January 31, 2006

Real compensation down, as wage squeeze continues

Both wages and compensation for the average worker are lagging inflation, according to today’s Employment Cost Index (ECI) release from the Bureau of Labor Statistics.

Total compensation—wages plus benefits—grew 3.1% between 2004q4 and 2005q4, the same rate of growth as the previous quarter.  This increase is the slowest since 1999q3.  And because inflation grew 3.4% over the year, real compensation fell by 0.3% from 2004q4 to 2005q4.

The deceleration in compensation growth is due to slower growth in both wage and benefit costs.  Benefits grew 4.5% compared to 2004q4, down from 5.1% last quarter and the slowest rate of growth since 2001q2.

Wage growth ticked up slightly, from 2.3% in 2005q3 to 2.6% last quarter.  Real wages are down 0.8% over the year (2004q4-2005q4).

As we note in a recent Issue Brief (The Wage Squeeze and Higher Health Care Costs ), some commentators have been arguing that real wages are falling because rising health care costs force employers to plow more compensation into health benefits.  Today’s report further challenges that view.  While benefit costs are of course rising, they are doing so considerably more slowly than in recent years, in part due to diminished employer-provided health care coverage.  But regardless,  total compensation—that is, pay and benefits combined— is still lagging inflation, despite continued strong productivity growth.

With today’s report, we have full-year 2005 results.  On average, nominal wages rose 2.4% in 2005, the lowest annual result on record for this series, which began in 1982.  With average inflation up 3.4% for the year, real wages fell 0.9%.

After rising 1.1% in real terms for full-year 2004, real compensation for 2005 was essentially unchanged—down 0.2% and the worst year on record.

The ECI is a particularly broad measure of labor costs, covering all civilian workers (except those in federal government).  In that regard, these results reveal the breadth of the unprecedented gap between the pace of overall economic progress and the returns to working people.  They also clear up any mystery as to why so many Americans report dissatisfaction with the current economy: the economy may be up, but despite their increased productivity, workers’ paychecks are down (for further analysis, see EPI’s Why People Are So Dissatisfied With Today's Economy ).

By EPI economist Jared Bernstein with research assistance from Yulia Fungard.

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