News media is reporting compensation benefits for workers are increasing, but what’s the REAL story

One of the most important lessons from Econ 101: Nominal figures tell us nothing.

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ZUMA PRESS INC/ALAMY

he media likes to report nominal figures which can give news consumers a false sense of the trends. But in a monetary economy with inflation (increasing prices), nominal figures tell you almost nothing. Using real numbers, which are adjusted for inflation, give you a much better sense of what is really going on in terms of actual gains and purchasing power for workers. For example, if your salary has increased 2-percent, but the cost of everything has also increased 2-percent, you are not earning more than you did before in real terms. So when you see news media reporting nominal figures, you should be skeptical of any reported trend, and what it means for the economy, until you see the REAL figures.

Exhibit A: Bloomberg recently reported that compensation benefits are going up. Reporting on the Employment Cost Index (ECI) July release from the Bureau of Labor Statistics (BLS), their key takeaway was that these “latest results [from the report] indicate employers are offering better compensation packages to workers amid an ongoing shortage of qualified workers”, and more or less leave it at that. Exhibit B: The Wall Street Journal, reporting from the same ECI release, declared “ U.S. workers received their biggest pay increases in nearly a decade over the 12 months through June, a sign the strong labor market is boosting wages as employers compete for scarcer workers.” Other media outlets that have picked up on the good news have shown a little more skepticism, but little effort to find out the REAL story. The problem is that this is not exactly what the ECI report said in the first place, and it doesn’t account for inflation.

The first thing you should know about the Employment Cost Index is that it reports total employment compensation costs in nominal terms across the economy. It also breaks costs down into private and public sectors. Looking at private sector employment costs, the report does indicate that total compensation costs have risen 2.9-percent year-over-year (i.e. in the past 12 months). This includes both wages and salaries (which account for 70-percent of compensation costs) and benefits (which make up the other 30-percent).

Let’s focus on wages and salaries first. According to the ECI report, wages and salaries increased in the last 12 months 2.9-percent in nominal terms. Conveniently, the BLS also releases a report on REAL wage earnings. According to the most recent release, from May to June 2018, real average earnings increased only 0.1-percent. That’s one-tenth of a percent people, that’s nothing! And when the BLS looked back further, it found there has been no change at all in the past year: “From June 2017 to June 2018, real average hourly earnings decreased 0.2 percent, seasonally adjusted. Combining the change in real average hourly earnings with a 0.3-percent increase in the average workweek resulted in no change to real average weekly earnings over this period.” Let’s breakdown what that means. Private sector workers are earning less than they were 12 months ago, and are working more hours to makeup for it to maintain the same level income. That is a much bleaker picture than what the nominal figures suggest.

What about the benefits in these “better” compensation packages? It should also be noted that ECI includes healthcare insurance benefits. The report indicates overall benefit costs have increased by 2.9-percent between June 2017 and June 2018, however it also indicates 1.9-percent of that increase was due to increasing healthcare costs, not greater coverage. So that leaves a 0.3-percent increase in the last 12 months for monetary benefits other than healthcare insurance. But this is still a nominal figure. After you account for inflation, it evaporates. The most recent release of figures for inflation by the BLS as measured by the Consumer Price Index shows an increase of 2.9-percent for the same period before seasonal adjustment. But even after adjustment, what are the chances it gets revised down more than 2.6-percent to break-even on those “greater” benefits workers supposedly are getting? Quite low you can be sure. Which means that when it comes to REAL gains in benefits, workers are actually in the red while real earnings have not moved.

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I’m not sure who all gains from a rosy picture of the economy. Certainly President Trump. Some media outlets perhaps are just looking for a positive story given our democracy may be on the verge of implosion. Who know?. But these supposedly economic literate media outlets are not doing you any favors by reporting nominal figures that misrepresent what workers in the economy are actually experiencing in terms of real purchasing power even as real profits continue to increase for businesses (see Figure above). This little extra piece of context makes the story even more bleak. Businesses are earning more in real terms than they were before the recession, but not sharing the gains with workers whose purchasing power is eroding to the extent that they need to work more hours to maintain their standard of living. That is the REAL story behind these ECI numbers, but that would be less than flattering for the “strong labor market” narrative.

Doctoral student of Economics at the University of Massachusetts Amherst. Commentary, research and more at aaronmedlin.weebly.com

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