Thursday, September 07, 2006

Bad headline 

I probably spent 40 minutes talking to Larry Schumacher about this article he worked on yesterday. I'll discuss the article itself in a minute, but I first need to chew out the editor who wrote the headline that was the top story on the paper (can't hang that on Larry):
Workers Fall Behind
This may or may not be true, but the data Larry is citing says nothing about wage rates. It is per capita personal income received from all sources. I know I told him this, and I'm reasonably certain he understood it, since we were reading the description of the data from the report. (See the definitions on page 4 therein.) The number is an estimate of area personal income divided by area population.

Where we got into a long discussion was over the differences between this data and the median household income release from the Census last week that created a couple of memes on the web. Those are two very different datasets, and I was trying to explain how median real household income could fall while real personal income could rise. This is what led to the discussion of the return to education. Let me add a couple more things.

Anyone thinking about this stuff needs to read Russ Roberts' excellent point about how we are adjusting income for inflation. Here are two relevant parts:

When I hear the phrase, average hourly earnings, I think of taking a bunch of different wage rates, some high, some low, and averaging them. But that's not how these data are collected. The data on average hourly earnings are taken from the Current Employment Statistics (CES), a survey not of individuals, but of establishments. The BLS gathers data from 160,000 different businesses and agencies covering 400,000 work sites. They ask each business for each work site, to provide total wages paid and total hours worked and they divide the two. That's the average hourly earnings at that establishment.

That's a little bit weird. Do most businesses really know total hours worked? My employer, George Mason University, certainly doesn't. There's no way the President of the University or the head of human resources or any department chair or any individual knows how much people actually work at the University. I don't even know how many hours I'm supposed to work. I work at home. I work at night. I come in later than 9:00 am. I come in earlier. Sometime when I'm "working", that is, when I'm sitting at my desk in my office, I'm checking the Red Sox box score or chatting with my wife. Sometimes, while I'm driving my kids to a baseball game, I'm thinking about real wages. I have no idea what my actual hours worked might be. Certainly no one else at the University knows either.

Sure, there are places where people punch a clock. But those places have become a lot less common than in 1964. How do businesses report their total hours worked to get an accurate number? How much leisure takes place on the job today compared to 1964? How much work gets done at home that the company has no knowledge of? I have no idea. Neither does the BLS.

How does the BLS adjust the weights in the survey? When a manufacturing plant closes and a graphic arts company opens, how do they re-weight the sample? I'm sure they do re-weight, and I'll try and find out how they do it, but does their method result in any systematic bias?

I will have to ask some former students at BLS about this as well. What I do know about this is that the hours data we get covers about 1/3 of workers on payrolls. Overtime hours are only known for manufacturing. So Roberts is right that this data doesn't cover, say, his own production. But the hours for my office manager would be possible to calculate, as a timesheet is turned in.

He then turns to the issue of the divisor used to create the inflation adjustment. The usual divisor is CPI-U, the consumer price index for all urban consumers. There have been several improvements over the years, thanks in no small part to the Boskin Report when indexing of Social Security payments was an issue during the Clinton Administration. But for the historical series CPI-U, some of those changes are not incorporated to make the older and newer data comparable. Using the newer series (called CPI-U-RS, the last two letters meaning recent series), Roberts finds that U.S. real wages are 1% higher now than in 1979 -- nothing to write home about, but better than a 6% decline. (Then he adds more this morning on CPI bias, which includes some criticism of the Boskin Report as being incomplete for correcting those biases.) And this of course does not include all the non-wage benefits that have risen sharply.

What does this all mean for us? It means that when you argue about real wages, you have to be sure you have the inflation measures right, something you should never be sure of!