Saturday, March 6, 2010

Compensation: Pay, Benefits, and Payroll Taxes

Don Boudreaux from Cafe Hayek criticized Alan Tonelson and Kevin Kearn's Op-ed in the New York Times. The Op-ed criticized U.S. labor productivity figures because they fail to account for the amount of foreign labor used to help produce U.S. goods and services. According to the Op-ed, rapid increases in reported productivity are an illusion and that is why wages are stagnant. Boudreaux sent a letter to the editor in response.

When I read the article, my first thought was, "stagnant wages?" I had written posts here and here about real wages in the U.S. during the Great Moderation, noting that they have been increasing. In the comments to Boudreaux's post, someone said that while wages may be stagnant, compensation should be used, because that includes payments for benefits.

Of course, I had heard this debate. One side argues that wages are stagnant because of the "pro-business" policies of conservative Republicans. The reply has been that business is paying more for labor, but the extra compensation isn't captured in measures of the money paid to workers. The payments are going for benefits.

On the St. Louis Fed web page, Compensation of Employees: Wage & Salary Accruals measures the money that employees earn from firms. However, the amount that firms pay for the workers is National Income: Compensation of Employees, Paid.

The difference between the two is largely "Supplements to wages and salaries."
Supplements to wages and salaries (see 1–5) consists of employer contributions for employee pension and insurance funds and of employer contributions for government social insurance. Employer contributions for employee pension and insurance funds (3–15) consists of employer payments (including payments in kind) to private pension and profit-sharing plans, publicly administered government employee retirement plans, private group health and life insurance plans, privately administered workers’ compensation plans, and supplemental unemployment benefit plans. Employer contributions for government social insurance (3–16) consists of employer payments under the following Federal Government and state and local government programs: Old age, survivors, and disability insurance (social security); hospital insurance; unemployment insurance; railroad retirement; pension benefit guaranty; veterans life insurance; publicly administered workers’ compensation; military medical insurance; and temporary disability insurance.
I took these figures and divided by employment and deflated by the consumer expenditures deflator without food or energy. This provides an estimate of real compensation per worker. "Accruals" is the money and "Paid" includes benefits.

At the beginning of the Great Moderation, in 1984, firms were paying approximately $37,000 per employee. The supplements were $6,600. The monetary compensation for employees was $30,400. In the fourth quarter of 2009, firms were paying $51,000. The supplements were nearly $10,000 and so, the monetary compensation was $41,000. The supplements did increase as a percent of the total amount paid, from about 17 percent to 19 percent.

The two series move together, with trends that are nearly equal.

The growth rates are close, and the trend growth rates are right on top of one another. Average real compensation grew about 1.5 percent during the Great Moderation. Real employee compensation was not stagnant, and while supplements are a significant portion of employee compensation and have increased, their growth rate, 1.7 percent is only slightly higher than the growth rate of compensation.


  1. And what if inflation is systematically underestimated?

  2. I'm sorry I am confused about payments for benefits? Benefits are privileges right? So it is free as I see it like perks at the restaurant when you won as the best costumer of the month.

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