Drawing the Wrong Conclusion

Writing in the WSJ blog Patricia Minczeski makes the following remark about the chart on the left:

U.S. wages as measured in the Labor Department’s employment report have been largely stagnant over the past few months, despite improvements in the job market. In fact, many industries saw more wage growth during the recession than during the recovery.

which I interpret as finding it a curiosity or a paradox. Arnold Kling responds:

I imagine that Scott Sumner would suggest looking at causality the other way. That is, wages rose too much during the recession, causing unemployment. The slowdown in wage growth, combined with easier monetary policy and higher prices, is what has produced the recovery.

My initial reaction to this was that it reflected something about the state of economic journalism but on reflection and consideration I realized that a) it stood to reason and b) not only does it say something about economic journalism but about economists as well.

In many if not most businesses pay is based, at least in part, on seniority. This may not make sense from an economic standpoint (or it may) but it is the way things are done. And employees are typically laid off or terminated on a last in-first out basis, laying off the least senior and, consequently, lowest paid workers first. That means that total payrolls would decline while average wages increased or, said another way, exactly what the chart is telling us.

That’s true for both salaried and hourly employees. So, for example, paragraph after paragraph of UAW contracts are filled with complex rules for determining seniority and compensating more senior employees at higher rates.

There’s something else that I think should be pointed out. Whether it makes sense for an employer to add employees or not is not based on wages but on compensation. Healthcare premium costs have been rising at about 5% per year throughout the recession. Let’s say the wages for an employee are $50,000 and, in addition to wages, the employee has an employer-paid family healthcare plan (decreasingly likely these days). At the start of the recession a family healthcare plan cost about $12,000. They’re now nearly $14,000 per year.

That means that the approximate compensation for that $50,000 a year employee was around $62,000 in 2007 and is about $64,000 now even if that employee’s base pay didn’t move a bit. That’s a pretty sizeable jump. And here’s a key point: neither the employer nor the employee is a bit better off for that increase.

Actually, it’s a lot more complicated than that. For one thing most large employers are self-insuring. That makes it pretty hard to calculate what they’re actually paying for employee health costs. But it gives you the general idea.

So, if you’re wondering why employers aren’t taking on new employees makinhg the median wage or below, one of the places you’ve got to look is healthcare costs.