Wages increasing, but slowly

Are American workers suffering from a long-term decline in wages? The public could reasonably expect to get a clear answer to this important question, but instead respected analysts disagree sharply with each other.

Some liberal commentators, taking a gloomy view, claim that workers’ hourly earnings are now lower, or only trivially higher, than in the 1970s, and that employer benefits have fallen. Conservative commentators claim that both wages and benefits are higher.

So does our society have a huge problem? Or not? Let’s start with average wages of all workers: There is no doubt that average wages, after adjustment for inflation, have been rising.

Analysts who say that average wages are falling usually rely on U.S. Bureau of Labor Statistics data collected in a monthly survey of employers. These data show that wages, after adjustment for inflation, rose only 3 percent between 1979 and 2007 – apparently a trivial increase.

But these wage data, though useful for some purposes, are completely unsuitable for examining long-term changes in average wages of all workers.

First, the monthly survey covers only 80 percent of workers – only “production workers and nonsupervisory employees.” It excludes supervisors, many white-collar workers who are not supervisors, farm workers and government employees. Also, its earnings data omit most commissions and bonuses and all tips. Significantly, it excludes employer contributions for employee benefits, including Social Security, retirement plans and health insurance.

More inclusive wage studies show a post-1979 rise in average real wages much greater than 3 percent. Two other BLS data sources, both based on larger samples of employers than the monthly survey and both inflation-adjusted, show much larger increases of 22 percent and 37 percent. These two data sources cover a larger proportion of workers than the BLS monthly survey and they include tips, commissions and bonuses.

Significantly, most employer-provided benefits are included in the BLS data that show a 37 percent wage increase. Studies show clearly that these benefits have been rising rapidly, so it is not surprising that these BLS wage data show a strong increase.

But let’s go further and ask about the incomes of whole families, not just of individual workers. And let’s ask, too, about income of all types, including both wage and nonwage income such as Social Security benefits, pensions and dividends. Has the average family’s total income been rising over recent decades?

The Census Bureau finds that average household income from all sources has risen 17 percent since 1980, after adjustment for inflation. In Maine, average household income has increased slightly more rapidly.

So average wages and household incomes both have risen substantially. Does this mean that we do not have a big national problem? Should we all simply relax?

Far from it. Liberal analysts and others wisely have probed more deeply. They have asked: What about trends in the inequality of wages for highly paid versus low-wage employees? What about trends in the inequality of family incomes? What about the speed of recent income growth? The answers to these questions are disturbing.

First, since 1979, wages have increased slowly compared with earlier periods. According to one BLS data source, wages have grown less than half as rapidly as in earlier decades. And Census Bureau data show that household incomes are rising much more slowly than before.

Second, inequality has risen sharply. Wages of low-income workers (those in the bottom tenth of all workers) are now about the same as in 1979, while wages of the top tenth are 27 percent higher.

Inequality in total household income (wage plus nonwage income) also has been rising. Low-income households (the bottom 20 percent) now receive incomes only 9 percent higher than in 1979; since 2000, they actually have suffered a small drop in income. Meanwhile, households in the top 5 percent have enjoyed an increase of 74 percent.

Finally, consider the impact of the Bush tax cuts on the before-tax wages and incomes discussed so far. While taxes were cut across the board, high-income families benefited much more than middle- and low-income families. So the cuts reinforced the trend toward inequality in before-tax incomes.

Liberal commentators have wrongly claimed that average real wages have been stagnating. But they are absolutely correct in concluding that wages and household incomes are rising more slowly than before, that inequality is rising, and that the Bush tax cuts have reinforced the growing inequality.

Houston, we do have a problem.

Edwin Dean, an economist and seasonal resident of Vinalhaven, writes monthly about economic issues.