Thursday, July 20, 2006

Measuring Wages

Economist David Altig opines about measures of labor earnings:
If I had my way, appeals to the BLS average hourly earnings series would be banished from commentary about wages and the fortunes of the workers -- unless the the commentator explains why that measure is a truer measure of labor compensation than those that include in-kind payments to employees (that is, benefits).
Good point.

I am always surprised when I see economists compare wages and productivity using wage measures that exclude fringe benefits. Theory says that productivity should determine total compensation, not cash earnings.

Update: Some comments asked about data on fringe benefits. There is no doubt that the data can be hard to come by, which makes it tempting to ignore the issue and focus on cash wages. That is ill advised, in my view.

To gauge the importance of the issue, one can look at the national income accounts and compare "Supplements to Wages and Salaries" to "Compensation of Employees." One learns that fringe benefits as measured by this series rose from 8.0 percent of employee compensation in 1960 to 16.5 percent in 2000 and then to 19.7 percent in 2005.

Part of the explanation for this increase is the rising cost of health care. The value of employer-provided health insurance is a key part of many workers' compensation. It is a benefit that gets more valuable as improvements in medical technology drive up the cost of insurance.