Beware the Aggregate Stat

Update 408 — Beware the Aggregate Stat:
How Wage Gains Make Inequality Look Good

The nation’s ten-year-plus economic recovery from the financial crisis of 2008 barely lifted wage gains above inflation much of that time. Workers treaded water until the last couple of years when gains were finally recorded. This made news. 

Of course, over the same time, gains for a relatively small number rose by astronomical amounts. This made inequality a political issue, but you wouldn’t know it from the aggregate stats. More below.

Good weekends, all…

Dana

_________________

Belying President Trump’s depiction of a booming economy is the reality of two economies obscured or distorted by aggregate statistics. The recently released Bureau of Labor Statistics (BLS) data appears to confirm Trump’s ballyhoo: between December 2018 and December 2019, average hourly real wages grew only 0.6 percent. Unemployment has remained at or below five percent since 2015 and below four percent since May 2018. But even as the labor market tightens, corresponding wage gains have not materialized. 

How much of recent wage growth is attributable to Trump’s influence on the economy? Unemployment and wage numbers alone can only indicate so much about the state of the economy, and fixation on the aggregate figures has veiled a fraught situation for American workers.

Misleading Statistics: a Case Study

The depiction of an American economy in the midst of an unprecedented boom due to Trump’s leadership is at best incomplete and, more likely, misleading. Federal Reserve economists had to readjust their economic growth forecasts downwards in both 2017 and 2019, and large swathes of the economy are still significantly behind pre-recession levels. The stock market—may be breaking records on a regular basis, but most workers aren’t able to join in. 

No campaign rally or press release can mask the fact that wage growth is practically nonexistent and driven primarily by high-income earners. The last time unemployment was below four percent, in December 2000, real wage growth was 50 percent higher than it is today.  

The best news for workers and wages is occurring largely despite Trump’s policies. The recent wage growth for low-wage earners is mainly attributable to state-level changes in the minimum wage. Last year, 29 states raised their minimum wages. Low-wage earners who work in these states saw wage increases more than 1.5 percentage points greater than their counterparts in states that did not do so. 

Jobs — Quality Versus Quantity

The unemployment rate, as an aggregate indicator, says very little about the actual situation of workers. If the unemployment rate were zero, but people were only paid starvation wages, there would be nothing worth celebrating. Similarly, wage growth, even relative to inflation, needs more context. The full picture would include a look at employee benefits, whether the government has cut the social safety net, and how wages compare to rising costs of living.

The recent meager wage growth is indicative of the erosion of labor unions. At periods of low unemployment, we expect that employers will raise wages to entice skilled workers, but this should not be the only mechanism for wage growth. The erosion of workers’ rights to organize and collectively bargain has left little external pressure on employers to raise wages even as rents and healthcare costs continue to skyrocket. 

Inequality — Cause and Effect

Trump and Republicans rely heavily on aggregate numbers to illustrate their claims that the economy is improving for low-wage workers. But these numbers are distorted by inequality; GDP per capita has risen by 17 percent over the last ten years, while wage growth for the vast majority of workers has been stagnant. 

Source: Congressional Research Service

Outside of the top one percent of income earners, who have seen their incomes increase by about 17 percent since Trump assumed office, most Americans have seen few, if any, tangible improvements on their economic circumstances. 

The 2017 Republican tax cuts have amounted to little more than a handout for the rich, as promised jobs and capital investments have failed to materialize. Telecom giant AT&T claimed that the cuts would help them create 7,000 new jobs, but instead, it eliminated close to 24,000 jobs while reducing capital investment by $1.2 billion. 

CBO projects that between 2016 and 2021, after taxes and transfers, the bottom quintile of income earners will see their incomes grow only 4.9 percent while the top one percent will see theirs grow 16.7 percent — more than three times the degree of the bottom quintile. 

Slow wage growth, particularly for low- and medium-skilled labor, is a key indicator of how far the economy remains from a full recovery. If wage gains tracked with the rest of the recovery, average hourly earnings would be $3.68 higher than they currently are. Consistent wage growth of over four percent is considered necessary to allow workers to make up for recession-related losses. Despite Trump’s goals for growth, we are more likely to see half that amount for some time.