EC321-Topic #5: Wage Distribution (Divergence/Convergence)

Another interesting posting on Visualizing Economics this week looks at new information regarding middle-income workers showing if you look at the change in wages using a more appropriate price deflator and include benefits, real wages for these workers has risen over the past 30 years. The article by the Federal Reserve’s Terry Fitzgerald points out many issues regarding the change in middle income Americans’ wages over time. Compare this work with that of the Economic Policy Institute who point out that wage growth is unequal (Also reference the handouts distributed in class). Try to relate this material to the information we have gone over in class. Notice how these authors are both using statistics without controlling for other possible covariates. While there is nothing wrong with citing statistics, they can be misleading.

Questions you might try to answer:

  • What evidence has regression analysis given to this debate?
  • Do you think that the evidence is overwhelming in one direction or the other with regard to the debate?
  • Even if wages (real or otherwise) have stagnated, do you believe that the productivity in the U.S. has been unfairly distributed? Try to see if you can find any evidence about the source of the additional productivity. If productivity gains are from ‘management’ and ‘higher income’ productivity, does it make sense that lower income workers have not reaped the benefits?

Remember… I would like your statements to be as subjective as possible, or in jargon terms, positive and not normative in nature. Also, remember, I want you to keep your descriptions short, basic, and related to classroom content. Read other students comments before posting, and please leave your name with your posting.

8 thoughts on “EC321-Topic #5: Wage Distribution (Divergence/Convergence)”

  1. In assessing the various articles, I’ve concluded that Middle Class wages are not stagnant. Because these authors do not control for other covariates, it is difficult to read between the lines to figure out what exactly causes the Middle America to seem as if they have stagnant growth. The wage gap between those in the upper and lower classes has grown significantly and less and less people belong to the middle America. This adds to the thought that wages of Middle America have grown stagnant. Benefits have also began to increase over all, especially as the government decides how to take care of National health. One thought is to implement mandated insurance and benefit policies on firms. To assist with the extra payment needed to be given by the firm, they take away from the wages of their workers. More and more it is seen that companies are increasing benefits, thus reducing pay. Based on the more macroeconomic approach, the middle class wages are still rising and not stagnant because it includes new aspects such as health and other benefits.

  2. I agree with Hillary. Without fully accounting for benefits one cannot accurately assess whether or not wages are stagnant for the middle class. In response to the argument that the middle class is shrinking, I think that one should be careful to consider whether or not the middle class has shifted its parameters. I think it could be argued that middle class is not shrinking, but rather that there is a larger gap between the lower and middle classes. The middle class has shifted up towards the upper-middle class. This would be in response to inflation and the purchasing power of the dollar. It is important to factor purchasing power into the equation to get an more accurate picture of where the classes stand.-Tadge

  3. The two wage graphs in the article by Terry Fitzgerald are quite deceiving. As mentioned in the article, the two figures are not comparable on an apples-to-oranges basis. They do not control for similar covariates and many are not consistent between the two. On specific problem with the data was discussed in class, regarding how we determine hourly wages for salaried workers. As individuals choose to take salary, they are said, for example, to work a 40 hour work-week. When in reality these individuals are working what seems like around the clock with the newest technological advances in communication. We used the example of the lawyer working constantly, whether at the office, at home, or even on the weekend. With that said, after looking at the US Department of Labor: Bureau of Statistics, the largest growing sector with regards to productivity in our economy is the computer and electronic product manufacturing sector. These gains are indeed coming from ‘management’ and ‘higher income’ productivity, thus not allowing the lower income workers to reap these benefits. The lowest productivity sectors are Mining and Accommodation and Food Services; all sectors with traditionally low income workers. Therefore, it can be said that the increase in wage distribution is may be caused by the gains in productivity in the ‘higher income’ sectors of the economy. -Nick

  4. Even if wages (real or otherwise) have stagnated, the productivity in the U.S. has been unfairly distributed. Productivity has grown with the real GDP in the United States [1990 – $7112.5B to 2006 – $11319.4B ~ *Economic History Service]. The question is where these gains come from, the ‘management’ and ‘higher income’ or the ‘lower income’ workers. Looking at the increasing income gap between the higher income management and lower income workers, it is obvious that the rich are getting richer and the poor are getting poorer. If the labor market were fair, the high income management who are reaping the majority of the benefits [huge ‘superstar’ salaries, ‘golden parachutes,’ etc.] would be the economic actors contributing the high majority of gains in productivity. However in reality, this is not the case. There have been significant gains in the productivity of the lower income workers (increase in education – increase human capital), along with gains in the productivity of management. However, the benefits reaped by the high income management are significantly larger than the benefits reaped by the low income workers [including the non-wage benefits (health care, etc.)]. This assessment illustrates that there is an unfair distribution of benefits [wage + additional benefits] based on productivity in the labor market today.

  5. I agree with Hilary and Tadge that according to the posted articles it is difficult to conclude if middle class wages have been stagnant or not. Looking only at Fitzgerald’s paper, we can see how the results are changing while measured from the micro and macro side of economics and adjusted for the same measurement units. Another important aspect is the productivity increase versus real wages. The gap between those two data can have its background in the sources that affect productivity such as competition; market opens to foreign trade, investment, outsourcing, or financial market development. For example, investments in human capital such as upgrading labor skills by offering on the job training maximize benefits and turn them into profits, for all workers not only graduates or high-tech. Outsourcing can also contribute to increase in productivity by specialization in production what “we” do the best and outsource the rest. Roma

  6. It is clear from both Nick’s and Rob’s statements that the US is currently experiencing a readjustment of its socioeconomic classes due to differences in productivity growth. I fear that politicians have not properly acknowledged that an increasing portion of the American labor force is competing in a very competitive global labor market. Fiscal policies should be adjusted in order to maintain a competitive advantage in the sectors that are benefiting from productivity increases throughout the industry, not only in the “superstar positions” (like technology). In order for the average American to maintain his standard of living, it is necessary to embrace education and continue innovation. India (a country with no competitive natural resources), is competing in labor markets that were traditionally only done by American’s. As Rob mentioned, the innovators and the owners of capital (upper class) will reap the benefits of global expansion. It is necessary that the middle class increase their productivity in order to increase real wages… It is going to be an uphill battle with many losers, but that is the nature of competition. -Eric

  7. I agree with most of what Eric said. As Fitzgerald pointed out, after some computations using the same inflation indicator, adding in benefits, etc., the 40th and 60th percentiles wages have actually increased by a fair amount. Also, I’d like to point out that one should not only compare real wages of workers – but they should compare their standard of living (i.e. including benefits). GDP is increasing, as Rob noted, and this can’t possibly be due to only the innovators and owners of capital, or even the top decile. Clearly, from the data, the other percentages are increasing as well. It seems as though the middle class is getting poorer ONLY when compared to the corpulent income progress that the upper class has made. If one were to compare the middle class’s living standards as to how they were 30 years ago, one would most likely say they increased. However, if the upper class and middle class from 30 years ago had their “living standard gap” compared to the upper and middle class now, obviously now it seems greater ONLY because the upper class is composed of those that have taken advantage of globalization and have therefore increased their profits exponentially – whereas those that have not taken an educational or innovative stand in the global world today are fighting against other employees from other countries around the world. -Dan

  8. The statistics cited by Fitzgerald are misleading simply because they do not allow for an apples-to-apples comparison of average hourly earnings, median wage data, and national labor income per hour.Without using a common deflator across all potential comparison indexes, we start seeing data that conflicts with what we know about economic growth across the US. The same case appears again when the author reveals that benefits are not included in the various measures. He ‘takes them into account’ and gives us a new set of numbers, but we don’t know what exactly he has taken account for. Without controlling for what is included as benefits across the various measures he cites, we have an imperfect set of numbers to analyze.We know that the purchasing power of the dollar has increased since 1975, and the benefits employers give their employees has probably increased too. Even if the numbers don’t align perfectly, it cannot be true that wages for middle and lower classes has stagnated

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