Commentary: Bigger Paychecks, Yes. Better Pay, NoAaron Bernstein
Annual incomes finally rose last year after six flat years. Wage hikes periodically spook the bond market. And President Clinton announces every chance he gets that the economy has turned the corner. It's all true, and many Americans are doing better since job growth finally picked up in the past year or so. But don't celebrate yet: There's strong evidence that the two-decade trend of wage stagnation continues unabated.
It's easy to get a misleading picture, since the government conducts a half-dozen wage surveys that all tell different stories. The monthly series that bond hawks watch, which shows pay outpacing inflation, is so erratic that most labor economists dismiss it. The better assessment comes from a once-a-year snapshot taken each March as part of the Bureau of Labor Statistics' survey of labor costs. The 1996 figure, released in mid-October, shows that compensation growth still trails consumer prices. These numbers "are the best measure of the income of average American workers over the long term," says BLS Commissioner Katharine G. Abraham. And while the figures don't include the past seven months, there's little reason to suspect a sharp turn off the long-term course.
DETROIT SWAP. So how can incomes be rising if wages aren't? Simple. Strong job growth lets people work more hours, so households have more to spend. But that doesn't mean employees are earning more per hour. In other words, paychecks are up because Americans are working harder and longer, not because the long-term trends holding down wages--the shift to services, globalization, weak unions, and so on--have been checked. "All the long-term wage problems haven't gone away," says Marvin H. Kosters, an economist at the American Enterprise Institute, a conservative think tank in Washington.
To see why he's right, look at the BLS Employment Cost series. The data come in two versions. The more closely watched one, a quarterly index, tries to measure the same type of labor year to year: It assumes that the proportion of every type of worker in the economy--factory, service, professional, blue-collar--doesn't change. The second version, the so-called compensation-level survey done each March, includes occupational, industry, and other shifts. It shows that compensation has trailed inflation by six percentage points since the bureau began keeping track in 1987, while pay and benefits as gauged by the quarterly index have outpaced consumer prices (chart).
While the index offers the best picture of what employers pay for labor, the so-called level is better for gauging what employees earn, says Kosters and other labor economists. The two aren't the same. Take Detroit auto makers. They recently granted above-inflation raises to union workers, whose pay and benefits run $43 an hour. But in recent years, the Big Three have outsourced jobs to suppliers that often pay only $20 an hour. If suppliers also raise pay above inflation, the index would register real compensation gains. But in reality, thousands of high-wage jobs were swapped for lower-paid ones, reducing average wages. This only shows up in the level survey. Indeed, auto workers battled Detroit over outsourcing in their just-concluded contracts precisely because the practice lowers wages in the industry.
TEMP TIDE. Similarly, because the level method accounts for the shifting mix of job types, it's the only one that factors in such trends as the spread of lower-wage jobs. And these trends have been big in recent years. For instance, employment in the temporary help industry has soared by 70% since 1990, to 2.2 million. This pulls down average wages, because temp jobs pay $8.79 an hour, vs. $11.44 for full-time ones, according to the BLS.
The same holds true when service jobs, which average $15 an hour, proliferate, replacing factory ones that pay $20, according to the Economic Policy Institute, a liberal think tank in Washington. Since 1989, 1 million factory jobs have vanished while service jobs have soared by 10 million, EPI figures show. "The shift to low-wage industries continues to pull down wages," says EPI Chief Economist Larry Mishel.
Americans are doing better in a healthier job market, true enough. But don't mistake the good news for the whole story. Plenty of evidence still weighs wages down.