WATCH OUT FOR MISLEADING DATA!

The Social Security Administration, the agency managing the largest Ponzi scheme in the world that some would call the "mother of all Ponzi schemes", has just released data on the wage and income compensation paid to workers in 2014. The data is somewhat interesting, mostly from a curiosity angle since its analytical value is minimal. Nonetheless, I think it's worthwhile reviewing it, and pointing to its limitations since the data may easily lead the unwary to incorrect conclusions. In fact, I've seen a couple of references to this data drawing incorrect comparison to poverty levels.

The data shows the total wage income of individuals that is subject to social security payments. You can look at the raw data for last year here: https://www.ssa.gov/cgi-bin/netcomp.cgi?year=2014. Data for previous years is also available in the same web page.

The chart to the right shows on the horizontal axis the wages and income paid to all workers in the U.S. in 2014, in ranges of five thousand dollars up to those who earned $200,000. From that point the data are grouped into $50,000 ranges up to the million dollar mark, etc. On the vertical axis is the number of workers falling within each range. We can see the first point on the left represents 22.5 million workers, earning each under $5,000 a year; this is just over 14% of the workers. Wow, is the data telling me that one out of seven workers in the U.S. made less than $5,000 last year? Things are pretty bad then.

Well, not really. This is where the data is misleading if it's interpreted wrongly. First of all, the data includes all workers; teenagers working part time in the Summer, retired workers who also work part time in temporary jobs, housewives and others who take temporary jobs around the Christmas season, etc. Secondly, many of these workers are not the primary income earners in a household, they may have a spouse who is the main income earner in the family. That is, this is not the normal household or family income data that is more meaningful for analysis. For instance, the median household income is currently about $53,000, but using the Social Security data we find that the median compensation per person is about $44,500- the difference is made by other working persons living in the same household who presumably contribute to the household's economic wellbeing.

Comparisons to other data, such as poverty levels for instance, should not be made using these data. Poverty levels are usually meaningful only in terms of the number of persons who live within a family, while the social security data above does not provide a hint whether the person is living alone or with other members. If one were to use these data to estimate the number of people who are below the poverty level, we get that about 40.5 million individuals fall below the poverty line of $11,670 for one individual- this is 25% of the wage earners. But this is the wrong conclusion, as I said, because that individual may or may not be part of a larger family.


However an interesting comparison is to see how the data changes over time. The chart to the right displays the changes in the number of wage earners over the ten years ended in 2014. The horizontal axis displays data for individuals making less than $100 thousand, split again in groups of $5,000 each. The bars highlight changes over two 5-year periods; one is the change from 2004 to 2009 shown in the blue bars, and from 2009 to 2014 in the red bars.
It is immediately apparent that the number of individuals earning less than $35,000 fell over the ten-year period; it fell by nearly 8.4 million workers (although it's hard to discern that from the graph alone.) The graph suggests that most of that change occurred between 2004 and 2009, when in fact the number of individuals making less than $35,000 fell by 6.9 million.

Another caution with the data can be inferred from the last paragraph and chart. Yes, the number of workers earning less than $35,000 fell sharply; this is not necessarily because their incomes improved but because many of them lost their jobs as a consequence of the 2008-2009 recession.

RISING EMPLOYMENT BUT FLAT INCOMES, WHY?

The last two months' employment reports have been hailed in some quarters as a sign that the economic recovery is finally on. At the same time consumers' income continues to be stubbornly flat, if not declining. What is going on? Shouldn't more working people lead to higher incomes? We hear about the 10.7 million jobs created since the end of the recession (somehow attributed to the magnanimous hand of the government) but little is said of the fact that most of those "new" jobs are simply a catch-up to the employment losses suffered during the 2008-09 recession. In fact, only 3.3 million of those job gains truly represent new jobs, that is jobs over and above the number of people employed in January 2008 right when the recession hit. In this note we will review some explanations of this apparent disconnect between job and income growth.

Employment Growth Data Are Misleading
Currently, national employment is only 2.4% above the pre-recession peak of 138.4 million employed in January 2008. This growth translates to a dismal rate of only 0.8% per year, far below the 2.3% annual growth rate maintained between 1940 and 2007. Also since the end of the recession, U.S. population has increased by 5.9%- that means that employment growth is not even keeping up with population growth.  The chart nearby compares the average annual employment growth over the six years from the 2008-09 recession, to similar 6-year periods after each of the recessions since 1960. It can be seen clearly that the current recovery, as well as the post-2001 recession one, are far below par.

Many States Continue to Fall Behind
Underlying the slow pace of employment growth are several states that still have to regain the losses suffered during the 2008-09 recession. We find that 15 states still show a gap to the pre-recession employment peak. These 15 sates represent nearly one quarter of total U.S. employment, accounting for 34 million jobs. Leading the pack is Nevada that first enjoyed tremendous growth during the housing bubble years, only to see its economy collapse when the housing market crashed. The state had the highest rate of foreclosure filings in the nation in 2010, with an astounding 9% of all housing units in the state in foreclosure- that is, one out of 11 houses.
Second in line is Michigan, still reeling from both the housing crisis and the collapse of its auto industry, with two of its three automakers being forced to take advantage of the Obama's stimulus plan. Other states in similar straits are listed in the chart.

More New Jobs in Lowest Earning Sectors

A key reason for low income growth, and lackluster GDP growth, lies in the fact that the largest employment gains are in sectors that generate the lowest earnings. Nearly two-thirds of the new jobs created since the beginning of the recovery, six years ago, are in the four lowest paid sectors. The sharp path in job growth for these four sectors is shown in the chart nearby.
Yes, the number of workers in these sectors has been increasing rapidly, but little mention is made of the fact that these same sectors and jobs are among the lowest paid.



A simple graph showing average weekly earnings by sector against the relative contribution of each sector to total employment growth provides a clearer view. On the chart to the left, we can see that the sectors with the highest contributions to growth, highlighted in read, are also the ones that generate the lowest earnings.
The sector with the lowest weekly earnings, Leisure & Hospitality, contributed nearly one-fifth (19%) of the job growth since the end of the recession- that is 2.0 million jobs. But the average weekly compensation of these workers does not break the $400 mark. Similarly, Waste Services generated about one in seven jobs each barely making above $600 a week.
Other sectors with high growth but low earnings are Retail Trade, 10% of jobs at an average of $548 a week; and Health Services, with slightly over 19% of the new jobs although paying slightly over $800 a week. All in all, these four sectors generated 6.97 million jobs since June 2009, or 65% of the total 10.7 million jobs gained over that time.

Such Growth Does Not Lead to Prosperity
It is not only jobs, but high earning jobs that lead to prosperity. Although I do not explore here the reasons behind the fast growth of these low paying sectors, it seems that impediments set governments via regulations are stymying robust growth in some sectors that happen to generate higher earnings. Without making a judgement on the value of such regulations, we can readily see for instance that high-paying sectors such as mining or manufacturing have traditionally attracted heavy government regulations. Employment in coal mining has fallen from 90 thousand in 2012 to about 70 thousand today- efforts to move away from coal are having an impact, and the average earnings from coal mining are over $1,500 a week. Despite restrictions on off-shore oil exploration and limits on oil exports, the oil industry has moved in the opposite direction to coal's. Thanks to fracking, oil exploration employment has increased from 124 thousand in 2004 to nearly 200 thousand today; this industry generates weekly earnings of nearly $1,800.