Payroll Data Shows a Lag in Wages, Not Just Hiring

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Today's Economist: Profits Up, Wages Down: What Economics Has to Say

U.S. Consumer Spending Rises as Wages Lift Family Income

American families spent 0.3 percent more last month than the month before, which was in line with expectations, Commerce Department data showed on Friday.

Higher wages drove incomes up 0.4 percent, the most since February. Analysts said the increase could drive faster spending in the months ahead.

Rising wages and spending also appeared to give businesses a little more leverage to raise prices, with inflation outside food and energy picking up in August. That could bolster the case for the U.S. Federal Reserve to move forward with winding down a bond-buying stimulus program.

"This acceleration in core inflation will likely be encouraging to the Fed," said Millan Mulraine, an economist at TD Securities in New York.

The data backs the view that tax hikes and federal budget cuts are dragging on the economy less as the year goes on. Washington increased tax rates in January and slashed the federal budget in March.

But Wall Street and the Fed have appeared increasingly concerned that political gridlock in Washington could trigger a government shutdown next week and perhaps a debt default after mid-October, either of which could deliver blows to the economy.

Worries about the future are also rising among families.

U.S. consumer sentiment slid in September to its lowest level in five months as Americans saw higher interest rates and sluggish economic growth ahead, according to the final reading of the Thomson Reuters/University of Michigan's consumer survey.

The data had little impact on sentiment among investors, who remain preoccupied with the potential for fiscal crises. U.S. stocks fell and the dollar closed in on a seven-month low.

SOME BRIGHT SIGNS

The data from last month, however, was modestly upbeat.

Even after taking into account tax bills and price increases, incomes rose in August by the most since March.

"The pick-up in income growth in August suggests that consumption growth may even accelerate in the fourth quarter," said Paul Ashworth, an economist at Capital Economics in Toronto.

Indeed, the recent gains in consumer spending, while still modest, appear to have stopped a worrisome cooling of inflation.

Economists warn that if inflation runs too low an economic shock could tip the economy into a spiral of falling prices and wages.

Core prices, stripping out volatile food and energy prices, rose 0.2 percent in August, up from a 0.1 percent gain in July, according to the Fed's favored gauge.

Analysts pointed out that annualized readings for core inflation over the past few months now appear to be trending higher, suggesting a turning point may have been reached.

Still, annual inflation is lower than it was at the start of the year, according to both headline and core measures. These both came in at 1.2 percent in August, well below the Fed's 2 percent target.

(Reporting by Jason Lange; Additional reporting by Luciana Lopez in New York; Editing by Krista Hughes)

Economix Blog: The Audacity of the Fight for Higher Wages

Today's Economist: Nancy Folbre: Minimal Wages, Minimal Families

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“

Announcing his support for an increase in the federal minimum wage to $9 an hour, President Obama called attention to the needs of children: “Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong.”

Perspectives from expert contributors.

Many Americans share his concerns: 71 percent of Americans polled in mid-February by the Pew Research Center for the People and the Press support the proposed increase, including 50 percent of Republicans.

Influential economists have announced their support as well, including many affiliated with the Initiative on Global Markets at the Booth School of Business at the University of Chicago. Of 38 economists in the group, 18 agreed, 4 disagreed, 12 were uncertain and 4 had no opinion or didn’t answer.

Every time increases in the minimum wage are proposed, a centuries-long history of concerns about the impact of the labor market on family life comes into play, setting the stage for fierce debates over regulation.

The classical political economists of the late 18th and early 19th centuries believed that the forces of supply and demand would always be constrained by the cost of subsistence, setting a floor under wages. After all, if the wages that workers received were not sufficient to keep them alive, the supply of labor would be reduced, driving wages back up again.

Because people don’t live forever, the costs of subsistence should include the costs of producing replacement workers, namely, raising children. But as many young children and unmarried women began entering wage employment in the 19th century, it became apparent that an increase in the supply of workers without family responsibilities could potentially drive average wages well below the level adequate to support children.

Market forces, in other words, could discourage, even penalize, family commitments.

In the United States, the “family values” argument for a minimum wage gained political traction on the state level long before federal legislation was passed in 1938. As the historian Alice Kessler-Harris explains, this argument bolstered efforts to reinforce traditional gender roles by discouraging the employment of married women. At the same time, it called attention to the difficulties wage earners faced in supporting dependents.

This historical legacy shows up in calculations, like the one President Obama offered above, that seem to presume that a minimum wage for one parent working full-time should be able to support not only two children but also a spouse who stays home to take care of them. Similar assumptions are often used in state-level estimates of the hourly wage required to bring a working family over the poverty line or a higher standard such as a locally designated living wage. On the other hand, these same estimates show that the costs of child care largely wipe out the net contribution of a second earner’s wage income.

As I emphasized in a previous post, conventional measures of poverty are seriously out of date. Application of the Census Bureau’s new Supplemental Poverty Measure suggests that a $9 minimum wage would not necessarily bring working families over the threshold.

Any way you look at it, adults taking responsibility for young children need considerably higher earnings than those who don’t, even taking into account the tax relief President Obama referred to (primarily the earned income tax credit).

As Lawrence Mishel of the Economic Policy Institute points out, the median worker’s real hourly compensation (real earnings plus benefits) has stagnated over the last 10 years, and the declining real value of the minimum wage has contributed to increased income inequality.

The resulting economic stresses are bad for children, bad for working parents and bad for family formation and stability. In 2010, children represented 24 percent of the United States population, but 34 percent of all those living in poverty.

Critics of the proposed increase in the minimum wage object that it would increase unemployment. But proponents point to considerable evidence, nicely summarized by Brad Plumer at The Washington Post’s Wonkblog, that this potential effect would be small or nonexistent,

Critics like the economist David Neumark also insist that the policy is not effectively aimed at poor families, because many individuals earning the minimum are young people living with their parents. But proponents like Natalie Sabadish and Doug Hall of the Economic Policy Institute emphasize that about 80 percent of workers who will be directly affected are over age 20.

Many young people earning the minimum wage are living at home. Some can’t afford to do otherwise. And while their parents may be helping them out with living expenses, the wages they earn will determine their opportunity to enroll in college, pay off their debts, save money and start a family of their own.

So, the debate circles back to the dilemma acknowledged by classical political economy in the 19th century. The forces of supply and demand, left to themselves, treat labor like any other commodity. But labor itself is produced outside the market, by families and communities who must struggle to find ways to support their contributions to the future.

Real Wages Stagnant for Public-Interest Attorneys, NALP Says

The National Association for Law Placement has issued its latest round of sobering job news, and this time the depressing statistics focus on public-interest lawyer salaries.

Today's Economist: Casey B. Mulligan: The Rise and Fall of Wages

Casey B. Mulligan is an economics professor at the University of Chicago.

Aggregate wage-rate data show no sign of the huge and prolonged demand shock said to have hit the economy in 2008. Instead, they bear the fingerprints of an expanded social-safety net.

Perspectives from expert contributors.

A conventional narrative of the American labor market since 2007 is that the demand for labor collapsed, so that despite a uniformly willing and eager work force, millions of people had to go without jobs. This narrative is an aggregate theory and not primarily about sectoral shifts that would depress demand for some types of labor and increase it for others. If this narrative is accurate, it should be visible in aggregate wage-rate data.

At a minimum, the aggregate demand collapse should have frozen wage rates in dollar terms, so that inflation-adjusted wages would erode with inflation as consumer prices crept up. With the price index for consumer items 8 percent higher at the end of 2011 than it was when the recession began, inflation-adjusted hourly wages should have fallen at least 8 percent over that time frame, if not more.

In my view, the change in aggregate demand has been heavily exaggerated, and the greater impulse affecting the labor market over the last five years has been higher marginal tax rates created by an expanding social safety net of unemployment insurance, food stamps, Medicare and other anti-poverty programs. Those tax rates, as I noted last week, refer “to the extra taxes paid, and subsidies forgone, as a result of working, expressed as a ratio to the income from working.”

I expected real wage rates (and hourly labor productivity) to rise in the short term, and to do so a couple of percentage points above the previous upward trend made possible by continuing progress of the productivity of labor and capital.

Marginal tax rates increase real wage rates a few percentage points in the short term because, with more help during unemployment, employees at struggling businesses have less reason to make some of the concessions in wages and working conditions that can help the employer to retain employees affordably.

As I explain in “The Redistribution Recession,” wage rates would quickly fall back toward the trend line when some of the temporary safety-net measures began to expire, which was two or three years after the recession began.

Those safety-net expansions that were permanent would eventually reduce average real wage rates, as people out of work reduced their human capital investment. This reduction might reflect people who, because they no longer practice a trade, lose contacts in the workplace or no longer maintain a wardrobe or tools they need for work. (For more on this effect, see especially the literature on women’s wage trends.) Unfortunately, these wage reductions do not encourage employers to hire because they derive from reductions in productivity.

The black series in Chart 1 below shows aggregate real wage rates measured as inflation-adjusted employee compensation (including fringe benefits like health insurance) per hour worked. I have removed an upward trend, because for short-run analysis it is interesting to look at deviations from trends. Under normal conditions real wages can increase with productivity even while the amount of labor is neither rising nor falling.

The trend adjustment is 0.5 percent a year, based on the average rate of growth of total factor productivity during the four years before the recession. Without the trend adjustment, the black series would increase two percentage points more through 2011 than shown.

The chart also shows in red the marginal tax rate on labor income measured in my book for a typical household head or spouse based on the ever-changing eligibility and benefit rules for safety-net programs. Sure enough, real hourly compensation increased during the recession and did so about a quarter after marginal tax rates began their increase.

Marginal tax rates were high and fairly flat during 2009 and early 2010 as the “stimulus” law was in full force. During this time, real wages failed to fall back anywhere close to their prerecession values. Only when some of the stimulus provisions began to expire, reflected in a marginal tax rate that falls to 44 or 45 percent from 48 percent, did real wage rates decline quickly and significantly.

Even after the decline in late 2010 and early 2011, it looks as though real wage rates are about where the previous trend line was, rather than being the several percentage points below what one might expect after a huge, prolonged demand shock.

A few economists have used Census Bureau wage data, which ignore the fringe benefits from employment, to show that wages fell during 2010 and 2011. It is incorrect to ignore fringe benefits (I discuss this and other wage measurement issues in Chapter 2 of “The Redistribution Recession”), but the choice of series is just a quibble, because none of the aggregate wage measures display a cumulative decline that would be commensurate with the huge, prolonged demand collapse said to have occurred.

A magnifying glass is not required to see a decline in after-tax real wage rates. The after-tax real wage rate (calculated as the product of real hourly compensation and one minus the marginal tax rate shown in black in Chart 2), reflects the net financial reward per hour of working, taking into account taxes and safety-net subsidies.

The after-tax real wage series has been adjusted for a trend of 0.5 percent a year.

Marginal tax-rate changes, such as those created by an expanding social safety net, cause deviations between the real hourly compensation shown in Chart 1 and the after-tax series shown in Chart 2. In theory, the downward marginal tax rate effect on after-tax real wages exceeds the upward effect on real hourly compensation.

In fact, after-tax real wages fell a startling 12 percent below the trend line during the first two years of the recession (note that each tick in Chart 2 is twice as large as each tick in Chart 1). They rebounded somewhat as marginal tax rates came off their stimulus highs but still remain six or seven percentage points below the trend line.

The quantity of labor — hours worked per capita including zeros for people not working – is shown as a red series in Chart 2. Remarkably, labor and after-tax real wage rates collapse together, hit bottom together and exhibit a partial recovery together.

Helping the poor and unemployed is intrinsically valuable, but is not free. It has made labor more expensive and depresses employment.