On Real Compensation: Real Economists Don’t Let Karl Rove Control Their Pens

Daniel Gross takes on Edward (“Crazy Eddie” as Max Sawicky calls him) Lazear and Allan (no relation to Glenn) Hubbard:

Allan Hubbard, director of the National Economic Council, and Edward Lazear, chairman of the president’s Council of Economic Advisers, take to the op-ed page of the Wall Street Journal as part of an effort to convince Americans their wages haven’t been falling – and that if they haven’t, it’s not the administration’s fault, anyway. From Hubbard, one expects such junk. But Lazear, a respected academic economist, now shows signs of succumbing to the same tendency that struck his respected-academic-economist predecessors Gregory Mankiw and Glenn Hubbard: retailing intellectual garbage in an effort to make their boss look better.

Even though the WSJ provides a link to “Coming of Wage”, one needs a subscription so let’s turn back to Daniel Gross for what he sees as the offending comments:

Over the first half of this year, compensation growth has averaged a remarkable 6.3%, at an annual rate adjusted for inflation. This growth is much faster than in previous years … Recently, nominal wages of production workers have also grown considerably. At an annualized rate, nominal wage growth has been about 4% so far this year, faster than at this point in the last economic expansion. Nominal wages are now growing faster than the past couple of years and are growing at about the same rate as they were in the late 1990s.

Daniel Gross is correct about the intellectual dishonesty of using nominal wage increases:

This last bit is the most pernicious and intellectually dishonest one. What’s the point in comparing nominal wage growth in an economy where inflation is growing at 3.8 percent (i.e. today’s) to nominal wage growth in an economy where inflation was growing at 2 percent or less? Do people pay their bills and mortgages with nominal dollars or with real ones? I’m wondering if you asked Hubbard and Lazear whether, they’d prefer (a) having a 4 percent nominal raise in a year when inflation rose 3.8 percent; or (b) having a 3.6 percent nominal raise in a year when inflation rose 1.6 percent; they’d choose (a) as being equivalent or better. But that’s precisely what they’re asking their readers to do.

The Bureau of Labor Statistics provides series for “total employer costs for employee compensation” breaking this down into wages&salaries versus total benefits from early 2004 to 2006QII. Over the past two years, total compensation has increased from $24.96 to $26.86- which is a 7.6% increase. For those who think in terms of real compensation – note that the consumer price index rose by 7.4%. Not exactly a large increase over the past two years.

Now it is true that total benefits rose by 11% from $7.26 to $8.06, while nominal wages rose from $17.70 to $18.80 – that is, a mere 6.2% nominal increase. Every freshman student of economics should know that if nominal wages rise by less than the increase in the cost of living, real wages have declined. I’m sure Crazy Eddie knows this – but does Allan Hubbard get the simple point?