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Proposed spendable earnings series retains basic faults of earlier one.

On the surface, the new spendable earnings series proposed by Professor Weisskopf appears to be a considerable improvement over the series published by the Bureau of Labor Statistics until 1981. Upon close scrutiny, however, the proposed series is found to share some of the basic deficiencies that led to the discontinuation of the old one.

Because the proposed series uses gross hourly earnings as its principal ingredient, it is certainly free of much of the downward pressure on earnings levels that the secular decline in the length of the workweek had applied to gross weekly earnings averages, the backbone of the old spendable earnings series. The fact that Professor Weisskopf attemtps earnings series. The fact that Professor Weisskopf attempts to account for average deductions for State and local income taxes--in addition to those for Federal income taxes and social security contributions--marks another departure from the old series.

Because of these changes--and, I suspect, primarily because of the first one--Professor Weisskopf's series does show a somewhat steeper upward trend in spendable earnings over the 1950's and 1960's than did the discontinued BLS series. To this extent, the new series would appear to yield a more accurate picture of the actual trend in earnings for the average full-time worker than was given by the old series, which was being held down by the expansion of the part-time work force.

Of more interest, however, is what the two series tell us about the changes in spendable earnings after both turned downward from their 1972 peaks. Specifically, while the old BLS series showed a decline, of 16.6 percent in real spendable earnings during the 1972-81 period, Professor Weisskopf's new series shows a somewhat comparable decline of 13.5 percent over the same period. (See chart 1, p. 41.) The fairly parallel movement of the two series over this period can lead to only one conclusion. If the old series was biased downward in portraying the trend in spendable earnings for the average worker during the 1970's--and there was ample evidence indicating a large bias--then the new one, although constructed differently, must also be seriously biased downward for the period in question.

It must be remembered that the 1970's were a period during which the age-sex composition of the work force was changing significantly, with the proportions accounted for by women and youth growing very rapidly. The fact that many of these newcomers to the job market took only part-time jobs had an obvious dampening effect on the weekly earnings average for all workers. But the hourly earnings average was also affected--in similar direction, if not in similar magnitude--by the changing mix of workers and by the growing proportion receiving lower, entry-level wages.

The extent to which the changing mix of workers affected the overall earnings average is difficult to quantify. However, some notion of its impact can be obtained merely by comparing the earnings trends for all workers with the separate trends for men and women. The tabulation below shows the percent changes--in constant dollar terms--over the 1972-81 period both for the payroll-derived series on gross weekly and hourly earnings (which do not provide any information by sex) and for the household survey-derived series on weekly earnings, which are available with some age-sex detail:

Percent change, 1972-81 Payroll series: Mean gross weekly earning -14.3 Mean gross hourly earnings -9.9 Household series: Median usual weekly earnings of full-time workers: Total -8.6 Men, age 2k and over -2.8 Women, age 25 and over -1.4 Men, age 16 to 24 -11.6 Women, age 16 to 24 -12.6

While all of these earnings trends point downward for the period in question, the gross weekly earnings series, which was the cornerstone of the BLS spendable earnings series, shows a drop that far exceeded the decline in weekly earnings among most full-time workers as measured in the household survey. And the decline in gross hourly earnings, although somewhat smaller, also appears to overestimate by a considerable amount the true decrease in real earnings among most workers.

While the household series on median weekly earnings for all full-time workers did show a decline almost as large as that found in the payroll series on gross hourly earnings, such was not the case for the medians for workers age 25 and over. For these workers--who still make up the bulk of the U.S. work force, and who are still visualized as the "typical" or "average" workers--real median weekly earnings showed only minimal declines over the 1972-81 period. Only for persons 16 to 24 years of age, who are but a small portion of the full-time work force, was the drop in weekly earnings of the same magnitude as the changes shown by the two payroll series.

The above comparisons raise serious questions as to whether an earnings average for all worker groups combined is a good indicator of the long-term trend in the earnings of most workers, particularly over periods when the composition of the labor force is changing rapidly. The problem is that the changes in the earnings averages for a given group of workers are not always representative of the changes in the earnings of the "average worker" in the group.

to illustrate, take the following example of a group of workers, consisting initially of five persons and expanding subsequently to six, with their individual earnings behaving as follows:

In this case, he earnings average for this group of workers has not changed at all between the two periods. But could we say the same with regard to the earnings of the average worker in this group? Would we not have to conclude that the average worker enjoyed a 10-percent increase in earnings regardless of what is shown by the average for the group? (Incidentally, an analogous situation could well develop in those industries where, on the basis of recently concluded contracts, newly hired workers are brought on at wages much lower than those received by workers already on board. In other words, the institution of a two-tier wage system may bring down the earnings average for the industry without a decline in the earnings of any of the individual workers.)

SUMMING UP, in examining earnings trends it is important to go beyond the overall averages and to disaggregate the data as far as possible. While we cannot actually track the earnings of individual workers (except in isolated experiments), disaggregation of the data by sex, age, or other characteristics becomes vital when we are dealing with long-term trends spanning decades. (Where such disaggregations are not possible, we should be careful not to automatically equate the changes in earnings averages with the changes in the earnings of the average worker.)

The use of aggregate numbers is the basic problem with Professor Weisskopf's analysis, but it is not the only issue complicating the analysis of earnings trends and the computation of a "spendable earnings" series. The fact that more and more of a worker's remuneration--or an employer's labor cost--is in the form of fringe benefits which are not captured in most earnings data renders the meaning of any "spendable earnings" series ever more difficult to conceptualize and explain. And the anchoring of such series to the earnings information from the establishment survey--which is the case for the proposed series as it was for the old one--handicaps them with yet other limitations. For example, the computation of the tax burden is seriously hindered by the lack of any information on family composition and total family income. And coverage would be limited to production and nonsupervisory workers in the private sector--a still large but gradually declining proportion of the work force.

A better alternative to such series is now available in the form of the studies of "after-tax money income" initiated recently by the Bureau of the Census. These studies, based on microdata from the Current Population Survey, provide very detailed estimates of the year-to-year changes in the purchasing power of U.S. workers and of the differences in purchasing power among the principal population groups. While these studies do not yet provide us the historical perspective on spendable earnings that Professor Weisskopf's series attempts to give us, they are built on much more solid foundations.
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Author:Flaim, Paul O.
Publication:Monthly Labor Review
Date:Nov 1, 1984
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