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Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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July 20, 2006

The Chairman Speaks: How Should We Measure Labor Compensation?

Whenever a Fed Chairman testifies before Congress, the question and answer part of the session is often the most interesting.  This time around was no different, and here is one of the exchanges that caught my attention:

[Senator Robert] BENNETT: ... Chairman Bernanke, we've had a lot of conversation about wage growth compared to inflation. I find it hard to get a single statistic on this. If you look at the narrow measure of labor compensation that's labeled average hourly earnings, which does not include any benefits, then you get one answer. If you look at the more comprehensive measures of labor compensation, such as those that come from the Bureau of Labor Statistics productivity statistics and the Employment Cost Index from their National Compensation Survey, you get another answer...

BERNANKE: ... depending on what sector you're looking at, you might choose one or the other. For purposes of looking at household income -- that's how much income consumers have to spend -- you would probably look at the nonfarm business compensation...

BENNETT: When I was an employer, I learned very quickly that you cannot look at your labor costs in terms of what shows up on the W-2. Your labor costs are based on the entire compensation package, which includes all of the benefits.

Yes!  If I had my way, appeals to the BLS average hourly earnings series would be banished from commentary about wages and the fortunes of the workers -- unless the the commentator explains why that measure is a truer measure of labor compensation than those that include in-kind payments to employees (that is, benefits).

I've linked to this before, but if you are relatively new to this blog, or this issue, check out this article by Joseph Meisenheimer II for a nice overview of the differences between various measures of labor compensation.

UPDATE: My campaign is off to a bad start.

July 20, 2006 in Federal Reserve and Monetary Policy , Labor Markets | Permalink


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Appeals to average hourly earnings might be warranted when making the argument that what matters most for workers is their take-home pay, not their total "compensation package." If employers have to pay more each year for health plan that just gets worse, is that a raise in workers' living standards? Or if the boss has to pay into the company's pension plan because he's been raiding it, is that an improvement in workers' immediate standard of living?
Personally, i think the employment cost index is the better gauge of worker pay, because it's adjusted for composition of jobs, but even there, i think you need to look at BOTH wages and benefits. Take home matters, even if the only time Sen. Robert Bennett ever saw a paycheck was when he was a boss.

Posted by: fred c. dobbs | July 20, 2006 at 06:15 PM

As Kash noted, much of the increase in fringe benefit compensation relates to much more in $$$ going to pay for the health insurance of employees. I'd say we have an index number problem in terms of measuring real compensation.

Posted by: pgl | July 20, 2006 at 07:04 PM

"If employers have to pay more each year for health plan that just gets worse, is that a raise in workers' living standards?"

No, it wouldn't be. But that's not what's happening. The real cost of the same procedure or drug that you got 20 years ago is lower today. But there are a lot of newer, better, and more expensive procedures available. Apparently, people seem to regard a plan that pays for the state-of-the-art in 1986 and a plan that pays for the state-of-the-art in 2006 as getting the same benefit. It isn't.

Posted by: David Wright | July 21, 2006 at 12:48 AM

Ok. Let's do it for private industry.

Results: First quarter 2006 real compensation per hour is in negative territory, along with real wages, for private industry employees.

Employment Cost Index news release
March 2005 Release

"Compensation costs in private industry rose 2.6 percent in the year ended March 2006, slowing from a 3.5 percent increase in March 2005."

But real compensation is down compared to the 2005 annual rates for most if not all employment sectors. (And that's without challenging the manner in which some compensation benefits are calculated, including healthcare insurance.) Services may be a slight exception. But very slight.

"Private industry workers wages and salaries increased 0.7 percent during the March 2006 quarter, compared with a 0.6 percent gain in the previous quarter. Private sector benefit costs rose 0.4 percent for the March quarter, following a 0.7 percent gain in the previous quarter."

But real wages are down. And Bernanke, unfortunately, was off the mark with his testimony before Congress yesterday on this point. Real wages are down. Period.

The 12-month percent changes in wages and salaries for each of the major employment sectors are in negative territory for the second year in a row, ranging from -0.4% to -1.0%.

Employee compensation benefits continues to show growing weakness.

Benefit Costs, Private Industry, 3-month percent changes:

Jun 2004 - 1.6%
Sep 2004 - 1.0%
Dec 2004 - 1.2%
Mar 2005 - 1.5%
Jun 2005 - 0.8%
Sep 2005 - 0.9%
Dec 2005 - 0.7%
Mar 2006 - 0.4%

National Compensation Survey - Compensation Cost Trends

Select this interactive link:
Create Customized Tables (multiple screens), NAICS basis

2006, Otr 1 vs. 2005, Qtr 4
12-month percent change
Value of Compensation: Total benefits, not seasonally adjusted:

All workers - 3.0%, down from 4.0% in Qtr 4, 2005
All union workers - 2.9%, down from 3.3%
All nonunion workers - 4.2%, down from 6.0%
Blue-collar occupations - 2.1%, down from 2.9%
Management, professional, and related - 3.2%, down from 4.8%
Sales and office - 3.3%, down from 4.4%
Service occupations - 3.3%, up from 3.1%
Natural resources, construction, and maintenance - 3.2%, down from 3.7%
Production, transportation, and material moving - 1.4%, down from 2.4%
White-collar occupations - 3.2%, down from 4.6%
Manufacturing - 0.7%, down from 4.2%
Aircraft manufacturing - (-18.5%), down from 40.6%
Goods-producing industries - 1.3%, down from 3.8%
Service-providing industries - 3.5%, down from 4.1%

First Quarter 2006, revised
1 June 2006 release

Review Table 1.

Real Compensation Per Hour:

Business sector - 121.5, down from 2005 annual rate of 121.6
Nonfarm business sector - 120.6, down from 2005 annual rate of 120.8
Manufacturing sector - 126.8, down from 2005 annual rate of 128.2
Durable manufacturing sector - 123.9, down from 2005 annual rate of 125.1
Nondurable manufacturing sector - 130.6, down from 2005 annual rate of 132.4
Nonfinancial corporate sector - 118.5, down from 2005 annual rate of 118.7

Posted by: Movie Guy | July 21, 2006 at 05:33 PM

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