Tag: Wage Stagnation

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.

Don’t Be Fooled – Wages Are Not Stagnating Under Trump

The stock market is booming after a year of turbulence, the economy is adding far more jobs than expected despite the lowest unemployment since WWII, and despite the booming economy, we’re told that workers aren’t sharing in the prosperity. Why? Because wages aren’t rising fast enough.

Indeed, wage stagnation has been the great argument against Trump’s tax plan, allowing liberals to make the same tired old arguments against so-called “trickle-down economics” that we’ve heard for the past five decades. As a few writers at the Center for American Progress put it last year; “On measures that determine whether workers’ wages are keeping up with the cost of living, there has been little improvement and even some regression since the start of 2017, when President Donald Trump took office.” Forbes’ Chuck Jones wrote half-way into last year that “While GDP hit 4.1% for the June quarter… the unemployment rate is hovering at all-time lows, inflation continues to increase, real wages are stagnant.”

Before completely tearing apart a claim, it’s worth explaining the basis for why people believe it to be so. Private sector wage growth in 2018 was about 3.2%, respectable at face value, but only a net 0.76% increase when you account for inflation being 2.44% that year. It’s on this basis that the Washington Post’s fact checker Glenn Kessler gave Trump’s claim that wages are finally rising once again after stagnating “four Pinocchios,” which are reserved for particularly-bogus claims.

Kessler isn’t an economist, so he can be forgiven for not realizing that his “fact check” isn’t as solid as he thinks. Rather than take isolated statistics at face value, it’s important to remember that all the figures we’re dealing with are averages and can be affected by external factors, such as:

  • An increase in the rate that people are retiring. Since those nearing retirement have decades of work experience, they far out-earn the average American. In fact, 55-64 year olds boast wages 28% higher than those age 25-34.  If my workspace consisted of me earning $10 an hour, Dan earning $15, an hour, and a prospective-retiree earning $30 an hour, the average wage would be $18.33. But suppose the prospective-retiree retires while Dan and I simultaneously see our pay hiked to $15 an hour (+50%!) and $20 an hour (+33%). While every worker saw their wages increase massively, the average wage at this hypothetical firm as decreased to $17.50 an hour.
  • The labor force participation rate has increased under Trump. Those who previously had given up looking for work are now re-entering the labor force. Those who’ve been out of the workforce for an extended period of time tend to have less skills in the first place – and those skills they do have atrophied over time. While they’re not dragging anyone’s individual wages down, their addition to the workforce does lower average wages on paper.

As the San Francisco Federal Reserve wrote regarding those two phenomena, “counterintuitively, this means that strong job growth can pull average wages in the economy down and slow the pace of wage growth.” The San Francisco Fed’s most recent calculations quantifying the effects of those variables were in the second quarter of 2018, and estimated a drag of about 1.5 percentage points. Assuming that remained constant for the year, it would imply nominal wage growth of 4.7% in 2018, or 2.26% post-inflation. 

While I chose to focus on 2018 in particular because it’s the first year to be impacted by the Trump tax cuts, wages in 2017 were also higher than advertised. Nominal private sector wages rose 2.5% in 2017 (about in line with inflation of 2.13%), but rose close to 4.5% (or over roughly 2% net of inflation) once accounting for retirees and those rejoining the workforce.

I’ve been using the consumer price index thus far in making all my inflation adjustments (because it’s the most commonly used inflation metric), but it does tend to overstate inflation relative to other inflation measurements. For example, if I instead measured inflation using the personal consumption expenditures index (PCE), inflation is roughly 0.5 percentage points lower than used in my prior calculations. In other words, real wage growth was an even higher 3% in 2017, and 2.76% in 2018, using the PCE.

By those figures, a household with an annual purchasing power of $50,000 when Trump took office should have the equivalent of roughly $53,000 today. They certainly haven’t noticed any wage stagnation.

Have Wages Stagnated Since 1970?

Authored by: Matt Palumbo

The myth that wages have stagnated since the 1970s has been utilized by both ends of the political spectrum over the decades for differing goals. Ron Paul observed in his 1982 book “The Case for Gold” that inflation adjusted wages declined from 1971, which he attributed to Nixon hammering the final nail in the gold standard’s coffin in ’71.  The late Milton Friedman noticed a similar stagnation in his 1984 book “The Tyranny of the Status Quo,” though he was making a point about the harms of hyperinflation.

In recent times, as the period of alleged stagnation now spans almost five decades, liberals have tried to dominate the narrative. Most (but not all) choose to ignore the alleged wage stagnation of the 70s, and instead pretend the problem started with Ronald Reagan (as an indictment of his tax reform efforts, or anti-union policies). “Wages for ordinary workers have in fact been stagnant since the 1970s, very much including the Reagan years” wrote the far-left economics Nobel Laureate Paul Krugman. Meanwhile Robert Reich, who only pretends to be an economist, asks “Why did the playing field start to tilt against the middle class in the Reagan recovery, and why has it tilted further every since?” He adds, “don’t blame globalization. Other advanced nations facing the same global competition have managed to preserve middle class wages” before blaming Reagan’s anti-union policies.

And surprise surprise, they’re both wrong.

So what kind of statistical trickery is afoot here?

Inflation Isn’t an Exact Science, and Earnings are More than Just Wages 

While the Consumer Price Index (CPI) is the most commonly used inflation measurement (and used by our government when determining social security raises, and other cost of living adjustments), it actually has a known tendency to overstate inflation. Naturally, this overstated inflation makes statistics on inflation-adjusted wages more unreliable (and understated) the more years back you we measure.

So what do other measurements say? According to George Mason University economist Don Boudreaux, it is true that from the mid 1970s to 2006, average wages did decline slightly by 4% if we measure inflation using the CPI. But what of other inflation metrics?

    • According to the Personal Consumption Expenditures Deflator (PCE), wages rose 10% over the same period
    • According to the Gross Domestic Product Deflator (GDP), wages rose 18%

Futhermore, nearly twice as much of the typical employee’s pay is in the form of fringe benefits today (19% of total compensation) as opposed to 40 years ago (10%). Put differently, nearly twice as large a share of an employee’s income doesn’t show up as income in the statistics. 

With all this in mind, let’s compare how “liberal reality” stacks up against “reality reality.”

Below is a chart from the left-wing Economic Policy Institute, which claims to show a massive divergence in productivity and wages since the 1970s, suffering from all the statistical flaws I’ve discussed so far.

And yet, if all we do is include benefits and change the inflation measurement from the CPI to the Implicit Price Deflator, a radically different picture emerges.

Labor’s Share of Income Has Not Changed

The “wage stagnation” myth is most often used in discussions of income inequality (presumably to paint the picture that greedy capitalists are “taking” all the money, while workers are left with peanuts). To dispel that myth, one can simply look at worker compensation relative to corporate income. According to economist Scott Winship:

  • In 1973, U.S. workers received 70 percent of the income produced by businesses; in 2007, they received 69 percent.
  • For the past 70 years, labor’s share of income has fluctuated—almost without exception—between 67 percent and 71 percent.

  • Since 1929, the U.S. business cycles with the highest productivity growth have also featured the highest growth in hourly compensation.
  • Middle-class pay has not stagnated: during 1997–2011, productivity rose by 35 percent, aggregate compensation rose by 32 percent, median hourly compensation increased by 20 percent, median female pay climbed by 25 percent, and median male pay grew by 18 percent.

If that’s what stagnation looks like, I’d say we’re doing pretty well.

While the “wages have stagnated since the 70s/80s” argument is bunk, what of the argument that wages are stagnating in an otherwise spectacular Trump economy? Stay tuned to see that argument blown out of the water later this month.

August 16, 2017: Ep. 526 It’s NOT About Confederate Statues!

In this episode:
Liberal efforts to tear the country apart, piece by piece, are intensifying. Their new enemy is Confederate statues but they’ll move on to another to show their political power.

A far-Left website completely obliterates the Russian “hacking” narrative?

Why aren’t you getting a raise despite the economic recovery? This report provides some answers.