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Flash: Labor Market Works Like It Always Does

December 8, 2006, 10:06 am

During the last election, politicians and pundits made a lot of hay trying to argue that the labor market was somehow broken and not functioning like it always has.  First, the argument was that we were having a "jobless recovery."  Then, when employment took off, the argument was that wages were somehow broken and trailing productivity.  Whether this was a secret plot by GWB or by Wal-Mart was never quite made clear.

Well, it turns out that the job market works like it always has.  In a cyclical economic recovery, employment and productivity gains always precede wage gains.  Wages tend to go up late in the cycle, after excess available labor is soaked up:

After four years in which pay failed to keep pace with price
increases, wages for most American workers have begun rising
significantly faster than inflation.

With energy prices
now sharply lower than a few months ago and the improving job market
forcing employers to offer higher raises, the buying power of American
workers is now rising at the fastest rate since the economic boom of
the late 1990s.

The average hourly wage for workers below
management level "” everyone from school bus drivers to stockbrokers "”
rose 2.8 percent from October 2005 to October of this year, after being
adjusted for inflation, according to the Bureau of Labor Statistics. Only a year ago, it was falling by 1.5 percent.

I am not one to really accept the "active bias in media" argument (I believe in a more passive bias based on reporters failing to apply skepticism to stories that fit their view of the world).  However, the bias crowd predicted that reported economic news would suddenly improve after the election and that certainly seems to be the case.

One final note - be careful of folks who are claiming that wages have not kept up with inflation for years.  Make sure they are using "total compensation, including benefits" and not just "wages."  The former number has consistently outpaced inflation.  These numbers diverge because the portion of compensation paid out in non-cash benefits has been growing as a percent of total compensation.

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Category: Economics
  • http://mdahmus.monkeysystems.com/blog/ M1EK

    1. It's misleading to argue that workers without raises are better off because their employers' are paying more for health plans which are usually of a lower quality than the year before (requiring more, not less, worker contribution). Yet that's usually the "non-cash benefit" being discussed here (nobody's noticed people getting a lot more vacation, have they?)

    2. Graphs of job growth in this recovery versus priors are quite telling. One example here:

    http://bigpicture.typepad.com/comments/2005/08/post_recession_.html

  • JohnDewey

    "It's misleading to argue that workers without raises are better off because their employers' are paying more for health plans"

    Has anyone made the argument that they are better off than they used to be? I didn't see that argument. I just read that employee's total compensation had increased.

    Of course, if health care costs are rising, companies could simply pass along all the increased costs to employees. If they did so, then the employees would certainly be worse off than before.

    Though some employers are increasing employees' share of health insurance, employers in general are picking up most of the increase. Every employer that is paying more for employee health insurance has shared the economic gains derived by the organization.

  • JohnDewey

    "Graphs of job growth in this recovery versus priors are quite telling."

    I don't think the graph supplied gives a complete picture at all.

    What was unique about the 2001 recession is the extremely high employment rate at the onset of the recession. Unemployment was only 4%, so the employment rate was 96%. The unemployment rate only dropped to 6%, a level of 94% employment.

    Contrast this last mild recession with:

    - 1975: post-recession unemployment reached 9%
    - 1982: post-recession unemployment reached 11%
    - 1991: post-recession unemployment reached 8%

    The 2001 recession was clearly milder. We should have expected a slower return to pre-recession employment levels simply because the economy at lowest employment levels was still very close to full employment. And we should not have expected firms to return to levels of the overheated 1999-2000 economy.

  • http://mdahmus.monkeysystems.com/blog/ M1EK

    "Has anyone made the argument that they are better off than they used to be? I didn't see that argument. I just read that employee's total compensation had increased."

    The argument that total compensation has increased is shorthand for "see, the workers ARE better off". Nobody would argue otherwise if their wage compensation was outpacing inflation, and the benefits counterargument is always the first resort of those answering the charge that workers are WORSE off, isn't it?

    "Of course, if health care costs are rising, companies could simply pass along all the increased costs to employees. If they did so, then the employees would certainly be worse off than before."

    Here's how it has turned out, at my last four employers:

    Year N+1: Your real (adj for inflation) payroll contribution for the health plan stays the same or increases slightly from Year N. Your real deductible/copays increase non-trivially. No new services are added to the health plan; in fact, in most cases, some services are discontinued (or made non-trivially more expensive in real terms).

    Yes, in theory-land, the worker is getting more valuable health care. In reality-land, the worker is getting the same quality health care at a non-trivially higher real cost to BOTH themselves AND their employer. To use this state of affairs as evidence that workers are better off than the year before is highly disingenuous. (Of course, neither are the employers).

  • http://politics.lel-hosting.com/ Matt

    Well, we could always kill off the income tax, which is the reason we have "health insurance" out there polluting the healthcare market with bushel-loads of perverse incentives in the first place. It's only fairly recently that it's started to seriously pervert the general labor market, but it was never what any sane person would think of as a good idea.