Macro right, micro wrong?
Derek Thompson at The Atlantic had some thoughts on labor cost and economics taken from Henry Blodgett’s observation on declining wages for most wage earners. The second paragraph caught my eye as interesting for economists.
My response was that Blodget was macro-right — income inequality is a serious and growing problem — but micro-wrong, because this graph is measuring wages rather than full compensation. Total compensation — that’s wages plus benefits and taxes — hasn’t changed very much as a share of the economy since 1960, according to data from the National Institute of Pensions Administrators. What’s changed is that benefits and taxes have gone up, and wages have gone down.
(Wikepedia provides a short refresher of each term.)
I wonder if that is true. Health care benefits and pension benefits have gone down. Fewer employees qualify for health insurance and premiums and co-payments keep going up. Benefits too went down, employees must now pay higher premiums and co-payments out of wages and salaries, that is a big chunk for average wage earners. What kind of benefits went up? Taxes went up, taxes on military retirement benefits went up close to 2% starting Jan. 2011 with no COLA increase and Tri-Care prescription co-payments jumped by 66% as of Oct. People I know who lost jobs lost pay and benefits taking new jobs.
Maybe I misunderstand and it should say out of pocket costs of benefits went up, but then what is the difference? Benefits are part of wages and if the costs go up for the employees it is the same as a wage cut. If employers get a break on FICA without compensation to employees, that too would be a cut in wages.
Lys
You have just stumpled upon the problem of establishing the validity of an argument using income data across time. It is not that the data cannot be “equalized” for comparative purposes. It is that one can support nearly any side of an argument having to do with wages and taxation with the very same data that one might use to negate that same argument. Remember the old saying, Statistics don’t lie, but statisticians do.”
While it may be true that data presented in a professional journal (dare I use the term professional? at least I didn’t say scientific.) is subject to peer review and critique that is not so in regards to most of the published “reports” by think tanks infinitum and their brethren in the private for hire research companies. The data is as slippery as an eel and the purveyors of the data are equally slimy.
Lumping health insurance benefits in with wages is complete B.S. Those are benefits in kind, not in money, and with much higher deductibles and co-pays (and perhaps other limits), their value is actually down. The cost to the employer does not equal the benefit to the employee.
“The cost to the employer does not equal the benefit to the employee.” U.L.
Of course not. There’s the profit to the health insurance industry and its administrative costs that make up that difference. That’s why so many people wanted Medicare for all, or whatever name you want to give a one-party payment system. Take the profit motive out of health care finance and reduce the cost of that system. The actual cost of health care is only one part of the problem. The cost of the payment system is the other.
Urban,
I respectfully disagree, benefits in kind have money value and should be lumped with wages.
If you had to chose between two jobs one paying higher wages and salaries and no health insurance but a few $$$ more than the other job that pays a little less but provides good health insurance which would you take all other being equal? Would you not calculate how much you would have to pay for your health insurance on your own and how much that would take out of your pay check? A benefit package is money, no matter how you slice it.
Jack,
It is not so much the numbers as it is what you do with them.
Lys:
Healthcare, the same as SS, Unemployment Comp, Workman’s comp, vacation, holidays, EPA, OSHA, OT Laws, Child Labor Laws, etc. are Overhead and not the same as Direct Labor cost needed to make the product.
Run,
Don’t you confuse labor laws and the agreements between employer and employee?
Run,
labor costs are overhead expenses also.
I guess that’s what I’m trying to say. I just used a few more words to say it. That provides a context for the concept.
Labor compensation, including fringe benefits such as health insurance has been falling as a share of the pie since 1980 and has been reported here many times.
http://www.angrybearblog.com/2009/10/labors-share.html
It depends on what you do with the data. If the point is rising labor cost to the employer, then, of course, including the cost of health insurance to the employer counts. But if you are trying to make some political point — by saying that employees shouldn’t be complaining about stagnant wages because the extra cost of the health insurance is up — that’s what is ridiculous. The benefit to the employee is the insurance, not the money used by the employer to pay for it. That’s why it is a form of compensation “in kind.” In fact, the value of that benefit to the employee has declined as well, because it doesn’t cover as much as it did before.
Lys:
No they are not. The cost of maufacturing a product or even providing a service is broken into three components:
– Direct Labor, that labor which is used to make th product.
– Overhead, the list above and any other cost not associated with making a product
– Material, the materials and scrap that are used to make the product.
When you compare China to the US, the variance is not that great if you look strictly at direct labor because the perccentage of direct labor in a product is relatively small. The difference beteen both countries is in the overhead costs. This is what countries choose to avoid in the US by sourcing overseas and pocketing.
Lys:
No condfusion.
spencer:
That is a great post and I have used it numerous times. Your name and Angry Bear have been splashed all over the internet.
Run,
you included Child Labor Laws in your list above. Why would child labor laws increase the Overhead expenses? Would you say that it is cheap labor which is not available because of the law and an expense like safety requirements?
Just a day or two ago, an economist said manufacturing labor costs in Germany are about $48 an hour and in the US about $32, about 50% more. You are right, manufacturing is not as labor intensive as it used to be and therefore alone is less in total production costs, plus a unit of labor is cheaper. A deflation in labor costs increases productivity.
If you think an increase of costs of benefit for the employer counts as labor costs and the loss of that very benefit to the employee does not, you lose me. Looking at it that way is really manipulating the numbers. Health care has a monetary value, the very same $$$ amount the employer pays is the very same $$$ amount of benefit value the employee receives. That is accounting, not politics.
Lys:
Oh BS. No one is paid $32/hour unless you believe like Delphi’s Roger Miller that UAW workers made ~$70/hours. An Injection Molding operator makes ~$15/hour unburdened. One operater runs at least 4 pressess unless he is doing insert moldin. If there is robotics, the Labor drops to 10% or 10 presses.
In competition with China, this counts as Overhead.
My understanding of the economist was total labor cost, including what you call overhead expenses. In Europe that would include, health, retirement, paid vacation, maternity leave, vacation and Christmas funds, the so-called 13 or 14month salaries (spending money, so people can enjoy the holidays), the cars employees can buy with huge discounts once a year.
Yes, supply side economics is bad for European employees too, they are in the streets now to fight back.
As the argument is stated by Thompson, it has been misstated. Thompson says income shares have remained the same, so income distribution has remained the same. Those are two very different looks at income. Shares cannot be used to argue distribution among those who work for a living. That includes CEOs and hot-shot lawyers.
If you have been watching the charts floating around lately, thanks to the CBO’s income study, you’ll see that a big part of the income debate is entirely about earned income, rather than about the share of income that goes to capital. Thompson’s point, though he doesn’t say so directly, is only about the distribution between labor and capital. The 1% and the 0.1% clubs include a great many execs, doctors, lawyers and the like, and not many entreprenuers, whose pay is often in the form of distributed profits or capital gains.
Arguing that income shares, including benefits, have held steady utterly ignores the distribution of the share that goes to “labor”. Not an issue of micro vs macro. Not a matter of lumping benefits with wages (though, by the way, standard welfare analysis does favor cash payment over benefits, all else equal). Just an issue of misunderstanding the issue. And, since as spencer points out, Thompson is wrong about the share going to labor, one has to wonder why he confused the issue. I don’t know of the guy, so I don’t know if he has a tendency to get confused when it serves his purpose, but there is a tremendous amount of that going around these days.