Sunday, October 09, 2016

Beware Politicians Pushing Stagnant Wage Narratives

Beware Politicians Pushing Stagnant Wage Narratives

One of the most common claims made by politicians is that wages have not kept up with inflation. Yet this is an example of a lie being repeated so often that everyone begins to believe that it's true. In reality, worker pay has more that kept up with increases in the cost of living. Unfortunately, even when shown the facts, some people claim otherwise.

CLAIM: “But everyone says wages have declined!”

REALITY: Wages are not the appropriate measure to look at. That's because benefits such as employer health insurance and social security contributions are not included in wage statistics. But they are very much a part of the expense a company incurs to employ you and the compensation you receive for your work. Thus the true gauge of how much you are paid is found in the "compensation" statistic, which includes Paid Leave, Supplemental Pay (overtime, shift differentials, and non-production bonuses), Insurance, Retirement and Savings benefits... these all have to be included to get a real measure of worker compensation.

CLAIM: “Average pay is not representative of most households. We need to look at median household figures instead.”

REALITY: This is true to a certain extent. But we can adjust our data to approximate the median, which according to the Bureau of Labor Statistics is 25% lower than the mean. After making the adjustment, compensation growth since 2000 still far exceeds inflation, 49% vs. 39%.

Another factor to take into account when looking at household data is that the average number of people in a household has been decreasing for years, which makes it look like people are earning less when actually there are simply fewer earners per household. Thus household income is a worse measure of income growth than per capita income, which is what we use in our chart.

CLAIM: “Inflation is underestimated by government statistics.”

REALITY: The government provides very detailed breakdowns of its inflation calculation, which I'll be posting about further in coming days. Basically there are 8 major subdivisions to the Consumer Price Index, each weighted by the average percent of income a household spends on them: Housing (42.2%), Transportation (15.3%), Food and Beverages (15.0%), Medical Care (8.4%), Education and Communication (7.1%), Recreation (5.7%), Other Goods and Services (3.2%), and Apparel (3.1%). Within each subdivision are many other divisions, all of which are updated annually.

CLAIM: “But my expenses are higher than the inflation data”

REALITY: Part of the reason some people object to the inflation numbers is that their personal expenses are higher or lower than the government averages. A person in college, for example, will have a much higher education expense than the government's calculated average, and might therefore think the government numbers are wrong. But it’s important to keep in mind that the numbers are averages, and might not reflect one's personal situation.

Also it’s often the case that what's happening is that we're actually adding new expenses. Internet access, for example, wasn't an expense for most people 20 years ago, but today most view it as a necessity. Progress has added new expenses, but also increased our standard of living. Accounting for such changes is an important aspect of the calculation of inflation rates.

The bottom line is, when politicians claim that the market is failing and we need wage controls and other government programs to fix it, more often than not they're simply trying to gain your vote.

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