Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True
How to combat the wage stagnation that has afflicted the vast majority of American workers has emerged as a key economic issue addressed in speeches and policy deliberations by politicians and candidates in both parties. This is a very positive development–as we at EPI have been saying for quite a while, wage stagnation ranks beside addressing global climate change as the key economic challenge of our time.
A New York Times editorial points out, however, that Glenn Hubbard, a leading conservative economist and key adviser to GOP candidate Jeb Bush, does not seem to believe there is a wage stagnation problem. As an earlier New York Times article pointed out: “Mr. Hubbard argued that ‘compensation didn’t stagnate,’ citing large increases that employers have paid out in health and pension benefits.”
Hubbard is definitely mistaken, as the New York Times indicates and as I demonstrate below by examining actual wage and benefit trends. Shifting the discussion from wages to compensation (wages and benefits) does not alter any of the salient facts about stagnant pay in recent years, especially for the typical worker or for low-wage workers, and not even for the ‘average’ worker (including high wage as well as low and middle-wage workers). In fact, there has been an even greater growth of inequality in total compensation than there has been in wages alone.
The intuition behind Hubbard’s claim is that the costs of benefits provided by employers–especially those for health care insurance–have risen rapidly, suggesting that compensation has risen far more quickly than wages. What this ignores, of course, is that many workers in the bottom half receive very few health or pension benefits and employers provide fewer and fewer workers with health insurance and pension benefits each year. Hubbard’s intuition also ignores that employers have actually cut back on some benefits, particularly pensions, with a concomitant decline in the quality of those benefits (such as by providing defined contribution rather than defined benefit plans).
The chart below gets to the bottom line by showing the hourly wages and compensation of private-sector production, non-supervisory workers (covering 82 percent of payroll employment, the only wage series for ‘typical workers’ that goes back that far) since 1948. We convert the Bureau of Labor Statistics’ provided measure of wages to compensation by multiplying by the economy-wide ratio of total compensation to wages and salaries.* The chart shows that compensation grew significantly faster than wages over the 1948-1979 period and that both compensation and wage growth flattened out after 1979. The major improvement in both wages and compensation since 1979 came in the late 1990s. So, at least for a typical worker, both hourly compensation and hourly wages stagnated after 1979, except during the late 1990s. Plus, the slowdown of the growth of compensation after 1979 was even greater than the slowdown of wages. Shifting the discussion to compensation rather than wages does not alter the salient facts. In fact, inequality of compensation grew more than that for wages.
Real hourly earnings and compensation of production and nonsupervisory workers, 1948-2014 (2014 dollars)
|Years||Hourly earnings||Hourly compensation|
Note: Private production and nonsupervisory workers account for roughly 82 percent of payroll employment.
Source: EPI analysis of Bureau of Economic Analysis National Income and Product Accounts tables and Bureau of Labor Statistics Current Employment Statistics
UPDATED FROM: Figure 4B in The State of Working America, 12th Edition, an Economic Policy Institute book published by Cornell University Press in 2012
The table provides a fuller array of data that allows us to flesh out the picture. The first column presents the ratio of compensation to wages since 1948; whereas compensation was just 7.7 percent greater than wages in 1948, by 1979 compensation exceeded wages by 22.4 percent. This means that almost the entire growth of benefits relative to wages occurred by 1979, before the onset of wage stagnation for the vast majority that began around that time. Between 1979 and 2014 the growth of compensation relative to wages was slight, as the ratio grew by just 2.6 percent. The claim that compensation grew far faster than wages is simply untrue (recall also that benefits–pensions, health and payroll taxes–comprised only about 20 percent of total compensation in 1979). The second column shows that inflation-adjusted compensation (wages and benefits) for the average worker in the economy, including the highest wage workers as well as those in the middle and bottom, grew far more slowly after 1979 (1.0 percent) than the 2.4 percent growth from 1948 to 1979. It also grew only 0.8 percent annually after 1979 if we exclude the period of high-pressure, low-unemployment labor markets between 1995 and 2000. Most strikingly, average hourly compensation of all workers did not grow at all in the recovery from 2009 to 2014. So even if Hubbard had an average of all workers in his thoughts he was incorrect in saying that compensation has not been stagnant.
Changes in productivity, hourly compensation, wages and benefits, 1948-2014
|Total economy||Private Production worker|
|Ratio: compensation to wages||Productivity||Real hourly compensation||Hourly wages||Hourly compensation||Hourly benefits|
|Year||Index 2009=100||2014 dollars|
|1979-2014 (excluding 1995-2000)||1.5||0.8||0.0||0.1||0.6|
Note: For technical information on how the compensation-to-wages ratio is calculated, see the documentation and methodology from Table 4.2 of State of Working America
Source: EPI analysis of Bureau of Economic Analysis National Income and Product Accounts tables, Bureau of Labor Statistics Current Employment Statistics public data series, and unpublished Total Economy Productivity data from the Bureau of Labor Statistics Labor Productviity and Costs program
The issue of wage stagnation, however, should focus on what the vast majority of workers have been experiencing for most of the post-1979 period. Hourly wages, inflation-adjusted, grew only 0.2 percent annually from 1979 to 2014 and did not grow at all if we exclude the 1995-2000 period. What happens if we add in benefits growth and examine hourly compensation growth? Not much. The growth of the hourly compensation of private-sector production, non-supervisory workers was 0.2 percent annually over the 1979-2014 period and just 0.1 annually if we exclude the 1995-2000 period. Thus, the pay of the typical worker since 1979 has been essentially stagnant, whether you look at hourly compensation or wages and whether you include or exclude the 1995-2000 period. This is also true for the recovery period from 2009 to 2014. Pay stagnation, wage stagnation, and compensation stagnation for the vast majority of workers is a real phenomenon. We should focus on addressing this problem rather than denying it. Our analysis and the Agenda to Raise America’s Pay provide our contribution to this discussion.
* The ratio of compensation to wages is computed from NIPA data in inflation-adjusted dollars. All items of compensation except health (i.e., wages, pensions and social insurance) are deflated by the PCE chain index. Health insurance (group insurance) is deflated by the PCE medical care chain index. Health is deflated separately because it is not adequately weighted in the consumption index because most health expenditures are not part of personal consumption. Compensation is the sum of real wages, pensions, health and social insurance. Our conclusions would not change much if one examines the ratio of compensation to wages in nominal terms, with the ratio rising from 1.066 in 1948 to 1.182 in 1979 and to 1.241 in 2013. Tellingly, health care as a share of compensation, in nominal terms, grew as much as a share of total compensation from1948 to 1979 as it did in the slightly longer period from 1979 to 2013, meaning health care did not rise any faster in the era of wage stagnation.