Taking Stock of the Labor Market
Steven Pearlstein's column, "Our Inequality of Outcomes," in Wednesday's Washington Post prompted me to think more about "one of the most depressing graphs I've ever seen" (see this earlier post):
Real earnings crashed in the 1970s, continued to decline through the mid-1990s, and rebounded through the mid-2000s. The rebound is only about half of the earlier declines. Pearlstein wonders about why the last several years have been flat, given higher productivity growth over the last decade or so.
Here's annual productivity growth over a similar time period (with period averages prior to 1973, 1973-1996, and 1996-2007):
The periods of decline in the real earnings chart do correspond pretty well to the low period of productivity growth. But I don't think that's the whole story. Consider the following chart of labor force participation by sex over the same time frame:
The rebound in productivity also corresponds roughly to the end of the big increase in labor force participation. I'd suggest that the long-term increases in labor force participation, driven by women entering the labor force in larger numbers, also played a role in holding down real wage increases. With that trend having slowed or stopped, there was more scope for real wage gains as labor was compensated.
But adding this consideration of labor supply doesn't do anything to explain recent events--labor force participation has been lower during the same period that real earnings have been flat.
Some explanation can be found in the share of total compensation going to wages and salaries versus benefits. In March 2008, wages and salaries were 70.6% of total compensation in private industry. In March 2000 and March 1986 (the earliest report I could find), wages and salaries were 73% of total compensation. So the growth of benefits as a share of total compensation knocked 3 - 3.5 percentage points off the growth of wages and salaries over the last 8 years. Annualized, that translates into 0.5 percentage points per year, which is still small compared to the annual productivity growth rates.
Womens lib was a capitalist
Womens lib was a capitalist plot to exploit the last available supply of high quality cheap labor.
This way of expressing he idea is designed to draw strong reactions, but there is still a nugget of truth in the statement.
Why 3 million are leaving the US each year
http://www.usnews.com/articles/news/2008/07/28/a-growing-trend-of-leavin...
We are seeing this trend big time here in Minnesota. Australia, Canada, Costa Rica are popular destinations. Asia is also popular for jobs (Singapore, Taiwan, Korea).
We live in a global economy, and that explains a lot of what is going on here in US.
Reconciling the numbers
The BEA says "employee compensation" was 65.0% of national income at the Pearlstein Peak in 1973, and 63.6% in 2007. (Table 1.12)
That's hardly the drop shown on the graph, and would seem to keep employee compensation growth pretty much in line with productivity growth.
(Rapidly increasing benefit growth offset slower wage growth over the period. Benefits generally are tax-favored for both employer and employee, so there's plenty of incentive for that.)
This interesting article at the Minneapolis Fed reconciles the wage-earnings-compensation numbers, and micro versus macro data (e.g.: BLS v BEA), and concludes that when different modes of measurement are put in common terms the wage & earnings numbers are significantly better than often reported.
Significantly better, but still bad
Great article Mr. Glass. The analysis in the Minneapolis Fed article Jim Glass mentions above shows that wages have likely increased 25-30% since 1975, not the -4% to 10% reported.
So, a job that paid 30,000 in 1975 would be at 39,000 dollars today (30% more).
Meanwhile the average price of a new home in in 1975 was around $43,000. A gallon of gas was 57 cents. A gallon of milk was $1.57. A new car was $4200 or so, and you could rent a nice apartment for $200 a month.
If everything went up at the same rate as wages the new home would be $55,900 today. The gallon of gas would cost about 75 cents. A gallon of milk would be around $2.10, and a new car around $5500 to 6000 or so. The apartment would rent for $260.
Of course that's not the case.
This helps to explain why one-income households had to become two-income households in the past 30 years. No more stay at home parent -- not unless there is accumulated wealth or one partner is a highly compensated employee.
When making it on two incomes became a stretch (and since polygamy is illegal) people started using more credit, and taking the equity out of their homes to maintain a middle class lifestyle. That continued the illusion of a healthy economy, and kept house prices going through the roof (ok, bad pun), and now lots of folks are caught in a trap.
It will take a few years for all this mess to unwind.
Consequences of stretched nation
The last few years of "no new taxes" sentiment are a direct result of the pinched middle and upper middle classes.
People are going nuts over a few cents increase in the gas tax in Minnesota . . . after 20 years of no increases to the gas tax and roads crumbling. Oh sure, some people get it, but you'd be surprised at the push back on that . . . the "no new tax" Republicans are having a field day with it and all are using it in their campaigns against the Dems who voted for it.
The middle (and upper middle) class have nowhere else to go for more income . . . husband and wife are working flat out and the mortgage and car loans are killing them. Gas going to $4 a gallon was a tipping point for many. So they want tax cuts. And congress knew that, and so they gave them the "economic stimulus" tax cut. Never mind that the federal deficit is outrageous and we stopped funding infrastructure, etc a while ago . . . the bottom line is the American middle class just can't pay the bills.
Next to go is grandma and grandpa . . . boomers will face a triage system for healthcare as they age (already happening in other countries). We can't keep all these people on life support AND fix roads and educate the youth of this country. The burden is too great, and despite what McCain and Obama tell us, something has to give.
My advice: Stay healthy. Live debt-free. Buy only what you need and can afford to purchase with cash.
More important question is what can our government do to turn this around? Cut spending. Bush's senior drug benefit plan, which added billions to spending, was a really, really dumb idea even though it got him re-elected (turns out he was clueless on this energy crisis). Invest in infrastructure, energy conservation, renewables, alternatives. End the war in Iraq.
We need to get off the credit card debt, as individuals and a nation, and we need to do it now.
my input
"My advice: Stay healthy. Live debt-free. Buy only what you need and can afford to purchase with cash."
one quibble with above: a 30 or 40 year fixed rate mortgage in the 5-6% range is probably an okay thing (assuming 1) someone does not borrow an extremely high multiple of income and 2) someone has other financial and other assets, preferably with low or negative correlations, 3) risk-management (insurance) is in place, and 4) other stuff). even berkshire hathaway has interest expense of around 10% of earnings before interest and tax (EBIT). The problem becomes letting interest expense get too big - either in % terms or absolute terms - or income volatility and (non)correlation of assets.
people that borrowed back in the 1960s at a low nominal rate to buy something that appreciated probably did okay.
input on graphs
nice work on the graphs
it would be nice to see labor participation rates by gender and by age (in some sort of a way that is easy too understand and not too cluttered).
it would also be interesting to look at federal tax collections as a % of GDP over the years - payroll taxes, income taxes, other, total.
These days, stock prices............
These days, stock prices fall dramatically around the world due to the current economic situation. And the American industry is also suffering from the effects. In addition, many people already loss their only source of income because the company they are working with are cutting a large number of workers to keep their business buoyant. And survival is the thing on a lot of people's minds since the recession started. Many people have turned to their grandparents for advice on what they did for survival during the Great Depression, when stock prices plummeted, the economy tanked, almost a full third of Americans were out of work, and there weren't installment loans to float them. Well, they tightened their belts and did whatever they had to do to get through it, and they also knew that as long as they kept at it, and didn't despair, things would turn around, which is exactly what we should do today. Vigilance, common sense, and determination are some of the keys to survival.