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Have median wages stagnated?
This is a very common charge. It is true that median wage growth has been slower than usual over the last thirty years. But it's not quite the grim picture it is often made out to be.
For instance: "Including estimated benefits adds 6 percentage points to the growth rate of
average hourly earnings and 8 percentage points to the growth rate of the median hourly wage." For the last thirty years, twenty-eight percent growth in median wages is the best available estimate. Don't let anyone tell you it is zero or negative.
Here is the one good summary article on this topic. Thanks to a loyal MR reader for the pointer.
Posted by Tyler Cowen on October 24, 2007 at 08:22 AM in Economics | Permalink
Comments
I dunno, I think that this news just reformulates the charge. Instead of complaining that the median wage has stagnated, people can complain about the rising cost of healthcare and other benefits eating away at the increased income and leaves them no better off than before. I don't know if that's the case, but I could see the argument being made.
Isaac Crawford
Blogging in Yemen
www.isaharr.com
Posted by: Isaac Crawford at Oct 24, 2007 8:33:59 AM
Slower than usual is a bit harsh. What was the growth in median wages from 15,330 BC to 15,300 BC?
Also, why do we necessarily look at logarithmic wage growth? Why not absolute growth? Is there a good explanation for this?
Posted by: josh at Oct 24, 2007 9:19:15 AM
Adding the benefits means that total compensation may not have stagnated, but wages have. Crawford's got a valid complaint.
Posted by: Joshua Holmes at Oct 24, 2007 9:23:53 AM
The liberal-leaning Economic Policy Institute says median total compensation has stagnated from 2003-2007 (see Table 2): http://www.epi.org/content.cfm/bp195
Posted by: Robert Franklin at Oct 24, 2007 9:34:16 AM
Isaac's point is only correct if rising health care costs aren't buying us better health care outcomes. If they are, then we're just choosing to spend our compensation increases on longer lives.
Posted by: Josh at Oct 24, 2007 9:38:55 AM
Wages and compensation are two different things. Wages have stagnated,
compensation has growth more slowly then productivity. A significant part of the difference is the Bill Gates effect. Wages are usually reported as average hourly earnings that do not include the income of the CEO while compensation does include this.
I have seen no good analysis of how sharply rising inequality impacts the compensation data, but it obviously has a big impact and means that the
compensation data is not the best measure to use to describe trends for
typical or middle income individuals.
Posted by: spencer at Oct 24, 2007 9:55:42 AM
Fitzgerald's calculation of the benefits effect assumes that the increase is evenly (in fact proportionately) spread but there may be distribution effects there too even beyond the ones Isaac describes. If these benefits include health insurance say those figures may be significantly biased.
It is also the case that these figures are remarkably sensitive to the inflation figure used. There is no definitive answer to even in principle bu it is awfully bold to assume that the correct correction restores growth.
Posted by: Jack at Oct 24, 2007 10:04:55 AM
How much of this is CPI bias?
Posted by: Chris at Oct 24, 2007 10:06:03 AM
Taking a cue from your post on expressing age in terms of years remaining, I'd like to know the median age where wages peak. Then I'd like to know the trends of how many are past peak vs. pre-peak. If that age is somewhere at 50 years or above, then there is a big baby boom effect pushing that median wage figure that is getting kicked around so much.
Posted by: caveat bettor at Oct 24, 2007 10:15:54 AM
I would like to know what happened in the late 90's to the macroeconomic statistics that caused a sudden change in the relationship between the data sets. Inflation was low so it probably was not the inflation measures. Did health care cost go up that much?
Posted by: joan at Oct 24, 2007 10:23:47 AM
Jack is on to something. Health care costs are a much higher percentage of the lower-paid employees' wages, since they are not a direct function of income. These costs vary by age and family size. Consequently, the share of total compensation that goes to benefits (and which is ignored when looking only at wages), would boost the total comp of lower-paid workers even more than the average.
Posted by: Rich Berger at Oct 24, 2007 10:59:24 AM
josh: "Isaac's point is only correct if rising health care costs aren't buying us better health care outcomes. "
I agree Josh, but I'm waiting for someone to bring up the comparison of U.S. health care "outcomes" with those of other nations. Or with those of the U.S. from just three decades ago.
The problem with such comparisons is that the measurement criteria used are both too narrow and perhaps not even relevant.
Looking at life expectancies and infant mortality is simple to do, but ignores many other health care outcomes:
1. the U.S. spends considerably more than most nations for dental care, but the pearly white smiles of our children are not included in health care stats;
2. the U.S. spends considerably more than most nations for cosmetic surgery, yet no measures of the emotional uplift received from breast augmentations or facellifts are ever included in health care outcome stats;
3. recovery periods for all sorts of major and minor surgeries have plummeted over the past 30 years. Yet those significant decreases in invalid times are never included in health care outcome stats.
Many of the benefits from increased healthcare spending are increases in quality of life rather than increases in life expectancy. Health care outcome measures by organizations such as the WHO ignore quality of life in assessing the effectiveness of national health care systems.
Posted by: John Dewey at Oct 24, 2007 11:10:31 AM
Some of the most interesting data on well being comes from the family income data.
http://www.census.gov/hhes/www/income/histinc/f12ar.html
It shows that from 1975 to 2005 median real family income rose 28%-- almost a 1% average. For families with one earner the cumulative average real increase was 3.3% -- about 0.1% annually. But for families with two earners the increase was 41.5% or about 1.4% annually. this is in line with other data that shows real income for males has been flat while it has risen nicely for female as the gap between male and female wages narrowed.
The other very interesting point in the data that goes to my point about inequality on compensation while median real family income rose 28%, mean real family income rose 47%.
Posted by: spencer at Oct 24, 2007 11:10:59 AM
Does immigration affect these numbers downward? Is it a big enough effect to counteract partially the increased inequality?
Posted by: sourcreamus at Oct 24, 2007 12:02:17 PM
The liberal-leaning Economic Policy Institute says median total compensation has stagnated from 2003-2007 (see Table 2): http://www.epi.org/content.cfm/bp195
This is actually a nice demonstration of these figures are sliced. Why '03-'07? Because it is the largest recent interval that they can get a stagnant number over. The same table shows a 5.1% growth from '00-'07. If you look at Figure C, you can also see that the '03-'07 period corresponds to weak productivity growth (about x3 slower) compared to '00-'03.
Posted by: MattXIV at Oct 24, 2007 12:11:32 PM
Median income for young people has declined.
Median income for everyone had declined if we compare it to the price of college tuition, the price of housing, or the price of healthcare.
On the other hand, median income has gone up a lot compare to the cost of TV sets.
Thus the phenomenon of young men living with their parents, unable to marry because they can't afford to live on their own because of the high costs of housing, but they have a really fancy big screen TV.
Posted by: Half Sigma at Oct 24, 2007 12:13:16 PM
sourcreamus: "Does immigration affect these numbers downward? Is it a big enough effect to counteract partially the increased inequality? "
I think the answer is "Yes" and "Partially yes". Certainly immigrants are working at many low wage jobs. So looking at just the paid workforce over the past four decades will show a large increase in low-wage, service oriented jobs filled by immigrants. But that's not the whole story.
Why did the number of low-wage service jobs increase so much the past 40 years? It's not because manufacturing jobs have been eliminated and blue-collar workers were forced to do something else. Rather, the work formerly performed by housewives has moved from the unpaid sector into the paid workforce.
For a couple of decades, women tried to do both - have careers and continue the housewife chores. As female incomes rose, however, tasks such as child-raising, housekeeping, food preparation, and clothing repair was handed over to low wage workers. The U.S. didn't have enough low-skilled workers to meet the growing demand, so immigrants were offered the jobs in huge numbers.
The answer is that the liberation of U.S. housewives increased the demand for immigrants to perform newly created, low-wage service jobs. Those newly created jobs reduced the median wages only bnecause housewife tasks were formerly not part of the paid workforce.
Posted by: John Dewey at Oct 24, 2007 12:49:27 PM
I wanted to second spencers observation on male vs female earnings with a slightly different spin. I think that male wages stagnating is a truer picture of what is happening to wages in general. The fact that female wages rising is not about the disappearance of a "gap" but rather that women are moving more into previously male dominated jobs.
Thus assume bill and betty are married and he works in a factory while she is a teacher in a daycare facility. Time passes and he still works in a factory while she goes to work in the factory too. Now family income went up while wages might not have moved at all.
Posted by: RobbL at Oct 24, 2007 1:01:32 PM
It is *not* true that benefits are more likely to go to low-wage workers. Hamermesh 1999 and Brooks Pierce 2001, among others, have papers looking at the distribution of benefits, and find that benefit inequality has widened faster than wage inequality. I didn't read the Minn Fed article close enough to see if the author just assumed benefits were constant, as an earlier commenter claimed, but if so, this will bias compensation growth upward in the bottom half of the income distribution, and thus understate compensation growth.
Two other notes:
Even with compensation, it's unquestionable that a huge percentage of males are strictly poorer, in real terms, than in 1975; nearly all of the growth since 75 has been in female wages.
Second, even taking the article's numbers as given, 28% growth in median wages over 30 years of fantastic GDP growth should be a national embarrassment; median wage growth has been quite a bit stronger among other developed countries during this period. I'm no raving liberal, but I don't see how well under 1% annual median wage growth (since the 28% is compounded)is anything to write home about.
Posted by: cure at Oct 24, 2007 1:13:40 PM
28% growth in median wages over 30 years of fantastic GDP growth should be a national embarrassment
I was going to say the same thing. Compared to GDP, it might as well be zero.
Posted by: Tony at Oct 24, 2007 1:43:58 PM
cure: "28% growth in median wages over 30 years of fantastic GDP growth should be a national embarrassment"
I don't see why. The U.S. enjoyed enormous advantage over Japan and Europe for 20 years after World War II. While the manufacturing capacity of the former was massively increased through war, that of the latter was bombed into rubble. As other developing nations caught up with the U.S., their more modern and more efficient factories eliminated those advantages.
At the same time, as I pointed out above, moving non-paid housewife tasks into the paid work force was bound to reduce "measured" wage wages. It's very simple: wages of 30 years ago weren't properly calculated because the zero wage of the housewife was ignored.
Posted by: John Dewey at Oct 24, 2007 1:49:32 PM
RobbL: "I think that male wages stagnating is a truer picture of what is happening to wages in general."
"Stagnating" seems a strong term to use. Do you have evidence to show this? Just because median wages have not grown does not mean that wages for every occupation have decreased. I'm pretty sure that wages for the highly-skilled have increased over thirty years. Certainly returns for investment in education have been increasing. I think our economy has many more service jobs than it did when I was growing up in the 50's and 60's. Millions of those have been filled by low-skilled immigrants. Millions more have been filled from the ranks of housewives whose previous work was totally uncompensated.
Posted by: John Dewey at Oct 24, 2007 2:01:59 PM
How much of this is CPI bias?
Whatever CPI bias there is would affect most of the relevant comparators as well, such as productivity growth and real GDP growth.
Posted by: Michael Sullivan at Oct 24, 2007 3:14:18 PM
Whatever CPI bias there is would affect most of the relevant comparators as well, such as productivity growth and real GDP growth.
But would not effect a theoretic "standard-of-living" metric, for which median wages are being used as a crude proxy. A (reasonable) 0.5%/year inflation mismeasure takes that 28% to 48% increase in standard-of-living over the course of thirty years, which starts to sound not so headline-worthy.
Posted by: Dave at Oct 24, 2007 4:31:01 PM
John Dewey (and others)
I don't understand. A women gets a paying job and so now gets compensated. The family loses her services for the time she is at work. The family's income goes up. This is supposed to be a triumph of capitalism? It sounds like a wash for the family (of course for many women it is a net loss because somehow they maintain the same duties....).
As to your question about the term stagnating, I was referring to the fact that the median men's wage has been more or less flat for a long time. Perhaps that is not the proper term. It works for me. And no, it doesn't imply that the wages for every occupation have decreased. What it means is that half of all men made less than X way back in the past and that today half of all men still make less than X. It is a sobering rejoinder to the "rising tide lifts all boats crowd" except that of course they reply
"well, it lifted some of the old boats but all these new boats came in and messed everything up"
Posted by: RobbL at Oct 24, 2007 4:32:38 PM
