Are Pennsylvania’s workers worse off than they were three decades ago? A report prepared by the labor union-backed Keystone Research Center claims they are. Their data indicate that average real wages have either declined or been stagnant over the past year, past five years, and since 1979.
Stagnant wages would imply that Pennsylvanians can’t afford any more goods and services than they could three decades ago. Whether you TiVo’d Keystone’s press conference to watch on your HDTV, listened to their podcast on your iPod, or (like me) downloaded the report to your laptop through a wireless Internet connection, you must recognize the fallacy in this claim.
Not only are we buying many new products and technologies, but more and better versions of older products and services. More people own their home, and new homes are larger and more likely to have central air and other amenities. People are buying more cars—and opting for SUVs and mini-vans instead of the compact cars popular in the late 70s. We are buying more health care and legal services, taking more trips to Disney World, and sending more students to college. And obesity is cited as one of the main problems of today. Not only are Pennsylvanians not starving, they are buying and eating too much food.
We are buying more of everything. And that doesn’t take any account one of the fastest growing expenditures—taxes. Taxes take a greater share of Pennsylvanians’ income (31% today vs. 29% in 1979), according to the Tax Foundation, and we spend more on taxes than on housing and health care combined. Yet our after-tax consumption of things has gone up dramatically. How could the economic naysayers be so wrong?
As it turns out, the wage data cited by Keystone don’t capture the whole picture. Wages are not the same as income—the amount families have available to spend. According to the Bureau of Economic Analysis, per-capita personal income in Pennsylvania increased almost 50%—in inflation-adjusted dollars—from 1979 to 2005. The Keystone analysis ignores a number of factors that explain why Pennsylvanians are so much better off.
First, much of what employers pay their workers are not wages, but rather benefits such as health insurance and pension or 401(k) contributions. In fact, employer spending on benefits has grown faster than wages, and benefits comprise a greater share of compensation than they did 30 years. Payroll taxes for Social Security, Medicare, Unemployment Insurance and other government programs have also grown faster than wages.
Second, personal income coming from sources other than employers has increased. Investment income, including dividends, interest, and rent, have grown rapidly and are not included in wages. Business “owners’ income” has also grown much faster than the rate of wages. Investment and owners’ income goes to working Pennsylvanians, not merely “the rich.” Investment income includes retirement accounts of current workers and much of the income earned by retired senior citizens. Over 1 million Pennsylvanians—nearly 17% of all jobs in PA—earn “owners’ income,” an increase of 50% since 1979.
The fastest growing category of personal income, ignored in wage data, is “transfer payments.” While taxes have been increasing, so have government handouts. From Social Security and Medicare for seniors, to Medicaid, food stamps, cash assistance, and the refundable Earned Income Tax Credit and child tax credits, government transfer payments have almost doubled in inflation-adjusted dollars since 1979. Government transfers grew as percentage of personal income from 14% to 18% in that time. Ironically, the groups decrying “wage stagnation” are calling for more government handouts, ignoring that the increase in these programs (and the taxes needed to pay for them) are responsible for keeping wages lower than they would be otherwise.
Finally, the analysis of average wages ignores one key element—the number of jobs. While the “average wage” for all jobs may not have changed much, the number of jobs has. From 1979 to 2006, Pennsylvania’s population increased a mere 4.7%, but the number of jobs grew almost 20%. Indeed, the number of people in the labor force grew by 890,000, while the number unemployed fell by 96,000. Thus, from December 1979 to December 2006, the unemployment rate fell from 6.6% to 4.1%, even as the labor force participation rate grew. Additionally, the “average wage” in 1979 doesn’t include hundreds of thousands of additional people earning no wage at all.
These job growth numbers would have been even more dramatic without the burden of government holding back the economy. While Pennsylvania’s economic growth has lagged behind the rest of the nation, a national wave of economic growth has been creating jobs and raising our incomes nonetheless. Unfortunately, the Keystone report—through its incomplete and misleading analysis—advocates for more economic stifling government programs, including greater wealth redistribution and political intervention in our economy.
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Nathan A. Benefield is Director of Policy Research with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.