What is Noah thinking? Part 2
Noah Smith has replied to my recent post criticizing his use of median household income to measure middle class living standards. He raises some interesting questions, but some of them still leave me scratching my head.
I don’t understand the idea that “households have had to” compensate for lower weekly wages (also the choice of weekly over hourly wages continues to mystify me, since long workweeks suck, but OK).
Of course, no one literally had to compensate for the fact that their wages were falling, but people do prefer to maintain (if not improve!) their current level of consumption. So, if wages are falling, and you want to maintain your standard of living, you have to adjust something.
Let’s make no mistake, real wages were falling (see Table B-15), and even today remain below their all-time peak. The Bureau of Labor Statistics (BLS) likes to use the period 1982-84 as its base period for inflation calculations, so the numbers that follow are in 1982-84 dollars to adjust for inflation. Smith likes to talk about 1980-2000, working from one business cycle peak to another, but he ignores the previous business cycle peak, 1973, which is a very interesting and important one since that is the year of peak real hourly wages (equal to 1972) and real weekly wages were just 37 cents less than 1972. It seems to me that it’s more interesting to ask if middle class workers are as well off as they were at their peak than to ask if they are as well off in 1979 or 1980.
What happened to real wages? In inflation-adjusted dollars, the hourly wage peak of 1972-73 was $9.26 per hour; in 1980 it was $8.26 per hour, in 2000 it was $8.30 per hour, and in 2013 it had increased to $8.78 per hour.
But it’s actually worse than that. Unlike professors, whose working time is pretty much their own as long as they teach well enough and publish enough to get tenure, most people cannot choose how much they work: Their employer decides that for them. Your paycheck is hourly wage times hours worked, and hours worked by production and non-supervisory workers has fallen from 36.9 in 1972 and 1973 to a low of 33.1 in 2009 and in 2013 was 33.7 hours per week. That is why we can’t look at just the hourly wage, but need to use the weekly wage (hours per year would be an even better metric, but BLS does not publish the data that way). By the way, this category of workers is no small slice: It makes up about 62% of the entire non-farm workforce and 80% of the non-government workforce.
Because both hourly real wages and hours per week fell, real weekly earnings fell even more: From $341.73 (again, 1982-84 dollars) in 1972 to $290.80 in 1980, $284.78 in 2000, and $295.51 in 2013. If you’re keeping track at home, that’s a fall of 15% from 1972 to 1980, a 16.67% fall from 1972 to 2000, and still 13.5% below the 1972 peak in 2013.
But wait! After directly quoting and discussing what I said about real weekly wages, Smith suddenly, with no documentation, rejects that premise: “So, median real wages in America stayed roughly flat in America in 1980-2000, and people worked more – actually, what happened is that many women stopped being housewives and began working.” Nothing I said in my post was about median real wages, but weekly real wages of production and non-supervisory workers. And he knows this is my view, because he clicked through, and even linked to, my much longer post, “The best data on middle class decline.” He suddenly introduces a different measure entirely, and gives no argument for why it’s better.
That’s not to say there’s no argument one could make for that measure. In fact, Dean Baker in an email a few years back pointed out to me that the real weekly wage measure I have used does not include McDonald’s supervisors, who certainly are not well paid by any stretch of the imagination. But likewise, it does not include everyone from CEO on down. To clarify the difference, my preferred measure is the average (mean) of what’s close to the bottom 62% of workers, while the median is of course the median of everyone. Which better captures the situation of the middle class?
I submit that my measure is better. Smith is right that real median wages have stayed fairly flat from 1980 to 2000, and in fact they have also varied little from 2000 to 2013. But that does not seem consistent with increasing cries of economic distress, as people have lost jobs, homes, and, too often, their pensions. I have always thought that declining real wages were fairly invisible at first: People might have made less than the previous generation, but for any given individual, that effect was offset by their increasing experience over time, leading to a slightly higher real income for that person. It was only when large numbers of people began to lose jobs, and could not find anything that paid as much as their old job, that the issue of middle class decline rose more to public consciousness.
Having shifted measures in midstream, Smith’s final comments are rather less compelling. He has via this shift precluded the answer that women entered the workforce in large numbers from 1980 to 2000 to help maintain consumption, a position buttressed by the finding of Elizabeth Warren and co-researchers that private debt has increased sharply. I would also point out that women entered the workforce more rapidly in the 1973-79 period (when incomes were falling the most consistently) than in 1980-2000, as a close inspection of this FRED chart will show. Finally, going back to Warren’s work, she argues that the rapid rise of home prices swallowed up the nominal income increase due to women entering the workforce, and that the average house grew in size by less than half a room in over 20 years, even while new single-family houses were growing by the much larger percentages Smith gave in his initial article.
Hence, Smith’s claim that I’m saying increased women’s labor force participation “represents a deterioration in the living standards of the average American” is mistaken, based on his using a different measure of middle class income than I do. I have tried to indicate why I think my measure is better, which would make women’s labor force participation indeed at least in part a response to the falling incomes his measure doesn’t show.
If currently twice as many people need to work in order to bring n the same income as one person did twenty or more years ago, obviously something has made the labor of one person less remunerative. That’s just math. Is math not part of the Smith discussion? No way does a family with both heads of household working outside the home thrive as much as the one where at least one parent can be available when children are home.
Don’t you think that there is something wrong with the CPI-U deflator as a measurement in the 1970s? I do.
Both the CPI-U-RS and PCEPI say so. The entirety of your “wage” narrative is based on the 1970s decline.
Why aren’t you considering total compensation (wages plus supplements). Nominal supplements (benefits) have risen faster than wages for the last 40 years.
This blog post and, for instance, the EPI “State of Working America” from the left leaning orgs are likely understating hourly compensation increases whereas the right leaning think tanks like American Enterprise or Manhattan Institutes are vice-versa. Scott Winship is the go to guy on the right.
IMHO, the truth is somewhere in between.
QUOTING NOAH: “I don’t want to make national policy to help people keep up with the Joneses.”
Rephrase: I don’t want to make national policy to keep, in the beginning, the top 10% from running away with all the economic growth (GET ME MALTHUS), and in the end, to keep the top 1% from running away with all the economic growth (WHAT DID WE BOTHER TO HAVE AN INDUSTRIAL REVOLUTION FOR?).
If the top 1% income continues to receive all the economic growth, then, by the time the output per person expands 50% (25-30 years?) the top 1% income will “earn” half of a half-larger economy (25% + 50% = 75% of 150%). By the time output per person doubles (typically 40-50 years) the equation will read 25% + 100% out of 200% = 62.5% of a twice-as-large economy.
Be nice if the bottom 50% were not being bled to death: federal minimum wage closing in on $4 an hour lower than 1968 — DOUBLE the per capita income since. Minimal minimum wage = $15. $15 is the American 45 percentile wage. Would take a big 3.5% of income shift to make the minimum $15. (Last I looked, years ago, $15 was the German 10 percentile wage).
MY LATEST HOW-TO-STRAIGHTEN-OUT-THE-LABOR-MARKET SCREED:
The ultimate – federally prosecutable — sweetheart labor contract may be no contract at all.
No one would doubt the criminality of a mob union boss and/or an employer threatening to fire workers for speaking out against a mobbed-up sweetheart contract – in order to obtain for themselves the pay and benefit moneys that might otherwise have gone to employees through fair bargaining practices. A for certain RICO or Hobbs Act target.
Why shouldn’t the exact same extortionate activity be view in the exact same extortionate light when union busting “consultants” and ownership threaten to strip away workers’ economic livelihoods should they dare to participate in a federally approved path to establish federally approved union bargaining rights?
US Attorneys — Criminal Resource Manual 2403
In current (virtually universal) practice this economically — and by extension politically — ruinous extortion is “punished” only under administrative law laid down by the National Labor Relations Board — and employers found guilty pay only a (usually small) compensation for lost wages (not a penalty).
Alternate route: if any state independently outlaws this form of labor market extortion with a penalty of at least one year in prison, federal prosecution can automatically step in.
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Too obviously, commercial speech (selling soap) is no way nearly as constitutionally protected as political speech (Gettysburg Address). Not nearly so obvious to the broad swath of public opinion is that commercial association (collective bargaining) should be on almost the high plane of political association (demonstrating) – given its core impact on almost everyone’s lives (extracting the max the labor market is able to pay – instead of the min the labor market is willing to pay).
Historically, only labor organizations have empowered the average person with political muscle (campaign financing and lobbying) equal to ever persistent business interests — deservedly ranking commercial association right along side political association — and freedom of speech.
Saith the Wisconsin Supreme Court reaffirming legislation that sharply curtailed state employees bargaining scope: “… collective bargaining remains a creation of legislative grace and not constitutional obligation. The First Amendment cannot be used as a vehicle to expand the parameters of a benefit that it does not itself protect … ” [my emphasis]
Labor’s threshold question here can only be: could any government — federal, state or local — constitutionally bar all employees from collectively bargaining with any employer(s)? Seems impossible given any sensible take on freedom of association. Courts may balance constitutional rights against other interests, or course. But, at what point along what spectrum may a core constitutional right be said to transmogrify into a non-binding “creation of legislative grace”?
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Labor can challenge type laws that arbitrarily shrink the scope of bargaining. Wisconsin limited bargaining by state employees to wages (capped to inflation! — ever hear of econ growth?), all gone on benefit cuts, yearly contracts and union re-certifications, whole categories like home care and child care workers stripped of all bargaining. Illinois recently passed crackpot legislation requiring public school teachers to have a 75% majority vote to strike (they did!).
State card check? That the current federal schematic sets up a gauntlet almost no one can pass (50% of private employees are said to want union membership — but only 5% and going down[!] have it) could create a powerful impetus for First Amendment protected state facilitation of genuinely workable labor organizing schemes — if there were any question of federal preemption.
Because of the rapid growth of part time employment average weekly wages should be biased downward compared to average hourly earnings.
The average workweek has fallen from 38.5 hours in 1964 to 33.7 in 2014 — about a 15% drop.
P.S. The drop in the workweek will also bias fringe benefits or total compensation down as part time employees earn fewer benefits like health insurance, sick leave, vacations and retirement benefits.
My reply this morning over on Noah ( http://noahpinionblog.blogspot.com/2015/01/postwar-vs-new-gilded-age-how-did.html?showComment=1422462548958#c4198847399557809862) :
“4. According to the Economic Policy Institute, a Washington D.C. think-tank, between 1979 and 2006 (the latest year of available data), the top 1% of earners in the U.S. more than doubled their share of national income, from 10% to 22.9%. The top 0.1% did even better, increasing their shares by more than three times from 3.5% in 1979 to 11.6% in 2006. … The U.S. growth rate in per capita terms since 1980 has been around 1.8%, which is the same rate as the one seen between 1950 and 1980.”
Noah, if the growth has not been squeezed out of the middle class — at least not as much — maybe it has been that much more squeezed out of the lower middle class and the poor. Witness the dissolving of supermarket union contracts in the face of the unionized Walmart, the multi-dollar decent of the minimum wage and the resulting 100k out of 200k Chicago gang age males in gangs …
… or the decent of the would-be, had-been middle class, for instance regional airline pilots getting food stamps (nothing centralized bargaining wouldn’t straighten out), or the destruction os NY, Chi and SF taxi driver me …
… In the late 70s I used to pick up $150 a shift in today’s money as gypsy or car service driver in the Bronx, ditto in Chicago (got tired of living in the “James Bond Movie”). But, between 1981 and 1997 Chicago allowed one 30 cent increase in the per mile rate, while adding trains to both air ports, opening up unlimited limos, putting on free trolleys between all the hot spots downtown — and — adding 40% more cabs. By early 1997 I had emigrated 2000 miles with my own country to drive a cab in San Francisco.
Same story in NYC: last taxi strike, 1976, $2.25 a mile (2004 dollars) — by early 2004 down to $1.50 a mile (lease system meaning shortfall all out of driver).
Any attention from you for the deunionized, ever more stripped bare half of all of us?
Good Points Spencer
Economics is hilarious , when you think about it.
Most of the economic dogma that dominates today was based on examination of economic data pre-Reagan , when everything did look like a relatively stable equilibrium. Growth didn’t require ever-increasing leverage – income growth was sufficient. With better monetary policy , inflation wouldn’t have gotten out of hand. With proper recognition of the oil shocks’ impacts on the economy , more reasoned countermeasures would have limited those impacts. Bretton Woods , instead of being trashed , could have been saved with minor adjustments , probably. The Age of Finance wasn’t really necessary – we had plenty of finance in the 70’s.
If we want the economy to work like the models say it should , maybe we should fix the economy so it looks more like the one the models were based on. Real middle-class wages grew with productivity during those good post-war decades. That’s probably one “Golden Rule” to bring back. Minimum wage was some much higher percentage of median wage , and should also track productivity – another rule to live by. Gov’t coupon-clipping of top incomes and wealth – this kept the plutocrats from running away from everyone else – rule #3.
There would need to be more , I’m sure , but these three alone would go a long way , I think , and would likely result in a natural shrinkage of the finance sector over time – a good thing , as Martha says.
The model-builders should welcome this , I’d think. Clearly , however , most of them would not. Which makes me wonder if the models are simply there for entertainment value.
Those models are pretty funny , when you think about it.
Marmico, I’m not persuaded there’s anything wrong with CPI-U. As I mention in my response to you at MCPE, PCEPI isn’t designed to measure inflation as experienced by individuals. I need to look more into the CPI-U-RS. You will note the EPI uses it in its “State of Working America.” On the other hand, Edward Wolff in his December 2014 NBER paper on wealth inequality uses the same Table B-15, with CPI-U, that I do. I’ve started collecting materials so I can address this some more in detail at a later time.
The rental equivalence CPI was introduced in 1978 and the CPI-u-rs
simply takes the new methodology back to 1978 so you can have a consistent series from 1978 to now.
Here is a very short explanation of CPI -U-RS.
The CPI-U-RS incorporates changes in methodology implemented by BLS from 1978 through 2002 and may be used to analyze inflationary
trends in the CPI without interference from changes in methodology.
New values based on current methods are released each April. Values for the current year are rebased and appended to the historical data by Haver Analytics. In order to eliminate the bias due to the introduction of the rental equivalence measurement of housing prices in 1983, the CPI-U-RS should be compared to the CPI-U-X1 (PCUX1N: all items, rental equivalence approach). BLS reports data through December 2006 for the CPI-U-RS. Data from January 2007 to present are calculated by Haver Analytics based on the period to period percentage change of the CPI-U.
should be” was introduced in 1983, not 1978.”
Marmico and Spencer, I think I’m coming around on CPI-U-RS. Thanks. As I mentioned Economic Policy Institute uses it. I see the value in a consistent methodology over prior time periods.
Note that using CPI-U-RS, there is hourly wage decline from 1978 through 1992; it’s not just in the 1970s. From 1972 to 2012, hourly wages grew from $19.14 to $19.77 (2012 dollars), but weekly wages fell from $706.15 to $666.99 (2012 dollars), per the EPI.
I do not like the rental equivalence measure, but it is better than the old methodology.
My biggest problem is that the old methodology included mortgage rate.
So when the Fed tightened the rise in yields showed up as a rise in inflation.
Yes, it was what people actually faced, but having the Fed actions to fight inflation being counted as higher inflation never made much sense.
We now have very good measures of home prices that is based on actual transactions prices –Case-Shiiler –and should use that methodology in the CPI. But I have seen no effort to shift to that methodology for the CPI.
Some years back I worked out how many hours of work it took a median pay worker to buy a median price house at the mean mortgage rate that year. Most people borrow to buy houses. Basically, it was a bit over 600 hours into the 1970s. In the late 1970s it started to rise, peaking at over 1400 hours during the Volker squeeze. (I had friends with a 20% mortgage.) It dropped through the 80s and leveled off around 800 hours in the 90s before starting to rise again in the late 00s.
In other words, housing did get more expensive in terms of hours of work. A 40 hour work week means a 2000 hours (or less) work year. The old guideline was 1/3 of one’s income for rent or a mortgage. (It was 1/4 back in the 1930s.) So 600 hours was fine for a single breadwinner, but 800 or more hours was not. So, an awful lot of women went to work. Remember all those bogus child abuse cases in the early 80s. There was serious anxiety, but no killer clowns tearing the heads off of chickens, despite the allegations.
Back during the Cold War, whenever someone compared living standards in the US and the USSR, they’d pull out the hours worked comparison to buy a car, a television set, a steak and so on. Even before the Cold War was over, these comparisons suddenly vanished. It might be interesting to do a series on the value of an hour’s work in the US today and forty years ago.
I posted my methodology and results at http://www.kaleberg.com/househours/ if anyone cares to look at it. If nothing else, some of the links to data sources might be useful, particularly if they’ve been updated.