November 1, 2006

November 1, 2006 | Commentary on Jobs, Jobs and Labor Policy

The Pundits Who Cried Wolf

Remember the "jobless recovery"? For a while after the tech bubble of the 1990s collapsed, it was all some pundits could talk about. But with more than six million jobs created in the past three years, you don't hear much about a "jobless recovery" anymore.

Now the same pundits who bemoaned anemic employment growth even as the job market was taking off are back.

This time, they're warning Americans that we've returned to a new era of corporate robber-barons, with workers' pay stagnating as businesses pocket the profits of economic growth. Wages haven't been growing, they cry, even as workers have become more productive, their wages and salaries -- as a share of GDP -- have fallen dramatically.

Surely, they argue, something has gone fundamentally wrong when a growing economy does nothing for most Americans.

Fortunately, this depressing picture of the economy is incomplete. Far from being exploited by corporate America, working Americans are in fact earning more than ever.

The pundits who claim that working Americans' pay has dropped can only do so because they ignore almost a third of what worker's actually earn - namely, employer benefits. These benefits -- such as health insurance, retirement plans, supplemental pay and paid leave -- have become an increasingly large and important part of how businesses pay their workers.

Leaving benefits out of the picture presents a misleading picture of how Americans are actually doing. Looking at wages and benefits together shows that U.S. workers are doing better than ever before, even better than at the height of the tech bubble. Total compensation, after inflation, has risen 9 percent since 2000.

If workers are earning more than ever, how can pundits say that workers' pay as a share of the economy has dropped to near-record lows? By making misleading comparisons. There are statistical discrepancies between the way the government measures income and how it measures GDP, so the two are not strictly comparable. Further, GDP includes allowances for things like depreciation that it doesn't make sense to compare to workers' pay. How much workers are earning relative to how quickly our national highways are wearing down tells us little about the wellbeing of working Americans.

To say anything meaningful about the state of the economy, workers total earnings should be compared to National Income, which accounts for the statistical discrepancies and factors out depreciation. The correct comparison shows that nothing unusual has happened to the size of workers' piece of the income pie. Over the past year, employee total compensation as a share of national income has been slightly above the average value since 1960. Despite the claims of many pundits, businesses are not stiffing their employees.

But what about the disconnect between productivity and compensation? Employers may be giving their workers raises, but worker productivity has increased even more. Shouldn't we be concerned that businesses aren't passing on those gains to their employees? Not really. The same thing happened during the 1990s. Productivity grew faster than pay until the late 1990s. Then, with a tight job market, employers had to compete for increasingly productive workers, and pay shot up, fully catching up with productivity.

The same thing appears to be happening now. Unemployment has fallen to lows that, outside of the tech bubble, haven't been seen since Richard Nixon was president. And pay is already picking up, growing at a faster rate than productivity. Over the full course of the business cycle, workers' pay will rise to reflect their increasingly fruitful labor.

American workers are no more being shortchanged now than the economy was experiencing a jobless recovery two years ago. The claims that corporate America is booming while workers languish simply doesn't hold up under scrutiny. Workers' total compensation as a share of national income is slightly above its long-term average, while workers are earning more than at the height of the tech bubble. Their earnings are now growing faster than productivity.

The benefits of low unemployment, robust growth and a booming stock market are not bypassing most Americans. Which raises the question: Why aren't consistently inaccurate pundits seeking new jobs?

James Sherk is a policy analyst in the Center for Data Analysis at The Heritage Foundation

About the Author

James Sherk Research Fellow, Labor Economics
Center for Data Analysis

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