New study finds higher median income growth

(401kcalculator.org)

(401kcalculator.org)

 

Median incomes are stagnating, or even falling – it’s a conclusion often taken for granted in major newspaper articles and supported by research of left-leaning economist Thomas Piketty. But is it really true?

A new report by Stephen Rose, an affiliated scholar at the Urban Institute, suggests that there may be a different story behind the data. Rose examines data from the non-partisan Congressional Budget Office (CBO) in order to better understand what has really been happening to wages over the past 35 years.

His conclusion? “Reports of long-term stagnation in wages, earnings, and income, however, are misleading and likely understate the actual growth in the compensation earned by workers and the resources available to families.”

The vast difference in perspectives, according to Rose, is partly due to the way the CBO measures inflation. One of the most well-known measures of inflation, the Consumer Price Index (CPI), is what people often use to measure changes in the real median wage over time. But the CBO uses a different measure, called the personal consumer expenditure (PCE) measure. The PCE is preferred by the CBO, Bureau of Economic Analysis, and the Federal Reserve because it more accurately measures changes in buying habits in response to price changes.

According to Rose, using the PCE to measure inflation increases the rate at which median wages have grown.

Additionally, Rose considers the change in median compensation over time instead of just wages. Measuring compensation includes benefits such as health insurance and the employer’s contribution to payroll taxes and retirement accounts.

This is a better measure of workers’ compensation, argues Rose, because companies consider all of these costs as part of the total labor cost of a worker. There’s evidence that workers do so too: “To the degree that workers have had a chance to negotiate the split between cash wages and benefits in union contracts, they have generally chosen generous benefit packages even at the cost of lower cash raises,” said Rose in the report.

He also uses yearly earning numbers rather than hourly rates, to better account for the actual hours worked.

After using the more accurate inflation measure, accounting for changes in hours worked, and including all types of compensation, Rose demonstrates that the data tell a very different story than the common refrain. He finds that real (inflation-adjusted) median compensation of all workers increased by 38 percent from 1979 to 2013. That’s more than six times the growth rate commonly cited by those who make none of these corrections.

Women have benefitted the most. Rose’s calculations show that women’s median compensation grew by 73 percent from 1979 to 2013, while men saw an increase of only 13 percent.

Median income growth differs vastly based on education as well. Those without a high school diploma saw only an 8 percent increase in median compensation from 1979 to 2013, while those with a graduate degree saw a 46 percent increase.

These numbers are reflected in surveys too, where a majority of Americans think they live better than their parents did at the same age. “Those analysts who argue that most workers have not had a raise in decades and are struggling to maintain their standard of living tend to call for large public programs and higher taxes on the wealthy,” said Rose. “But in this country, public support for such policies is mixed at best, likely because actual standards of living have grown slowly, but faster than CPI-adjusted hourly wages suggest.”

Published on Opportunity Lives

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