Wednesday, April 20, 2011

the Wall Again (aka part 3)

We have posted on hitting the wall within the United States before.  I did find an interesting casual link the other day. Ht Brad Delong.

As our recession ends with more people going back to work, generally at lower wages, it will be important to see if consumer spending can recover without additional borrowing.

From Credit Slips Bob Lawless

Today, I am visiting my parents' home and went for a walk that included a stroll down the commercial strip on the busy street near their house. Along this commercial strip in a solid middle-class neighborhood in Peoria, Illinois, is a small red brick building that thirty years ago I remember housing an insurance agency. What is there today? A payday lender.
My stroll turned into my own personal metaphor for the change in the middle class over the past generation. In place of an institution that cushioned against risk, the neighborhood now has an institution that creates it…
The payday lender that inspired this post does not even really stand out. In that one-quarter mile stretch of that commercial strip, there are now five payday or auto title lenders.

And we add to this, information provided by one of his commenters from the Hamilton Project.
The pool of full-time workers has shrunk at the same time that the median wages of full-time workers has stagnated. Why is this important? It means that the statistics about the stagnation of wages like those above are based on a comparison of very different groups of workers. Put plainly, the story of the stagnation of wages is based on a comparison of apples to oranges.

When you compare apples to apples by looking on the experience of all men (rather than just the changing group of men able to find full-time work), the stagnation story has a different ending.

The below figure plots the median earnings based on all males aged 25-64, along with the more conventional plot that is based only on those men aged 25-64 that happen to work full-time.

This analysis suggests that earnings have not stagnated but have declined sharply. The median wage of the American male has declined by almost $13,000 after accounting for inflation in the four decades since 1969. This is a reduction of 28 percent!

The red line is the median income for full-time men.  The problem is that less men are working today than previously.  The drop out in the labor force is primarily found within the “low-skilled” portions of the workforce.   So the red line is propped up by the withdrawal of the lower end of the sampling pool. 

It is a little like when one of our school districts decided to drastically raise the entry age for student.  If you (exaggerating) have a kindergarten class full of twelve year olds, you would expect them to score very well.  But you haven’t said much about the overall education of our youngsters.  It is the same situation here.  If you have a work force made up of doctors and lawyers, but half your tradesmen are unemployed, you cannot really say that wage earning are going up in any real sense.

The blue line is thus a calculation based on the median wage for all men (not just the full-time workers).

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