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February 10, 2005

What Workers Know That Kevin Doesn't

Kevin Drum is surprised by a poll that shows that Americans think prices have been rising faster than wages, when "everyone" knows -- especially given the social security wage indexing feature -- that wages have risen much faster than the cost of living.

Except that for most workers, they really haven't.

How do explain this contradiction? It's the statistical difference between mean wages and median wages. The wage index used for social security is based on the average of all wages subject to federal income tax, not just the wages subject to social security taxation, so it includes all the wage income for the wealthy. And the massive wage gains for the wealthiest workers skew the "average wage" upwards.

But for most workers, the better measurement for their day-to-day reality is median wages, the wage level for the worker making more than 50% of all other workers and less than the other 50%. With that measure, the last thirty years have seen very little increase in real wages. In fact, between the 1970s and about 1995, real wages fell for most workers as measured by median wages. There was a pickup in real wage gains in the late 1990s, but those gains have declined in the last few years and the massive declines in pension and health care benefits in the last few years are leaving many workers worse off in real terms. See EPI's State of Working America.

So it's not surprising that a lot of people wouldn't expect wage indexing to get them much compared to the massive price hikes they are seeing in housing, health care and other costs. They are missing the fact that with indexing based on mean averages, they get to "borrow" some of the wage gains for the wealthy. But it's an honest mistake since the reality is that if social security reflected gains for just the workers subject to social security taxes, the difference between the CPI index and a wage index would be practically nil.

Update: Matt over at TAPPED is equally scornful that "the American people have a pretty weak grasp of the situation" because they don't think their wages are growing faster than prices. People aren't dumb just because they don't realize the quirks of an indexing system that taxes only working and middle class wages, but counts the wages of the wealthy into the index. In this case, the quirk works to their advantage, but their day-to-day experience is that prices seems to be escalating far faster than their wages-- and while you can debate the exact numbers, there's been no big jump in wages compared to prices for the average(median) worker for the last generation.

Posted by Nathan at February 10, 2005 07:47 AM