Expansion Leaving Workers, Income Behind

I will add very little, other than pointing to this pair of interesting income related articles over the past 24 hours.

First up: Bloomberg:

"American workers have rarely taken home a smaller share of the nation’s prosperity, a condition that is undermining bipartisan support for free trade and creating friction between President George W. Bush’s administration and the Federal Reserve.

After 16 consecutive quarters of economic growth, pay is rising at a slower rate than in any similar expansion since the end of World War II. Companies are paying less of their cash gains in the form of wages and salaries than at any time since the Great Depression, according to government figures . . .

"There is no doubt that something is happening” to reduce labor’s share of income, says Robert Solow, a Nobel Prize-winning economist and professor emeritus at Massachusetts Institute of Technology in Cambridge. An economy that doesn’t distribute its gains widely is "poorly performing,” he says.

From the final quarter of 2001 through last year’s third quarter, total compensation paid to employees by corporations, including health benefits, rose at a 4.3 percent average annual rate, according to government figures. That’s the slowest growth for any similar period in post-war expansions lasting at least four years.

‘Not Connecting’

Stripping away benefits, corporate wages and salaries rose at a 3.4 percent annual rate in the 16-quarter period, the slowest of any post-war expansion lasting that long. Wages and salaries as a share of the cash corporations are generating from the expansion stood at 51 percent in the second and third quarters, the lowest in government records going back to 1929. Including benefits, labor’s share was the lowest since 1997. (emphasis added)

Next, The WSJ:

"A distinguishing feature of the U.S. economy of the past quarter-century is a sharp increase in economic inequality. No matter how you slice the data, very well-paid folks have done better than the rest.

But what changed the U.S. economy around 1980? Do those forces persist? Can or should government resist? Is computer technology the culprit? Is better education the answer?

Start with a couple of facts:

About 11% of income (and that’s not counting capital gains) went to the best-off ¬Ĺ% of Americans in 2002; 25 years earlier, they got 5.25%, according to Internal Revenue Service data crunched by University of California at Berkeley economist Emmanuel Saez.

Workers at the 90th percentile (those who earn more than 90% of all workers) earned 4.5 times as much as those in the 10th percentile in 2004; 25 years earlier, they were earning 3.5 times as much, according to Bureau of Labor Statistics data crunched by Harvard economist Lawrence Katz."

Why does this matter? Aside from the political ramifications, recall that over 70% of the economy is consumer driven. How much income goes to 99% of the population effects how much and on what they spend it.


Expansion Leaves Workers Behind, Creates Fed Friction
Craig Torres, Alex Tanzi
Bloomberg, January 17, 2006 11:11 EST

Inequality: an ’80s Legacy Or Worsening Now?
WSJ, January 19, 2006

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What's been said:

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  1. malbec commented on Jan 19

    Just a comment that might explain the low income growth (I have worked as a controller / vp finance at a couple of fortune 500 companies over this time period and am involved in setting wage increases). The baseline used is the government CPI #s. This has been running very low during the recovery and hence the base increases given to workers have been lower than past recoveries. I believe the CPI #s are not good to say the least but that is another subject.

  2. Rusty commented on Jan 19

    Another reason for “lower income growth” is that all of these income statistics strip out benefits, i.e. health insurance, which is skyrocketing. As one of the articles said: “Companies are paying less of their cash gains in the form of wages and salaries than at any time since the Great Depression, according to government figures . . .” and “Stripping away benefits, corporate wages and salaries rose at a 3.4 percent annual rate in the 16-quarter period, the slowest of any post-war expansion lasting that long. ”

    Healthcare costs are exploding, wages and salaries are flat. Overall, the total compensation picture is probably closer to normal than these wage/salary-only figures say.

  3. jill commented on Jan 19

    CPI will be even lower next month when the Bureau of Labor Statistics will update the market basket on which they compute CPI changes. The basket will reflect consumer expenditure patterns over the 2003-2004 period, compared to the 2001-2002 basket of goods they use today, meaning whatever has gone up in price will be eliminated and replaced with goods that have gone down in price.

  4. Ironman commented on Jan 19

    I’ll second Rusty’s comments regarding the Bloomberg article – it’s highly deficient in not providing a comparison of total compensation (wages & salaries + employer-paid benefits) with just the wages & salaries data.

    If you want to see the picture of the comparison between total vs. wage & salary component of employee compensation, here’s a link a copy of a chart from New York Times fron July 13, 2005 (via Cafe Hayek).

  5. jult52 commented on Jan 19

    The Bloomberg story does provide a number for total annual compensation increases since 2001 (4.3%) but their statement that this is:

    “the slowest growth for any similar period in post-war expansions lasting at least four years.”

    is opaque. Are they comparing it to previous periods with economic growth that is analogous to the post-2001 period? I would guess that it is the fact.

    In any case, this is a very interesting story. Let’s not lose the forest for the trees, here.

  6. cm commented on Jan 19

    Rusty: Two things:

    (1) You have to adjust increased benefits for healthcare cost increases. And not just consider the nominal benefit amounts, but also copays and coverage limits. I suspect you will get declining “real net” benefits.

    (2) Aggregate nominal profits are very good. it has yet to be demonstrated how they are eaten up by total compensation.

  7. M1EK commented on Jan 19

    In my field (software), benefits have been getting cut so that corporate contributions for them stay roughly the same.

    IE, their cash outlays for the benefits are not rising or falling; the VALUE of the benefits to the worker are clearly falling.

  8. B commented on Jan 19

    Now I’d like to stir the board.

    Why is it that companies are paying so little for wages? So little in wage increases? So much wealth accumulation with white collar workers? And with CEOs making unprecedented sums of money in the last five to ten years. Example, IBM paying Gerstner $800 million in stock & options while they kaboshed their pension plan in the late 1990s while showing record earnings. Not picking on IBM. Replace that with any other major company.

    I’d like to make an argument based on human nature and psychology. I believe the reason is….because they can. Why does Wal-mart pay $8 an hour with no benefits? Because they can. Why does Toyota pay a decent wage to its hourly workers? Because they have to. Fear of the UAW keeps them honest. Why does Wall Street dole out $5, 10, 30 million dollar bonuses while paying the support team a miniscule wage? Because they can. Why do Japanese executives make a small fraction of Amercan executives? Because their societal values would not allow such excess. It would bring shame upon an executive who was paid such a ridiculous sum while cutting the benefits or employment roles.

    Human nature never changes. I’ve said on here before that trends never last forever. Unions and worker rights are becoming nonexistent in America because we “don’t need them”. Companies are not the uncivilized brutes they once were where people were forced to buy at the company store or accept the wages thrust upon them by greedy barons. Maybe. Or maybe they just smile nowadays. There will always be uneducated people. There will always be the haves and the have nots. There will always be people who find it difficult to get ahead. Those people were paid a higher price for the same work in the past. Now, we can get the same work done for 10cents a day. Not that it has to be done for 10cents a day. But it makes us feel better as a rationalization. It’s progress. Is it? Or is it a race to the bottom of the barrel for the average joe? There will always be a struggle between the “haves” and “have nots”. Humanity has always tried to trample up the ladder on top of this brother or sister.

    While education is a way out of poverty, not everyone is capable of becoming a PhD for a multitude of social, economic or other reasons. Thus, when the trend gets out of hand, we will see a reversion to the mean. You see it around the globe all of the time. The degrees of severity are different but the end result is the same. We see a little of that now in the US with the SEC ready to pass new laws requiring transparency in executive compensation. We see it now with the backlash against Wal-mart. We see it now with a struggle over lack of health care. We see it now with people disenchannted with their elected government officials. We see it now with the oft quoted Misery Index Barry has referenced.

    I’m not here to take sides or to judge anyone’s behavior. I’m a capitalist through and through. I’m just stating that I believe human nature can be attributed to the wage problem. Especially given record executive compensation and record corporate profits.

  9. cm commented on Jan 19

    B: Not to disagree with you, but “because they can” is just “what the market bears” in different guise, or perhaps applied not in the domain of price bargaining but in the domain of social relationships & regulatory limits or lack thereof. The past (?) corporate abuses you quote were the “because we can” of then, and are now merely outlawed or socially ostracized.

  10. cm commented on Jan 19

    M1EK: My employer (also SW) is self-insured for medical (probably with some catastrophic re-insurance). They used to pay around 90% for healthcare, i.e. by design of the plan & actuarials, workers would in the aggregate pitch in some 10% by paycheck deductions, copays, and some measure of coverage limits. Recently they announced that 80% is the “industry standard”, and they will converge to that. Whether the fact of a rather “stable” low-turnaround workforce that has gotten a year older for each year that has passed, that many .com time immigrants have meanwhile gotten married with kids, and that domestic hiring has apparently been biased towards more years of experience has something to do with it I’m not sure.

    Raises have also not been much forthcoming in the aggregate, and there is a noticeable buildup in various management layers.

    In unrelated news, “it is hard to find qualified people” …

    OTOH we seem to have it rather good in relative terms.

  11. B commented on Jan 19

    You need to dig deeper. You aren’t articulating the reason. Your response is about numbers, statistics and rules.

    Economics is a SOCIAL science. It is the study of human behavior applied to the production, distribution and consumption of goods and services. It is a science because human behavior is consistent, repeatable and timeless. Economics is human behavior 101.

    The reason for economic conditions and behavior is psychological. If conditions exist where corporations are making record profits and executives are making record compensation but the average worker has stagnant wages, the root cause lies in human behavior and conditions which exist that allow or incent the situation.

    Wages aren’t stagnant and the delta between haves and have nots are no different now than they were at the turn of the century before worker rights or any different than they were in the time of lords and serfs. Human behavior is repeatable. What the market will bear is based on human behavior.

  12. cm commented on Jan 20

    B: I think we are on the same page. As I said I did not mean to disagree with you. Perhaps my wording was unfortunate. When I said “A is B in different guise”, that’s pretty much equivalent to “B is A in different guise”. I did not mean to imply subsumption.

  13. cm commented on Jan 20

    In other words, of course “social” phenomena arise out of human behavioral patterns. But also vice versa. They are not independent. In a way it’s a chicken & egg situation — are social phenomena an expression of individual behavior, or is individual behavior an expression of social phenomena? How much of what you think constitutes your self comes from you versus has been imprinted on you by your social environment (family, school, literature, TV, acquaintances)?

  14. B commented on Jan 20

    I guess I base my analysis more along the lines of Maslow’s hierarchy of human needs and innate human behavior rather than societal norms which vary from culture to culture.

    That is why economics doesn’t change whether you are in Japan, China, the US or Senegal.

  15. Lord commented on Jan 20

    I tend to think that a bunch of the increase in compensation is the cost shifting of increasing number of uninsured to the costs of the working insured.

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