)approaches to total self sufficiency might be achievable if the sum of the two categories held relatively constant, or at least with the growth attributable to wages/salaries.
ReplyDeleteThanks Ed. I tried to stay away from distribution of income because this data alone seems insufficient for that. One problem with using these percentage changes is that they might be misleading for conclusions about interactions. A 90% change in a variable that is small might not have the same impact on income as a small change in a variable that is large. For example, in 2020, Wage and Salary Income was $11.4 trillion. Company supplements were $2.1 trillion and government transfers were $3.1 trillion.
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