Friday, April 15, 2005

US Wages Going Down

Even though the economy added 2.2 million jobs in 2004 and produced strong growth in corporate profits, wages for the average worker fell for the year, after adjusting for inflation - the first such drop in nearly a decade.

The most commonly used yardstick of wages - the Bureau of Labor Statistics' measure of nonsupervisory private-sector workers, covering 80 percent of the labor force - fell 0.5 percent last year, after inflation. Real wages for these workers are now lower, on average, than two years ago. A broader measure, the employment cost index, which includes supervisors, managers and most government workers, dropped 0.9 percent.
Not really good news. I find it ironic that one of proposed solutions to the Social Security is to index Social Security benefits to inflation rather than wages. Under the current assumptions, wage growth should exceed inflation by 30% over 30-40 years. So if benefits were indexed to inflation not wages this is thought to be a way to solve the funding problem (and also allows some to consider it a "30% cut in benefits for future retirees").

Aside: how stupid is the American youth? I have seen polls that a vast majority don't believe that social security will be around for their retirement, and yet another poll shows that the youth don't want to see a benefit cut as a way to fix the Social Security problem. Huh? Who are these people that don't believe they will see anything, and then when offered 70% of what they would have gotten, reject it? I just don't get the thought process.

But now with this article it is not clear that wage growth is linked to productivity as it was in the past or that wage growth will exceed inflation for the foreseeable future. So maybe workers would get a higher benefit if Social Security was linked to inflation rather than wages.

Why the change?

1) Globalization. The threat of outsourcing is allowing employeers to keep wages flat. As Bill Gates has said, over time the wages for a software engineer doing the same work will equilibrate between all nations in the world. In order to do that, Chinese and Indian wages have a long way to go up.
"These factors aren't going to go away," he said. "The competitive pressures for companies to hold the line on labor costs are intense, and the alternatives they have - technological substitution and offshoring labor - are growing."
2) Wal-Mart.
Laurie Piazza, a Safeway cashier in Santa Clara, Calif., said she reluctantly voted to approve a pay freeze in the first two years of her union's three-year contract because Safeway insisted that it needed to hold down costs to compete with Wal-Mart. Her take-home pay will fall $20 a week because the contract reduces the premium for working on Sundays to 33 percent of regular pay, from 50 percent.
via The New York Times

1 comment:

sunil said...

Matt-- didn't you know that "The World is Flat"... Tommy Friedman has a new book out talking about some of these same themes. Definitely worth checking out.

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