Monday, September 11, 2006

I Blame Viagra

The New York Times ran a story on Monday August 28 on falling real wages. They buried the lede, missing the most interesting implication of the data they presented.

They presented a chart, showing wages and salary as a share of GNP. Wages are indeed at their lowest share on record (i.e., the chart goes back to 1947). Scary, yes?

But total compensation as a share of GNP is about where it was in 1966 and the mid nineties, and up from the era of post WWII egalitarian prosperity. Since 1966 it has been fluctuating in a fairly narrow band between 56% and 60% of GNP. Corporate profits have fluctuated in the same period in a similarly narrow band between about 5% and 10%, sometimes up, sometimes down.

However, eyeballing the chart, employee benefits were about 7% of GNP in 1970 and grew inexorably to over 12% today. That's a huge jump. Workers live longer, and that drives up pension costs. Viagra didn't exist in 1970. Today it does, and that's just one medication or treatment that didn't exist in the past but that today's consumer insists on getting. And, living longer, they're more likely to need it.

A longer life in retirement is a good thing, but you still have to pay for it. And if benefits take a larger share of compensation, wages will get a smaller slice of the pie.

Now, higher prices for petroleum products have meant a real decrease in the total buying power of a lot of people. That's a story the matters, although it may not be nearly as important in the long term. Gas prices have already declined considerably from their 2006 peak, and Americans will over time adjust their habits in response to higher prices. Thriftier vehicles will gradually reduce the share of the average consumer's spending that goes towards gasoline.

But the steady growth in benefits as a share of compensation is an even bigger story. Why did the writers underplay it? In part because of a leftish bias that seizes on corporate profits as a convenient scapegoat. But even more because reporters tend to think of news as what happened yesterday. A bigger story that unfolds over decades doesn't fit that model.

Update:

One of my readers writes:

"Nevertheless, I don't see the evidence for your point. Real wages are declining while corporate profits are rising. (To make matters worse, compensation gains are concentrated at the top.) The rich are getting richer, the poor poorer."

One of my points is that the appropriate measure isn't wages, but total compensation. Wages are only about 70% of compensation.

Consider this simplified scenario. Over three years CPI inflation is 10%. Productivity is unchanged. Employers are willing to pay 10% more in total compensation three years later. Health insurance costs increase faster than the CPI, but consumers still want it at the new price. Even with shifting some cost to the employee, employer costs for health insurance increase by a nominal 20%. It follows that average wages offered will increase less than inflation. Even though workers are getting what they want.

Note also that keeping total compensation equal in real terms results in increased wage inequality. Suppose that the average cost of health insurance is $6,000 per worker covered and only 60% of median workers get coverage. The median worker whose wages are $30,000 must give up $360 in wage increase to maintain the same real compensation: more than 1% in real terms. In contast, if the top 1% have 100% coverage and $300,000 in wages, they need to give up $600 in wages to maintain the same employer cost in real terms. The impact on real wages for this group is only .2%.

4 comments:

Retired Tourneyer said...

The article does point out that benefits increased, offsetting the relative decline in wages, until last summer; since then, even the benefits increase has not kept pace with inflation.

The increased benefits are principally health insurance. We're already in a health-care-cost crisis - it's arguably a more significant problem for Americans than terrorism - and this is just another facet.

Nevertheless, I don't see the evidence for your point. Real wages are declining while corporate profits are rising. (To make matters worse, compensation gains are concentrated at the top.) The rich are getting richer, the poor poorer.

The fact is that the rising costs of benefits are being used by corporations as an excuse to slow compensation increases. To some extent this is justifiable, because companies cannot accurately predict what health-care benefits are going to cost them in the future, so they are less inclined to risk increasing their total compensation packages.

To me it all comes back to the health-care-cost crisis. It's literally killing people, on top of the economic ruin (leading cause of personal bankruptcy). Yet every proposal for reforming the (obviously corrupt) system we have now gets torpedoed. Why?

Retired Tourneyer said...

Productivity has been increasing, as the article points out, while compensation has remained stagnant. The difference has not been consumed entirely by rising benefit costs - corporate profits are up. Executive pay is also way up.

So it isn't just the rise in benefit costs; the real story is more complex. But the point of the story remains true: workers are generally no better off now than they were years ago, in spite of the increased productivity they have delivered. Meanwhile, stockholders [like me] and executives are doing really, really well.

Your update scores a major point: holding total compensation constant would increase wage disparity, ceterus paribus. Add to that the huge increases in executive pay, and the disparities get much worse.

Our economic system is producing a feudal society. Wage-earners are often serfs who cannot leave their employers, not only because they need the pay, but because they fear the loss of health care benefits.

The Middle Ages are fun to visit, but I don't want to live there. Especially not if the baronial class contains a large proportion of insurance industry executives.

Will McLean said...

There's a problem with using productivity as a benchmark. If, for example, the cost of an imported input increases and is passed along to consumers, then that counts as a productivity increase.

Exxon, with the same number of workers, gets more income. But there's no reason to think that Exxon workers or shareholders are necessarily better off because of a price increase that is just sufficient to pay for an increase in payments to, say, the Government of Venezuela

bhec said...
This comment has been removed by a blog administrator.