Correcting AOC Economic Errors, Wage Stagnation Edition

After earning her Bachelor’s degree in Economics cum laude from Boston University, now-freshman Congresswoman Alexandria Ocasio-Cortez quickly put her degree to use by working as a bartender. It was certainly an odd choice for a graduate of a university where the average economics graduate can expect to earn $49,000 right out of college (and $116,000 mid-career), but given her public statements relating to the field since entering the public eye, it’s really no mystery why she was never employed in the field.

Just recently she decided to score social media points by misunderstanding an Ivanka Trump comment, then using her ignorance to grill Ivanka. During a Fox News interview, Ivanka had criticized the infamous bit in AOC’s “Green New Deal FAQ” that said people “unwilling to work” would still receive a paycheck. Ivanka said that “People want to work for what they get. So I think this idea of a guaranteed minimum is not something most people want.” The website Axios tweeted out the quote, which AOC mistook as a criticism of the minimum wage. WIthout reading the full context, AOC then tweeted out her criticism to her 3.2 million followers. “A living wage isn’t a gift, it’s a right. Workers are often paid far less than the value they create,” wrote Clueless Cortez.

She then trotted out an economic myth that’s as persistent as it is bogus – stagnating wages. “In fact, wages are so low today compared to actual worker productivity that they are no longer the reflections of worker value as they used to be.”

Cortez decided to post a nearly unreadable chart, so here is the original Economic Policy Institute chart she’s citing below. It argues that from 1948-1973, wages and benefits rose in tandem with productivity, and diverged in the early 1970s.

The most common criticism I’ve made of those claiming that wages have stagnated since the 1970s is that benefits (which are becoming an increasing percentage of the average person’s income) aren’t being included in the math. The EPI at least hedged against that objection, but the other problems in their methodology are even more glaring.

  • Underneath the chart on their website, the EPI has the following note:  “Data are for compensation (wages and benefits) of production/nonsupervisory workers in the private sector and net productivity of the total economy.” To translate what only including production/nonsupervisory workers in their sample means – the EPI is only including the bottom 80% of American income earners while ignoring the top 20%. They aren’t including all workers and measuring their pay relative to productivity, thus rendering their chart pointless.
  • The EPI is using hourly wages in their sample, which doesn’t include overtime, bonuses, some shifts paying more than other shifts, etc.
  • The EPI uses two different adjustment methods to deflate productivity and compensation. “Deflate” just means to adjust back to their real values (such as adjusting a wage from years ago for inflation). As economist Scott Sumner explains, “This is a pay/productivity gap being invented by using a slowly moving price index (NDP) to [exaggerate] worker productivity [so it] looks better, and the faster moving price index (CPI) to make real wages look lower. That’s not kosher. You need to use the same type of index for both lines on the graph.” This kind of mistake can be forgiven of a freshman economics student, but not a think tank (but then again, maybe they’re trying to purposefully deceive!). It’s also worth noting that the CPI is the most liberal measurement of inflation, meaning if you wanted to underestimate real compensation, that’s the metric to use.

The EPI also threw in some class warfare rhetoric to their report, claiming that “This [pay/productivity divergence] means that although Americans are working more productively than ever, the fruits of their labors have primarily accrued to those at the top and to corporate profits, especially in recent years.” In reality, employee compensation and post-tax corporate profits as a percent of national income have been relatively constant….. for a century.

Historically, corporate profits have averaged 12% of national income while employee compensation has averaged 63%.

Demonstrating that worker compensation as a percent of the (growing) economy has remained constant over the decades completely disproves the EPI’s premise that compensation is stagnant, and there are other charts that make the point just as well.

The Heritage Foundation ran the numbers using the Implicit Price Deflator to adjust for inflation (which doesn’t exaggerate inflation to the extent the CPI does), and that fact alone paints a radically different picture. Rather than a complete divergence between productivity and compensation, Heritage’s figures show them largely tracking one another. Heritage also ran the numbers using the PCE to adjust for inflation and found compensation 55% (to productivity’s 100%, which is being used as a baseline). While there is some truth to the claim that productivity and compensation no longer track one another to the extent they did, the narrative of a divorce between the two is untrue.

The research of Harvard economist Robert Lawrence is even more damning to the AOC/EPI narrative when he dove into the data, arguing that “when the numbers are measured more comprehensively—when wages are broadly defined as compensation to include benefits, comparable price indexes are used to calculate differences in wage and output growth in constant dollars, and the output is measured net of depreciation—the puzzle of lagging wages disappears, at least for 1970–2000.” He argues that there’s only been any notable divergence between productivity and compensation since 2003.

Furthermore, according to a 2014 Congressional Budget Office report, America’s poorest 20% of households saw their incomes rise 48% from 1979-2011. The middle three quintiles saw their incomes rise 40%. This is despite the fact that historically, both average household size and hours worked have been on the decline. Needless to say, we shouldn’t expect to see rising household incomes in an era of stagnant wages. And ironically, the CBO’s figures are using the CPI to adjust for inflation. so the actual percent increase is larger.

Thank God for AOC – because without her, my monthly quota would be much more challenging to hit.

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