Posts Tagged ‘wages’

Chart of the day

Posted: 17 April 2015 in Uncategorized
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The Wall Street Journal notes that workers wages in the United States are lower today than they were back in 1972.

In particular, both average real weekly earnings and real hourly earnings of production and nonsupervisory workers peaked in October 1972 (“when Richard Nixon won re-election, Eugene Cernan became the last man to walk on the moon and the Dow Jones Industrial Average closed above 1,000 for the first time”) and they still haven’t reached that level more than four decades later.

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To put this decline in workers’ wages in perspective, during the same period, worker productivity rose by about 70 percent.

Even more concretely, the weekly paycheck in October 1972 was the equivalent of about $811 in today’s dollars. If their wages had increased at the same rate as their productivity, today workers would be making $1378 a week. Instead, last month, average weekly earnings were just under $703.

So, workers are producing much more today than they did in the early 1970s but are still being paid less than they were then.

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The CEO-to-worker pay ratio is on the rise again, according to the Economic Policy Institute, after falling in the immediate aftermath of the financial crash of 2008. That’s both because corporate executives are able to capture more and more surplus and workers’ continues to stagnate.

The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.

According to more recent numbers, reported by Gretchen Morgenson, that ratio can be 1,073 (for Starbucks), 1,111 (for Qualcomm), 2,012 (for Microsoft), and even 2,238 (for Walt Disney). To be clear, that means Walt Disney CEO Robert Iger pulled in 2,238 times the median workers’ pay (estimated to have been $19,530 last year) at Walt Disney.

Here, according to the most recent figures (from Equilar) is the list of the top 25 highest-paid CEOs in the country.

CEO pay

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To hear mainstream economics and financial journalists, the ongoing economic recovery means that unemployment is falling, leading to rising wages, which in turn will to an increase in the price level. Therefore, the Fed should raise interest rates before the situation gets out of control.

Really?

Let’s see if we can’t unpack the connections between wages and prices, and to introduce an element the economists and journalists don’t ever mention: corporate profits.

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First, as we can see in this first graph, there is in fact a correlation between unemployment (not the official measure but, instead, total or U6 unemployment) and wages (the year over year change in hourly earnings of production and nonsupervisory employees): in general, since the early-1990s, as unemployment falls (and workers have more bargaining power), wages have a tendency to rise.* But the correlation is not perfect; especially in recent months, the unemployment is continuing to fall but the rate of wage gains is also falling.

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Second, as demonstrated in the second graph, there is no correlation between wage gains and inflation. Nominal wage gains have been very low for decades now but inflation has been all over the map, from a low of negative 4 percent to a high of about 11.5 percent and pretty much every level in between. The economists and pundits may claim wage increases threaten to provoke inflation but they’re hard-pressed to show that relationship empirically.

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It is clear from the third and final graph that there’s a missing element in the usual story: profits. Again the correlation is not perfect but there is a clear relationship between the change in profits and the change in the price level. How do we interpret that relationship? Basically, corporations attempt to set the prices of the commodities they sell in order to realize profits. In general, a surge in profits is accompanied by an increase in prices while a slowdown in the growth of profits leads to a lessening of inflation.**

The conclusion? Workers’ wages certainly depend on the amount of unemployment but inflation is caused not by wage increases but by the rise in corporate profits.

 

*Except in the usual neoclassical story, the direction is in reverse: wages cause unemployment.

**Corporations, of course, don’t have absolute power in setting output prices. Their ability to set prices and realize profits depends on a whole host of conditions over which they don’t have control. My point is only that prices go up when corporations do have the ability to raise prices and realize higher profits.

Update

Now that was a silly mistake, fortunately caught by careful readers.

The second graph above (which compared apples to oranges, the change in an index with a change in dollar amounts) should be replaced by the one below (with both series, of prices and wages, expressed in terms of percentage increases from a year ago).

fredgraph

Clearly, there’s a close—but by no means perfect—association between prices and wages in the U.S. economy.

But it is still the case that correlation is not causation. We still need a theory of price determination, and to include the role of profits. If price changes closely follow wage changes, then it can still be the case that corporations—in order to realize and protect profits—set output prices as a markup over costs (including wages).

What that means is that, when economists and pundits blame tight labor markets and subsequent wage increases for provoking inflation, they are choosing not to focus on the role of corporate profits.

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Special mention

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As is often the case in the United States, the current election campaign in the United Kingdom appears to be centered on the question, “are you better off today?”

Well, the answer is much like it would be in the United States: not the majority of people. Sure, the tiny minority at the top are doing fine.

Britain’s richest 1% have accumulated as much wealth as the poorest 55% of the population put together, according to the latest official analysis of who owns the nation’s £9.5tn of property, pensions and financial assets. . .

A rush to save among richer households as the recession deepened boosted the nation’s total wealth and ensured Britain’s long-established financial inequality remained in place, with the top 10% laying claim to 44% of household wealth – while the poorest half of the country had only 9%.

But not so much for everyone else. Wages, according to Wells Fargo [pdf], are growing at less than two percent on an annual basis.

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And, according to the Guardian, both GDP per capita and net disposable income per capita (especially the latter) remain below their 2008 levels.

Ed Balls, the shadow chancellor, said the Tories were wrongly telling voters they have “never had it so good” even though Britain is experiencing the slowest recovery in a century.

Speaking during a campaign visit to Swindon, Balls said: “This is a government which has presided over five years when wages have not kept pace with rising prices and family bills.

“George Osborne and David Cameron want to spend the next six weeks going round the country saying you are better off. I say ‘bring it on’ because working people are really struggling in our country and we can do better than this.”

Indeed, in both the United States and the United Kingdom, working people are really struggling and we can certainly do better than this. The problem is, while people are correctly questioning the policies offered by the political parties in power, they’re not convinced the challengers are offering a real alternative.

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According to the Century Foundation’s analysis of the latest Occupational Employment Statistics report by the Bureau of Labor Statistics, about a quarter of U.S. workers are working full-time, year-round in occupations where they cannot expect to earn enough to keep a family of four above poverty.

The chart above shows median wages for the 30 lowest-paying occupations with over 250,000 employees, which collectively employ 31 million people nationally. All the occupations on the list have annual median wages that fall at or below the poverty level for a family of four ($24,250). At the very bottom are America’s 3.1 million food preparation workers, who earn just $18,410 annually. That’s $8.85 an hour.

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The occupations with the largest employment in May 2014 were retail salespersons and cashiers. These two occupations combined made up nearly 6 percent of total U.S. employment, with employment levels of 4.6 million and 3.4 million, respectively. Of the 10 largest occupations (which accounted for 21 percent of total employment in May 2014), only registered nurses, with an annual median wage of $66,640, had an average wage above the U.S. all-occupations median of $34,540.

As the Century Foundation reminds us,

Many of these jobs are simple, but that doesn’t mean they are easy. Many are commonplace, but that doesn’t make them dispensable. Rather, in our haste to dismiss basic as beneath us, we lose sight of the fact that what is basic is also fundamental, what is mundane is also essential. These jobs matter—they are the substance of simple pleasures, the foundation of daily joys—and they mean more to our interpersonal well-being than any amount of high-flying CEOs ever will. But by labeling its practitioners as “low skill,” we rationalize relegating them to near-poverty wages.

The stark facts collected by the BLS also remind us that, when large numbers of people are forced to have the freedom to sell their ability to work, the wages many U.S. workers receive force them and their families to live in or within striking distance of destitution.

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Special mention

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