The Economy and Wages
Rich Lowry has a column about what he consideres the unreported story of 2005: the robust US economy. Lowry points to point after point of positive economic news:

MasterCard reported that holiday sales increased 8.7 percent over last year. Sales of electronics were up 11 percent, and home furnishings were up 15 percent. Purchases exceeding $1,000 increased by 13 percent. The Wall Street Journal noted that economic pessimists harp about median incomes declining, but ''judging by these holiday sales, somebody must have money.''
Overall, consumer confidence rose in December to its highest levels since before Hurricane Katrina battered the Gulf Coast. The price of a gallon of gasoline declined to $2.18, down from $2.26 in November and well below the high of more than $3 in September. Weekly jobless claims are back to their pre-Katrina levels, and workers were earning 3.2 percent more than in November 2004.
Then, there was all the news to ignore from the third quarter of '05: 4.3 percent GDP growth; 215,000 new payroll jobs in November; 4.5 million payroll jobs added since May 2003; fixed investment up 8.6 percent; industrial production up 0.7 percent from October to November.
The unemployment rate is at a level that at one time would have been cause for universal celebration - just 5 percent - and according to Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond (Va.), employment continues to grow at a ''healthy pace.''

Why then is it claimed that the economy is in trouble? The typical answer from the left is stagnant or contracting real wages. Typical of this line of reasoning is this article from epi.org, a "progressive" economic think tank:

Despite these monthly gains in November, both hourly and weekly earnings are lower, in real terms, compared to the same month one year ago. In fact, on a yearly basis, real hourly wages are down in all but two of the last 19 months. For real weekly earnings, 13 of the last 14 months show yearly declines.

With today's release, we have a full four years of real wage data over the recovery that began in November 2001. The real hourly earnings of non-managers in services and blue-collar workers in manufacturing (the sample covered by this survey, which represents more than 80% of payroll employment) are down slightly over this period, as shown in the figure.

Thus, after four years of solid GDP growth and impressive productivity growth (13.5% in the same time period), the average hourly wage of workers in these occupations is down by five cents. Even the large monthly spike last month only replaces the real value lost a few months ago (see figure).

In other words, one great month cannot erase the damage done to real wage trends over the longer term. The loss of five cents in four years is clearly not a success story.

Is the the economic recovery being fueled on the backs of American workers? Common sense would dictate otherwise. Consumption fuels any recovery. A true decline in real wages would reduce consumption and result in economic contraction. My question is what is being measured here? If the metric in question is merely wages rather than wages plus benefits, the staggering growth in health insurance would explain the discrepancy. Indeed, this was the call from centrists.org (a--you guessed it--centrist think tank) in this article:

Real wage growth remained surprisingly high during the recession of 2001 and its aftermath, mostly because those workers still on the job registered very strong improvements in productivity. This extra productivity was reflected in their paychecks.

However, recent increases in health costs are eroding the potential for wage gains... Health insurance premiums are a large portion of these benefit costs.

Health premiums fell in the mid- and late-1990s with the widespread introduction of managed care plans with coverage restrictions. However, backlash from health providers opposed to lower payment rates and politicians eager to curry favor with dissatisfied voters has caused health plans to loosen their networks and restrictions. Subsequently, rapid premium growth has returned.

As benefit costs rise, employers pay a smaller share of workers' total compensation in cash -- this is part of the reason why wage growth is so poor.

I was going to lay off the politics today, but I started thinking about this issue. My only comment here is that this is a complex issue least suited to argument by punditry. Conservatives need to explain that their policies will make Americans more prosperous in the long run. They need to convince people that medical malpractice lawsuits are the enemy, not free trade.
- posted by Base10 @ 1:31 PM