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The Truth About Wages
While average incomes are flat, the rich are not getting richer at the expense of the poor.


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There has been a big debate going on among Democrats about why workers aren’t outraged by their economic condition and therefore more hostile to Republican economic policies and more sympathetic to Democratic policies.

 

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On the surface, it would appear that workers should be in open revolt. According to the Bureau of Labor Statistics, the average worker is no better off today than he was seven years ago in real terms. In August 2006, his average weekly earnings were $275.49. In August 1999, they were $275.61. (Both statistics are in constant 1982 dollars.)

 

Census Bureau data confirm this trend. According to recently released data, median annual earnings for men fell to $41,386 in 2005 from $43,158 in 2003 (in 2005 dollars) despite steady economic growth. Male earnings in 2005 were lower than in every year since 1997. Female earnings also fell in 2005 to $31,858 from $32,285 a year earlier, and were lower than in any year since 2000.

 

Looking at the broadest measure of economic well-being, median household income, we also see flatness. In 2005, the median income — the point at which half of households are above and half are below — was $46,326. This was up from 2002, 2003, and 2004, but below levels registered from 1998 to 2001. Median household income peaked in 1999 at $47,671 (in 2005 dollars) and fell every year thereafter until 2005’s small uptick.

 

There is no simple explanation for worker passivity in the face of income stagnation.  One argument is that labor union membership has fallen sharply over the last generation and consequently workers have no organizational mechanism through which to bargain for higher wages or protest wage stagnation politically. In 2005, labor-union membership was down to just 7.8 percent of private-sector workers from 24.2 percent in 1973.

 

Another possibility is that workers have been so beaten down by layoffs and give-backs in recent years that they are grateful enough just to have jobs, even if their pay stinks.  And because of declining health coverage by employers, those lucky enough to have health insurance may feel compelled to hold on to such jobs. If they switch to another job, they may get higher pay, but they might lose their health benefits in the process.

 

Indeed, the rising cost of health benefits is a key reason for the flatness of average worker wages. From the point of view of employers, total labor costs have risen sharply. But all of the increase has gone into benefits, leaving nothing left over to raise wages. Workers may not like this fact, but they accept its reality.

 

According to the BLS, wages and salaries have fallen from 72.6 percent of total compensation in 2000 to 70 percent in June of this year. At the same time, health benefits have risen from 5.9 percent of compensation to 7.7 percent.

 

Still another explanation is that the changing demographics of the population have eased the transition to an economy with slower wage growth. Many baby boomers have just seen the last of their children finish college and leave home. Suddenly, they have had a huge increase in their discretionary income as the enormous costs of tuition and child care that they have borne for decades have now disappeared. They may not be any better off in terms of their family income, but they feel a lot better off financially.

 

Finally, despite wage and income stagnation at the macro level, people continue to move out of the working class into the middle and upper classes. According to the Census Bureau, the percentage of all households with an income below $25,000 per year (in 2005 dollars) fell to 27.1 percent last year from 27.6 percent in 2004. In 1995, 28.9 percent fell into this income class. In 1985, the percentage was 30.5 percent and in 1975 it was 33.1 percent.

 

At the same time, the percentage of households that are considered well-to-do — those with an income above $75,000 (in 2005 dollars) — rose to 28.3 percent last year from 27.9 percent in 2004. In 1995, only 24.4 percent of households had that much income, up from 20.2 percent in 1985 and 14 percent in 1975.

 

In short, despite all the talk about the rich getting richer at the expense of the poor, the fact is that the percentage of households with low incomes has fallen and the percentage of those with high incomes has risen. This is perhaps the main reason why Democrats have had trouble getting traction on the income issue: There are fewer people in the income class to which they historically have directed their message. The more people there are in the $75,000-plus income category the more people there are who are receptive to the Republican message of low taxes.



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