Academic journal article ABA Banking Journal

The Poor American Worker!

Academic journal article ABA Banking Journal

The Poor American Worker!

Article excerpt

ACCORDING TO MANY REPORTS, workers face falling real wages, which is the purchasing power of worker compensation. The Brookings Institution's newly-launched Hamilton Project promises to make the stagnation of wages for most workers the subject of a high-profile drive with notable authorities, including Robert Rubin and Larry Summers, at the helm.

One of the most fundamental and reliable economic facts is that real wages and productivity are very strongly tied together. This is not surprising because labor productivity is the key factor determining the demand for labor, and that, in turn, is a central factor determining real wages. Since productivity has been booming, so have real wages.

The chart shows indexes of output per hour and real wages in the business sector, as well as a measure of real average earnings that is often used to show that wages have been falling. Real wages are measured by total compensation per hour deflated by the personal consumption expenditure (PCE) deflator, the measure used by most policy analysts for consumer prices. If the real wage were measured on a cost basis, as compensation relative to the price of business output (not shown) and added to the chart, the line would be nearly indistinguishable from that for productivity. When compensation is measured relative to the PCE deflator, however, it grows more slowly, reflecting higher rates of increase in prices of consumer goods and services compared with output.

Average hourly earnings (blue line) offer a more pessimistic assessment, but the measure covers cash earnings of hourly and non-supervisory workers in the non-farm private sector, about 60% of all workers. Excluded are such things as overtime, bonuses, insurance, and legally required benefits, which comprise about 30% of total compensation for non-farm private and government employees. …

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