by From Dean Baker When workers are doing badly you can always count on a large number of economists to come forward with ways to argue it really ain’t so. For example, we have heard endless stories about how our price indices hugely overstate inflation — we’re actually way better off than we think we are. Or, they point to the growth in non-wage benefits. One problem with that story is that non-wage benefits have been shrinking as a share of total compensation in recent years, not growing, but whatever. One recent effort along these lines, which got mentioned in a NYT article, is the argument that aggregate wage growth is being depressed by the retirement of older, more highly paid workers. The argument is that individual workers are actually seeing a healthy pace of wage growth, but the
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from Dean Baker
When workers are doing badly you can always count on a large number of economists to come forward with ways to argue it really ain’t so. For example, we have heard endless stories about how our price indices hugely overstate inflation — we’re actually way better off than we think we are. Or, they point to the growth in non-wage benefits. One problem with that story is that non-wage benefits have been shrinking as a share of total compensation in recent years, not growing, but whatever.
One recent effort along these lines, which got mentioned in a NYT article, is the argument that aggregate wage growth is being depressed by the retirement of older, more highly paid workers. The argument is that individual workers are actually seeing a healthy pace of wage growth, but the change in composition leads to the aggregate growing more slowly.
While this argument has been given credence by many, it suffers from a simple logical flaw. It is not the change in the age composition of the work force that matters for the aggregate rate of change in wage growth, but the change in the change (the second derivative for calculus fans).
To see this point, imagine that everyone’s wage rises at the rate of 3.0 percent annually and there is zero change in the age composition of the workforce. In this story, average wage growth would obviously be 3.0 percent. Now suppose that one percent of the workforce retires this year and is replaced by new entrants. Suppose that these retirees earned 50 percent more than the average and the new entrants earn 75 percent as much as the average.
The lower age for this one percent of the workforce would reduce the aggregate rate of wage growth from 3.0 percent to 2.74 percent. In this story, we could accurately say that changing demographics had slowed the pace of wage growth.
Now suppose that in the following year everyone’s wage rose by 3.0 percent and again we saw one percent of the workforce retire to be replaced by new entrants who got half of their pay. In this story, the 99 percent of continuing workers see 3.0 percent wage growth. And, this year’s new entrants should get 3.0 percent higher pay than last year’s new entrants. This means that average wage growth should be 3.0 percent, in spite of the retirement of higher paid workers.
This is the problem of the age composition explanation for slow wage growth. While that may have been a useful explanation for slower wage growth when baby boomers were first hitting retirement age in large numbers, say 2010 to 2015, it can’t make much sense in 2017. The oldest baby boomers are now age 71. The youngest are age 53. We have been at or near peak retirement rates for some time now. Any incremental increase in the rate of retirement in 2017 compared to 2016 would have to be extremely small, if it’s positive at all.
In short, this story really can’t hold water. There may well be some groups of workers who are doing well, while others are doing poorly, but the aggregate pace of wage growth should give us a pretty accurate measure of how workers are doing, and that’s not good.