by Jurgen Brauer and Nicholas Anglewicz, October 2005
Copyright: J. Brauer. No reproduction without permission.

Adjusted for inflation, manufacturing wages went from $13.72 in 1960 to $16.15 in 2004 - an 18 percent wage increase spread over 45 years is nothing to write home about.

The nearby chart depicts a 45-year record of wage-related information for the United States, 1960-2004. To ensure that the numbers can be compared to each other, all were adjusted for consumer price inflation, with 1960 being the year of comparison. The red line depicts the inflation-adjusted wages of non-supervisory employees in private manufacturing businesses. The record is unenviable. Even though workers have of course received more money over time, once consumer price inflation is taken out of these increases, wages went up from $2.15 per hour to only 2.53 per hour (or from $13.72 to $16.15, if the prices of 2004 were the base of comparison). An 18 percent wage increase spread over 45 years is nothing to write home about.

However, few Americans work in the manufacturing sector anymore. In fact, of the 131.3 million Americans in the workforce in 2004, only 14.4 million, or 11 percent, were employed in the manufacturing sector (as opposed to 28 percent in 1960). Thus, the more relevant line in the chart is the black one, the one depicting wages and salaries for all public and private sector employees. This covers not only manufacturing workers, but the other 89 percent of the labor force as well. In inflation-adjusted terms, income from work has increased from $2.26/hour to $3.43/hour (in prices of 1960), a 52 percent increase. On average, by 2004 we were about half again as well off as our grandparents were 45 years ago. (In prices of 2004, the numbers are $14.45/hour in 1960 and $21.89/hour in 2004, yielding the same 52 percent increase.)

But unlike our grandparents, many employees today also receive increasing amounts of private pension and insurance benefits, especially health insurance benefits. The blue line in the chart depicts the dollar value of those benefits. Again adjusted for general consumer price inflation, the average employee compensation, including benefits, rose from $2.38/hour in 1960 to $3.99/hour in 2004 in terms of 1960 prices (or $15.20 to $25.48 in 2004 prices). This amounts to a 68 percent increase over the 45 years.

So far, so good. But there is a troubling oddity in these data. For one thing, worker productivity since 1960 has grown by 280 percent. It would seem that wages, salaries, and the value of fringe benefits should reflect this, or else the increased worker productivity would have been siphoned off by employers. And indeed, there is something wrong with the data. The key is that consumer price inflation, as the government measures it, is known to overstate the actual amount of inflation and therefore to understate our level of inflation-adjusted income. The reasons for this overstatement are complex and technical but easy to understand at the conceptual level. For example, when beef prices increase at least some consumers will switch consumption patterns and buy chicken or fish so that the actual inflation for these consumers is not as high as the government-measured inflation for beef would suggest.

The pink line in the chart corrects for this overstatement. Average wages now go from $2.38/hour in 1960 to $6.29/hour in 2004 (in 1960 prices, or from $9.66 to $25.48 in 2004 prices), a 264 percent increase – very much in line with workers' productivity increases. This makes economists confident that the correction for incorrectly measured consumer price inflation is on target.

While the heightened levels of unemployment during the recession of 2001 are thankfully back down to "normal," income growth has not yet recovered. People still hurt.

However, there is another oddity in the data. When one examines the black and blue lines, it turns out that since the year 2000, private and public sector workers' wages and salaries have been stagnant: the increase has been a mere 0.9 percent in the five years from 2000 to 2004. In contrast, when the value of pension contributions and health insurance is added (and adjusted for the price inflation overstatement), the increase is 7.3 percent. In other words, while employer costs have gone up appreciably, employees have essentially not seen any more take-home money in their wallets. Moreover, since employers' pension contributions rise in line with the underlying wages and salaries, we can conclude that the bulk of the increase in the value of fringe benefits is due to higher health care premiums employers pay for their employees.

The question then arises what this 7.3 percent increase in the dollar value of average health care premiums paid by employers is worth to employees who have had almost no cash-in-the-wallet pay increase over the past five years. While the heightened levels of unemployment during the recession of 2001 are thankfully back down to "normal," income growth has not yet recovered. People still hurt.