Macro Roundup

“…By virtually any definition of economic well-being, Americans are substantially better off today than they were a half-century ago. So how did we obtain this massive cornucopia of prosperity without a pay raise since 1972? Part of the problem is that the BLS’s measure of average hourly earnings excludes employer-provided benefits, which now make up 30% of compensation. Counting the value of worker benefits adds 5% to the 46-year increase in total compensation. More significant, the official index used to adjust for inflation—the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W—overstates actual inflation and understates real compensation. Nominal average hourly earnings rose from $3.99 in October 1972 to $23.26 this March, a 483% increase, but CPI-W also rose 483%, creating the reported stagnation in real average hourly earnings. While the CPI-W accurately measures changes in price for a fixed market basket of goods and services, it overestimates inflation because it fails to account for the substitution effect—how people change their consumption habits as relative prices change. Americans began to fly more often in the 1970s when the cost of airfare fell relative to the cost of ground transportation, for example, but the CPI-W missed this increase in consumer value by neither raising the weight it assigned to spending on air travel nor downgrading the weight for ground travel….”

Phil Gramm and John Early, "The Myth of ‘Wage Stagnation’,"Wall Street Journal, May 17, 2019, https://www.wsj.com/articles/the-myth-of-wage-stagnation-11558126174

The Myth of ‘Wage Stagnation

Perhaps the most common indictment of America’s legendary prosperity is wage stagnation. Bureau of Labor Statistics data show that average hourly earnings of production and nonsupervisory employees peaked in October 1972 at $23.26 (in 2019 dollars) and were at that same level in March 2019. But do these numbers remotely describe the life you have lived over the past 45 years, or square in any way with numerous official measures of changes in what Americans actually own and consume? In short, should you believe your eyes or government data?

Compared with 1972, American homes today are much more spacious and modern. The proportion of homes today that have two or more rooms per person is up 33.5%. The share of homes with two or more bathrooms has more than doubled; central air-conditioning is more than three times as common; and the share of homes that have dishwashers is up by more than two-thirds. Most homes in 1972 had televisions, but only about half were color sets. Today they are all color and most are flat screens in high definition, attached to cable or satellites. The average home in 1972 had at least one phone, but none had cellphones or internet access.

Kitchens today are stocked with a far wider array of foods, including out-of-season fruits brought from half a world away and a vast variety of prepared foods. Compared with 1972, this abundance costs an ever smaller portion of families’ budgets, freeing up some $3,200 on average to spend on other things.

Cars last 81.3% longer and are 72.7% safer, and many have GPS navigation and premium sound systems. No standard model lacks air-conditioning or power steering. The share of the population with college degrees is almost three times as high. Americans live 7.4 years longer and their median age is almost 10 years older, yet the proportion of people reporting poor health is 20.3% lower. Real median household net worth is up 172.2%.

By virtually any definition of economic well-being, Americans are substantially better off today than they were a half-century ago. So how did we obtain this massive cornucopia of prosperity without a pay raise since 1972?

Part of the problem is that the BLS’s measure of average hourly earnings excludes employer-provided benefits, which now make up 30% of compensation. Counting the value of worker benefits adds 5% to the 46-year increase in total compensation.

More significant, the official index used to adjust for inflation—the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W—overstates actual inflation and understates real compensation. Nominal average hourly earnings rose from $3.99 in October 1972 to $23.26 this March, a 483% increase, but CPI-W also rose 483%, creating the reported stagnation in real average hourly earnings. While the CPI-W accurately measures changes in price for a fixed market basket of goods and services, it overestimates inflation because it fails to account for the substitution effect—how people change their consumption habits as relative prices change. Americans began to fly more often in the 1970s when the cost of airfare fell relative to the cost of ground transportation, for example, but the CPI-W missed this increase in consumer value by neither raising the weight it assigned to spending on air travel nor downgrading the weight for ground travel.

In contrast, the Commerce Department’s personal-consumption expenditures price index updates the market basket of goods and services monthly based on what people actually buy, allowing it to account partially for the substitution effect. Since 2000 the Federal Reserve has used this index to set monetary policy because it’s a more accurate measure of inflation. In designing the 2017 tax reform, Congress indexed the new income-tax brackets using a similar index to account for product substitution. Using the PCE price index rather than the conventional CPI-W to adjust compensation results in real hourly compensation levels that are 27.7% higher today than they were in 1972.

The biggest challenge in measuring real compensation and Americans’ well-being is the extraordinary growth in new products that have brought new benefits not captured in any government consumer price metric. The BLS does add new products to its index when they become widely used, but it often misses the initial price decline and understates the product’s impact on consumer welfare, including displacement of other, older products. The cellphone was first introduced as a specific item in the CPI-W in 1998. But because the device entered the index 14 years after the first public sale, the index never accounted for the preceding 75% drop in cellphone prices, nor the value of their lighter batteries and longer-lasting charge.

It may be impossible to discern perfectly what share of changes in the costs of goods and services comes from inflation compared with the share that comes from real increases in value. But in communications technology, for instance, it’s clear that no government metric comes close to capturing the full value of technology as America has progressed from the Pony Express to the telegraph, telephone, portable phone, cellphone and the smartphone.

Today 224 million Americans have at our fingertips more than two million apps, forecasting the weather anywhere in the world and showing us how to get anywhere we want to go. We communicate immediately without stationery or stamps or driving to the post office. We get medical advice without going to the doctor and obtain instantaneous access to more knowledge than is in the local library. We shop from our armchairs and work for companies thousands of miles away. Yet no government consumer-price index has ever come close to adjusting for the value embodied in this one of many miracle innovations.

Economists Bruce Meyer and James Sullivan attempted to correct for some of this problem in a 2013 study, integrating the findings of 52 different economic studies to develop a price index that adjusts more completely for changes in quality and innovation, as well as substitution. For example, using data from the American housing survey to quantify size and quality, they determined that the CPI overstates housing inflation by about 0.25% a year because it mistakes higher payments for bigger and better homes for real price increases.

They also used hedonic regression, a method of calculating implicit market prices for different features of an item, to demonstrate that the CPI overstates the yearly rate of increase in prices for personal electronic devices by as much as 5.8%. They corrected the CPI’s overestimation of the yearly rise in health-care costs by pricing based on treatment of a condition, as well as differences in outcomes such as survival, recovery and function.

Messrs. Meyer and Sullivan’s improvements are only a modest beginning of the needed revisions to traditional measures of inflation. Yet they provide convincing evidence that at a minimum, real compensation, in terms of the value of what we can actually buy, hasn’t stagnated since 1972, but instead has grown by at least 69.5%. For most of us who were around in 1972, that 69.5% increase more closely fits the world we live in.

The suggestion that America hasn’t gotten a raise in 46 years doesn’t pass the laugh test. Poor measurements of compensation are more than misleading; they also cause many voters and policy makers to favor redistribution that would depress growth and compensation. Nothing is more critical to promoting sound policy than measuring economic outcomes accurately. A nation is only as good as its facts.

Okay, I've yet to find a good piece of academic/governemnt research adjudicating btw the Pew and Federal Reserve analysis, this Grabar's piece was useful when the reports came out.

a) Okay will run down Strain's data. b) CBO generally uses PCE, though they may use CPI in some circumstances

"... First, “household income” is a pretty limited proxy for wealth, especially when you consider that millennials are better educated and (not unrelatedly) have a high ratio of debt to income. According to a May study from the Federal Reserve Bank of St. Louis, the median net worth of households whose heads were born in the 1980s (older millennials) is 34 percent lower than that for people their age in the past. A recent Federal Reserve Board study corroborates this, reporting that average net worth for young adult households in 2016 is 20 percent lower than that of boomers in 1989 and 40 percent lower than that of Gen X in 2001. (The saving grace for millennials: the idea that student debt will get paid off by the increased future earnings associated with a college education.)Second, while millennials’ household income is higher, it’s not great compared with what everyone else is making. In 1978, according to the Fed study from this month, young boomer households were making on average $77,500 in 2016 dollars—compared with the $88,000 national average. In 1998, the average Gen X household made $73,500 versus the national average of $103,800. In 2014, the average millennial household made $78,200—more than Gen X, but less as a percentage of the national household average of $112,000. Relatively speaking, then, millennials are underperforming. Third, household roles are changing. Millennial women work more than their Gen X counterparts did 17 years ago, and they make more money. The median income for young women is up by nearly a third since 1975, to $29,429. The median income for young men has fallen. If you isolate for female-headed households, the trajectory looks great. If you forget the household concept and just look at all young people’s individual income, the numbers were worse in 2015 than they were in 1975.(Things have improved a bit since then, granted.)Fourth, lots of millennials still live with mom and dad—somewhere between one in five and one in four young Americans live with their parents. That’s a big change from previous generations, and it means the pool of “households” is a little skewed. According to census data, nearly 75 percent of the 8.4 million millennials living at home in 2015 made less than $30,000 a year. That share drops to 63 percent among those living with roommates, and 45 percent among those living independently. In other words, there’s a whole segment of millennial households that aren’t getting counted in Pew’s sunny data, mostly because they’re too poor to move into their own place. Mom is buying the avocados...."
Henry Grabar, "The Federal Reserve Says Millennials Are Broke. Pew Says Millennials Are Loaded. Which Is It?"Slate, December 12, 2018, https://slate.com/business/2018/12/millennial-households-are-making-more-money-than-their-parents-or-grandparents-did-but-dont-get-optimistic.html

The Federal Reserve Says Millennials Are Broke. Pew Says Millennials Are Loaded. Which Is It?

On Tuesday, a Pew Research Center analysis of census data revealed a counterintuitive piece of good news about millennials: Relatively speaking, we’re in the money.

According to Pew, households headed by Americans ages 22 to 37 earn more, adjusted for inflation, than young households at any time in the last 50 years.

Avocado toasts all around!

The median adjusted income for millennial households last year was $69,000, according to Pew, putting 2017 narrowly ahead of 2000 as the best recorded year of household income for young people.

But wait: Didn’t the Federal Reserve Board just report last week that, as my colleague Jordan Weissmann put it, “millennials are, in fact, the brokest generation”? (Yes, they did.) So what’s going on here?

First, “household income” is a pretty limited proxy for wealth, especially when you consider that millennials are better educated and (not unrelatedly) have a high ratio of debt to income. According to a May study from the Federal Reserve Bank of St. Louis, the median net worth of households whose heads were born in the 1980s (older millennials) is 34 percent lower than that for people their age in the past. A recent Federal Reserve Board study corroborates this, reporting that average net worth for young adult households in 2016 is 20 percent lower than that of boomers in 1989 and 40 percent lower than that of Gen X in 2001. (The saving grace for millennials: the idea that student debt will get paid off by the increased future earnings associated with a college education.)

Second, while millennials’ household income is higher, it’s not great compared with what everyone else is making. In 1978, according to the Fed study from this month, young boomer households were making on average $77,500 in 2016 dollars—compared with the $88,000 national average. In 1998, the average Gen X household made $73,500 versus the national average of $103,800. In 2014, the average millennial household made $78,200—more than Gen X, but less as a percentage of the national household average of $112,000. Relatively speaking, then, millennials are underperforming.

Third, household roles are changing. Millennial women work more than their Gen X counterparts did 17 years ago, and they make more money. The median income for young women is up by nearly a third since 1975, to $29,429. The median income for young men has fallen. If you isolate for female-headed households, the trajectory looks great. If you forget the household concept and just look at all young people’s individual income, the numbers were worse in 2015 than they were in 1975. (Things have improved a bit since then, granted.)

Fourth, lots of millennials still live with mom and dad—somewhere between one in five and one in four young Americans live with their parents. That’s a big change from previous generations, and it means the pool of “households” is a little skewed. According to census data, nearly 75 percent of the 8.4 million millennials living at home in 2015 made less than $30,000 a year. That share drops to 63 percent among those living with roommates, and 45 percent among those living independently. In other words, there’s a whole segment of millennial households that aren’t getting counted in Pew’s sunny data, mostly because they’re too poor to move into their own place. Mom is buying the avocados.

See the attached email/link. If hourly nonsupervisory wages grew 5% from 1973 until today but 20% from 1990 until today, then wages must have fallen 12.5% (=1-) from 1973 until 1990. Is that true? I’d like to see the data he is referring too (not just a link where I have to do the work myself). Does the same data base contain benefits? If so, I’d like to see that too. How does the CBO bridge from their (pretax and transfer) data to this data? Does the CBO use CPI or PCE?

If hh incomes have grown 50ish% since their starting point as the CBO claims, it’s hard to believe that millennia aren’t earning the same or more at the same point in their life than prior generations given how large each demographic is relative to the whole. If one group’s earning are down (relative the other groups at the same point in their lifetime), the others would have to be way ahead. Does CBO decompose their data by generations?

Did you ever ask pew (and ernie), and the st louis fed why their numbers were so different? If not, you should.

We have recent stuff on this from Pew, the Federal Reserve and Ernie.

Pew's looked at household incomes in December of last year and found each new generation seems to be doing better than prior ones at most ages, at least in real household money income. "....The median adjusted income in a household headed by a Millennial was $69,000 in 2017. That is a higher figure than for nearly every other year on record, apart from around 2000, when households headed by people ages 22 to 37 earned about the same amount - $67,600 in inflation-adjusted dollars. (A recent study by the Federal Reserve, which also looked at Millennials’ income, used a different methodology and data source.)..."

Richard Fry, "Young adult households are earning more than most older Americans did at the same age," Pew Research Center, December 11, 2018, http://www.pewresearch.org/fact-tank/2018/12/11/young-adult-households-are-earning-more-than-most-older-americans-did-at-the-same-age/

Ernie adjusted the Pew household money income for education levels which is also worth noting. Quick write ups follow in descending order.

(note this male head of household number doesn't adjust for single/married or educational attainment)

Ernie Tedeschi adjust the Pew numbers for education attainment which is also worth noting:

However they don't have "apple core" comparison that looks at generational incomes net say the cost of housing, education and child care.

They also found that despite the same preferences"... We showed that millennials do have lower real incomes than members of earlier generations when they were at similar ages, and millennials also appear to have accumulated fewer assets. The comparisons for debt are somewhat mixed, but it seems fair to conclude that millennials have levels of real debt that are about the same as those of members of Generation X when they were young and more than those of the baby boomers....."

The same Fed study found that consumption habits (in terms of car ownership, preference for owning over renting) have not changed generational, "... we find little evidence that millennial households have significantly different tastes and preferences than households of previous generations..."

For context the Fed used laborearningsand found lower real income then their comps (say baby boomers @ the same point during the life cycle) "... In the economic sphere, millennials appear to have paid a price for coming of age during the Great Recession: Millennials tend to have lower income than members of earlier generations at comparable ages, although the income of young households has not changed much; the difference likely reflects, in part, the rising labor force participation of women....."...Specifically, the real average full-time labor earnings of a millennial male household head in 2014 were about the same as those for a comparable male Generation X household head in 1998 and over 10 percent lower than those for a comparable male baby boomer household head in 1978...."