What Does a U.S. Worker Really Cost?

In his monster graph round-up of income inequality, Business Insider's Henry Blodget pointed to this graph as the epitome of Occupy Wall Street's gripes. It shows labor's income falling as a share of GDP.

And so, in conclusion, we'll end with another look at the "money shot"--the one overarching reason the Wall Street protesters are so upset: Wages as a percent of the economy. Again, it's basically the lowest it has ever been.

My response was that Blodget was macro-right -- income inequality is a serious and growing problem -- but micro-wrong, because this graph is measuring wages rather than full compensation. Total compensation -- that's wages plus benefits and taxes -- hasn't changed very much as a share of the economy since 1960, according to data from the National Institute of Pensions Administrators. What's changed is that benefits and taxes have gone up, and wages have gone down.

This got me wondering about what goes into the cost of a worker. From the Bureau of Labor Statistics employer costs survey, I came up with this chart that breaks down compensation into parts like taxes (for Social Security, Medicare, and unemployment insurance), retirement (like defined contribution), and paid leave (for vacation, sick days, and the sort). These measurements involve a LOT of aggregation, since they're smoothing out averages across the entire economy. My hope is that they provide an accurate reflection of scale. The upshot is that there's a lot your employer is paying for you that you don't get to take home.

The Cost of a Worker
price of worker.png

Liberals and conservatives share a similar goal that businesses should hire more people. Liberals do a better job (or perhaps a louder job) of protecting workers' rights. Conservatives, I think, do a better job (or perhaps a louder job) of pointing out that protecting workers is expensive, and it probably leads to fewer hires. That's right. All this non-wage compensation is a hurdle for employers. Why else would the president think that lowering the payroll tax would stimulate hiring?

If your final goal is to make workers cheaper, you'll probably want to argue for: (1) defined contribution plans that don't guarantee high retirement payouts; (2) a smaller or eliminated payroll tax; and (3) a private market for health insurance without government subsidies for employers. The rebuttal would be that defined benefit is better for workers; Social Security reduces elderly poverty; and an out-of-office market for health care is exactly what Obamacare is all about in the long run.

We're not going to solve these problems in this post, but this is the key point: Understanding that worker costs are rising is critical to the issue of middle class wage stagnation. There are lots of reasons to be mad at Wall Street for the Great Recession. They did help set the world economy on fire, after all. But when you're talking about the greater recession -- the 40 year decline of the middle class -- don't look at Bank of America. Look at growing non-wage compensation, which is both eating into our salaries and making American workers so expensive that companies are increasingly looking at foreign labor, machines, and computers.