Academic journal article Monthly Labor Review

Use of Hourly Earnings Proposed to Revive Spendable Earnings Series

Academic journal article Monthly Labor Review

Use of Hourly Earnings Proposed to Revive Spendable Earnings Series

Article excerpt

In 1982, the Bureau of Labor Statistics announced the discontinuation of its statistical series on "real spendable weekly earnings of workers with three dependents," which had long been used as an indicator of trends in the purchasing power of U.S. workers. This monthly series covered all production and nonsupervisory workers in the private nonfarm economy, and was based on data from the Bureau's establishment survey and information on Federal income tax and social security contribution rates.

According to the series, workers' real spendable earnings grew rapidly from 1948 through the mid-1960's, oscillated around a very slightly increasing trend for the next decade, and finally dropped sharply in the late 1970's. By 1981, the last year for which data were published, average real spendable earnings had fallen to levels recorded during the late 1950's. The implication that the average worker was no better off in the early 1980's than in the late 1950's was profoundly troubling to many economists. Evidence based on other statistical indicators (such as real per capita disposable personal income, or the gross weekly earnings of male full-time workers age 25 and older) suggested no stagnation, let alone decline, in workers' purchasing power. Economic statisticians were moved to scrutinize more carefully the real spendable earnings series, which had already begun to meet criticism during the early 1970's, and they identified a number of apparently serious shortcomings. Criticism of the old series

The chief concerns of the critics were summarized by BLS economist Paul Flaim in a January 1982 article in the Monthly Labor Review:

* Since the mid-1960's, there has been a significant shift in the composition of the U.S. labor force, with both women and young workers accounting for an increasing share of the total. Both of these groups hold part-time jobs with much greater frequency than older male workers, and tend to have lower paying jobs as well. As a result, a series based on average weekly earnings for all workers understates the rate of growth of (a) average hourly earnings, because hours worked per week have tended to decline; and (b) earnings of any given subgroup of workers (in particular male family breadwinners), because these better paid workers constitute a declining fraction of the labor force.

* Many of the assumptions made by the BLS in calculating the Federal income taxes paid by the "typical" worker were no longer appropriate. Most importantly, the typical worker is no longer the head of a household with three nonearning dependents. Moreover, a sizable minority of workers itemize deductions on their tax returns, rather than taking the standard deduction as assumed in the calculation of the BLS spendable earnings series.

* The BLS did not make any allowance for State and local income taxes paid by workers, deducting from gross earnings only an estimate of Federal income taxes and social security contributions.

* The BLS Consumer Price Index for Urban Wage and Clerical Workers (CPI-W), used to deflate current-dollar earings, was a misleading indicator of the impact of inflation on workers' purchasing power, especially (but not exclusively) because of its treatment of housing costs.

* The whole concept of "spendable" earnings was inadequate. In addition to take-home pay, one should include in a measure of a worker's economic well-being an estimate of the (not immediately spendable) benefits accruing from (a) employer-provided medical insurance coverage and private pension plans; (b) social security benefits; and even (c) public services provided by Federal, State, and local governments.

Some of the criticisms levied at the old spendable earnings series are no doubt justified. But others are far from compelling. Following a discussion of the possible relevance of each of the points noted above, this article presents a new spendable earnings series that avoids the genuine shortcomings of the discontinued BLS series. …

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