What's Happening To Americans' Income?

Policy Backgrounders | Economy

No. 138
Monday, January 29, 1996
by W. Michael Cox & Beverly J. Fox


Income, Wages and Total Compensation: Resolving the Conflict

Figure III - Employee Benefits as a Percentage of Payroll%2C 1953-93

"Today's households nearly 15 percent smaller than they were in the 1970s -- so household income is spread over fewer people."

Economic statistics gathered over a period of years can sometimes be misleading when they are used to gauge economic progress. We must interpret the economic variables we measure today differently from those of yesterday to account for changes in the population's size, work habits, social habits and age distribution, changes in the way we are paid and in the goods we produce. We must allow for the marked decline in size of the average U.S. family over the past 20 years, the increasing number of people in the labor force, shorter average workweek, younger labor force, higher employee benefits and so on. Such changes distort year-to-year comparisons of virtually every aggregate statistic, making comparisons difficult and inviting many different conclusions from the data. It is important to sort through this economic puzzle to determine what's really happening to Americans' monetary well-being.

"Employees benefits have grown from 20 of payroll in 1953 to more than 41 percent today."

Median Income. For the purpose of comparing today with yesterday, two of the economic aggregates most severely tainted by hidden biases are median household income and median family income. Today's households are nearly 15 percent smaller than they were in the 1970s -- the average household size was 3.01 persons in 1973 vs. 2.63 today -- and therefore household income is spread over fewer people.11 Comparing household income statistics over the past 20 years thus significantly understates the true income gains for comparable households. Similarly, the median family income statistics for yesterday's Brady Bunch cannot be accurately compared with those of today's Murphy Brown.

Total Compensation. Also severely tainted are the simple wage data, the biggest bias being that they ignore employee benefits.12 Employee benefits have grown from only 20 percent of payroll in 1953 to more than 41 percent today. As Figure III shows:

  • The proportion of payroll devoted to health benefits rose from 3 percent in 1953 to more than 14 percent recently.
  • Retirement and savings benefits went from 5 percent of payroll in 1953 to 13 percent in 1993.
  • Payments for time not worked, including vacations and holidays, sick leave, military leave and family leave, grew from 7.5 percent to 11 percent of payroll over the same period.

Benefits are a form of employee compensation. Like wages, workers value benefits and even bargain for them. Indeed, since benefits are often untaxed (or are taxed at a substantially lower rate than wage income), employees may be willing to give up more than a dollar in wage income to receive a dollar's worth of benefits. This means, in terms of the data, that the rise in employee benefits may have caused a more-than-equal decline in wages, again distorting the armchair analyst's ability to gauge well-being by looking at the wage data alone.

Figure IV - Per Capita Personal Income%2C Total Compensation and Hourly Wages%2C 1953-93

"From 1974 to 1993 real wages fell about half a percentage point per year, but total compensation rose about half a percentage point per year."

Personal Income. Once employee benefits are added to the raw wage data, the story of workers' compensation becomes a bit more optimistic, as shown in Figure IV. As mentioned earlier, from 1974 to 1993 real wages fell about half a percentage point a year. However, real total compensation, which includes wages and benefits, rose about half a percentage point a year. Add to this the fact that today's labor force is roughly two years younger than that of two decades ago, and the wage gain figures look even less subpar.13

A better gauge of economic well-being is per capita real personal income. Roughly speaking, per capita real personal income is the inflation-adjusted sum of all income-related receipts and disbursements -- wages, rents, interest, profits and government transfers, less taxes -- per person in society. It lacks the problems of household and family income because the economic unit is of a fixed size (one person), and it lacks the problems of the wage data because it measures more than wage income.

Personal income is essentially the payment side of GDP with allowances for depreciation, and it grows at roughly the same rate as GDP. For example, per capita real personal income grew at an annual rate of 1.65 percent over the 1974-89 period, which is virtually identical to the 1.64 percent growth in per capita real GDP.14

"Over the past two decades the average workweek has declined by 2.4 hours, and workers have added seven days of vacation and holidays annually."

However, per capita real personal income also hides distortions, such as those stemming from changes in labor force participation rate or annual hours worked. Over the past two decades the average workweek has declined by 2.4 hours, and American workers have added seven days of vacations and holidays annually, yielding roughly a 180-hour reduction in average time worked per year.15 Thus Americans have taken a portion of their progress as leisure rather than income, lowering the income and GDP growth numbers from what they otherwise could have been.


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