The facts behind the wage debate

Nation's Business, April, 1996 by James Worsham

By some measures, paychecks have shrunk, but overall compensation has gone up for American workers.

America needs a raise," proclaimed the AFL-CIO's new president, John J. Sweeney, late last year as he took the helm of the labor federation and pledged to do more for the nation's workers.

Corporate profits, stock values, and executive compensation all have surged during the economic expansion of the 1990s. The only thing that has lagged is workers' take-home pay, which has stagnated, says Sweeney.

When, he asks, will workers get their share of the economy's success?

Since Sweeney's election, his brand of business bashing has been taken up by President Clinton, Secretary of Labor Robert Reich, and Democratic leaders in Congress. Even frontrunning Republican presidential candidate Robert Dole, the Senate majority leader, has criticized corporations for laying off thousands of workers while seeing record profits.

Without a doubt, wages and income will remain a top election-year issue. Take-home pay is "the single most important economic issue in America today," says Stephen S. Roach, chief economist for Morgan Stanley & Co., a New York City based investment firm.

R. Bruce Josten, senior vice president for membership policy of the U.S. Chamber of Commerce, in Washington, D.C., agrees on the importance of the issue but believes "the media have failed to inform people about all the facts." Moreover, he says, the full picture shows that total compensation to workers has increased "quite dramatically" over the past 20 years.

Indeed, the best measures available challenge the prevailing view that workers are being shortchanged.

Wages

Real--inflation-adjusted--weekly wages have dropped almost 5 percent since 1979, according to the Labor Department's Bureau of Labor Statistics. The inflationadjusted average hourly wage peaked in 1973 at $8.55. Since then, it has fallen to $7.42 in 1995, according to the BLS.

A separate measure of economic wellbeing, disposable personal income, has advanced only $378 from 1990 to 1994--reaching $18,320 per capita in inflation-adjusted dollars.

"Wages are stagnant on the average," says Barry Bosworth, a senior fellow at the Brookings Institution, a liberal-to-moderate Washington think tank; he was director of the Council on Wage and Price Stability in the Carter administration. "When people are saying their real incomes are falling, this is a real statement," he says.

Total Compensation

Total compensation--take-home pay plus fringe benefits--has been growing, however. That's because a large share of total compensation consists of benefits--verything from health-care coverage and sick leave to company contributions to retirement accounts. This is the result of a major trend over the past few decades to compensate workers with things other than direct, taxable cash.

"For 25 years, workers have chosen to take a larger and larger share of their compensation in noncash wages because they're not taxable," says Kenneth Deavers, chief economist for the Employment Policy Foundation, a business-supported research group in Washington.

Moreover, organized labor has not, until recently, made falling wages a major issue because it has pushed for more-generous health and pension benefits instead.

The annual survey of employee benefits conducted by the U.S. Chamber shows that employee benefits have risen from 17 percent of total compensation in 1955 to 40 percent in 1994.

In fact, total compensation, as measured by the BLS employment cost index, has risen faster than general price inflation--as measured by the Consumer Price Index--very year since 1990. And while critics of business point out that the growth rate of the employment cost index is at a 10-year low, so is the rate of general inflation. Last year, the employment cost index rose 2.8 percent while the CPI rose 2.5 percent.

Productivity

Some analysts say that in addition to the increase in nontaxable benefits as compensation, another reason wages have lagged is slow growth in productivity.

Economists define productivity as the amount of worker "output per hour," or the amount of time needed to produce a given amount of goods or services. Most economists maintain that wages tend to rise with productivity growth.

Since 1979, growth in productivity had appeared to outpace growth in wages, lending support to labor's demand for higher wages. But recent revisions by the BLS in productivity data have narrowed the previously reported gap.

Here are the specifics:

Until recently, the BLS reported that productivity grew at a plodding 1 percent a year from 1979 onward and accelerated somewhat in the 1990s. Indeed, the productivity indexes for 1992, 1993, and 1994 had been announced as growing 2.7 percent, 1.3 percent, and 1.9 percent, respectively.

In February,, however, the BLS issued revised productivity figures calculated to track growth more accurately. The new figures show annual average productivity growth of 1.1 percent since 1990, lower than previously calculated.

These revised figures also show wages closing the gap with productivity. From 1979 to 1990, inflation-adjusted hourly wages grew at an average annual rate of 0.2 percent. But from 1990 to 1995, the growth rate in wages increased to 0.5 percent.