"REAL" AND "UNREAL" WAGES

Mark Shedlock


What follows is a guest post from Doug Short
at Advisor Perspectives . This post has its
roots in a discussion we had about
"real" (inflation-adjusted) wages.
Doug took our initial discussion and merged
it with the number of hours people work.
Here is the decidedly bleak result: Real
weekly earnings were $825 in 1973. Today
they are $690.
Doug Short Guest Post
As a follow-up on some collaboration with
Mike Shedlock in advance of his recent
commentary on wages over time, here's a
perspective on personal income for
production and nonsupervisory private
employees going back five decades.
The Bureau of Labor Statistics has been
collecting data on this workforce cohort since
1964. The government numbers provides
some excellent insights on the income history
of what we might think of as the private
middle class wage earner.
The first snapshot shows the growth of
average hourly earnings. The nominal data
exhibits a relatively smooth upward trend.
here are, however, two critical pieces of
information that dramatically alter the
nominal series: The average hours per week
and 2) inflation.
The average hours per week has trended in
quite a different direction, from around 39
hours per week in the mid-1960s to a low of
33 hours at the end of the last recession. The
post-recession recovery has seen a
disappointingly trivial 0.7 bounce (that's 42
minutes).
What about inflation? The next chart adjusts
hourly earnings to the purchasing power of
today's dollar. I've use the familiar Consumer
Price Index for Urban Consumers (usually
abbreviated as the CPI) for the adjustment.
Theoretically, the CPI is designed to reflect
the cost-of-living for metropolitan-area
households.
Now let's multiply the real average hourly
earnings by the average hours per week. We
thus get a hypothetical number for average
weekly wages of this middle-class cohort,
currently at $690 -- well below its $825 peak
back in the early 1970s.
Note that this is a gross income number that
doesn't include any tax withholding or other
deductions.
Latest Hypothetical Annual Earnings: $35,000
If we multiply the hypothetical weekly
earnings by 50, we get an annual figure of
$35,497. That's a 16.4% decline from the
similarly calculated real peak in October
1972. I've highlighted the presidencies during
this timeframe. My purpose is not necessarily
to suggest political responsibility, but rather
to offer some food for thought. I will point
out that the so-called supply-side economics
popularized during the Reagan
administration (aka "trickle-down"
economics), wasn't exactly very effective for
production and nonsupervisory employees.
Footnote for economist geeks: Here is a slightly
different look at the data. I've adjusted using
the less familiar Consumer Price Index for
Urban Wage Earners and Clerical Workers,
which among other things, assigns a higher
weighting to gasoline (e.g., longer drives to
work and the grocery store). Also, this is the
series the government uses to calculate Social
Security Cost of Living Adjustments (COLAs).
Here is the real hourly history with this
deflator.
Here is the real hourly data multiplied by the
average weekly hours. The latest data point is
14.1% below the 1972 peak.
For additional perspectives on earnings, see
my commentaries on household income.
Monthly Median Incomes Since 2000
By Quintile and Top Five Percent
Median Incomes by Age Bracket
Deflating the American Dream
End Doug Short
Real vs. Unreal Wages and Earnings
I asked Doug if we could factor in social
security, disability, and income taxes. Ideally,
we would also need to factor in property
taxes, sales taxes, and fees.
One might also want to factor in food stamps
and other transfer payments.
Unfortunately, there is no realistic way to
easily do all that. Instead, let's take a look at
Historical Payroll Taxes from the Social
Security Administration.
In 1973 the combined Social Security and
Medicare payment was 5.850%. Today it is
7.65%.
Given that workers making wages as shown
in the charts above would not have hit the
FICA limit, it would be reasonable to subtract
an additional 1.8% from today's weekly $690
weekly figure.
Each person would need to do sales taxes for
their own state. Today the Illinois minimum
sales tax rate is 6.25%. Depending on
localities, it can be as high as 9.75%.
I cannot find a historical table, probably on
purpose. No state would want to publish such
a thing, but I seem to recall something like
4%.
Whatever the rate, assuming most people
making these wages spend damn near
everything, it would be safe to subtract the
difference, whatever it is. Do the same for
income taxes, which Governor Quinn recently
raised from 3% to 5%.
Realistically, there is nothing "real" about
"real" earnings and wages. Thus we must look
at "unreal" wages (incorporating all of the
above ideas) to get the true picture.
It is very safe to say, the decline in "unreal"
weekly earnings from $825 in 1973 to $690
today, understates the decline by a huge
degree.
"Unreal" wages ignores transfer payments
that come out of some else's pocket.
Of course "unreal" is really "real" and "real"
is really "unreal", so it's easy to be confused.
Who to Blame?
I have outlined on many occasions who is to
blame for this sorry state of affairs. The
answer is the Fed, fractional reserve lending,
and government bureaucrats. Nixon closing
the gold window was icing on the cake.
The Fed is hell bent on achieving inflation.
Wages did not keep up because it was easier
to outsource.
In-sourcing is now the buzzword, but the Fed
has cost of money so low that it's easy for
corporations to borrow money and invest in
technology and software to replace workers.
That would be a lot harder to do if wages
were $2.50 an hour. And most people would
be a lot better off if prices were
correspondingly lower as well.
Those with first access to money
(governments, banks, the already wealthy)
are the only ones who gain from inflation.
Everyone else loses. The result is a shrinking
of the middle class.
Instead of pointing the finger at the real
problem, the Fed blames robots and
Democrats blame corporations and
Republicans. Meanwhile, Republicans and
Democrats alike fund wars and other
activities via the printing press that the US
cannot possibly afford.
If routine price inflation did not benefit the
banks and the wealthy at the expense of
everyone else, we probably would not have it.
The word that best describes the process is
"theft".