Category Archives: Compensation

Neoclassical Labor Economics: Its Implications for Labor and Employment Law

Source: Michael L. Wachter, University of Pennsylvania, Institute for Law and Economics, Research Paper No. 13-34, 2012

From the abstract:
Whereas law and economics appears throughout business law, it never caught on in legal commentary about labor and employment law. A major reason is that the goals of the National Labor Relations Act (NLRA), the country’s foundational labor law, are at war with basic principles of economics. The lack of integration is unfortunate if understandable. Notwithstanding the NLRA’s normative goal to keep wages out of competition, economic analysis applies as centrally to labor markets as to any other market.

One of the NLRA’s primary goals is to equalize bargaining power. Its drafters envisioned achieving this goal through procedural and substantive means: increasing the number of people covered by collective bargaining contracts and raising union wages above competitive levels. These goals, however, are in conflict. For the NLRA to succeed, the relationship between demand (employment) and prices (wages) would have to be upward sloping. Unfortunately, the reverse is true. While the adverse tradeoff between above-market union wages and union employment was not as marked in the Wagner Act, the NLRA’s vision became unattainable once the Taft-Hartley amendments sanctioned competition between union and nonunion models of the employment relationship.

This Chapter uses neoclassical economics to analyze several theoretical and policy issues. For example, it considers the efficiency wage theory that unions can raise productivity to offset above-market pay. Efficiency wages work when employees respond to a reward, as in above market pay, with greater loyalty. Yet union workers are more likely to be loyal to their labor unions than the firm that the union claims resisted the higher pay. The efficiency wage model works better in the nonunion model, the context in which it was first developed. While unions may be preferred on normative grounds, the highly competitive political economy of the United States makes it difficult for unions to succeed.

U.S. Metros: Wage Growth & Trends

Source: Tom Tveidt, Garner Economics LLC, February 2013

In this brief, we examine the recent wage growth and trends over the last two years among the nation’s 372 metro areas.

Over the last 24 months national wages have increased slightly each month on a year-over-year basis. Although the pace hasn’t kept up with inflation, the overall trend has been positive throughout the two years in absolute terms. Among metros however, there a wide disparity in wage trends over the last two years. Only 47 U.S. metros can claim the same consistent year-over-year wage growth in all of the last 24 months. Seven metros did not experience one single month of year-over-year wage growth over the same period.

Vast majority of wage earners are working harder, and for not much more – Trends in U.S. work hours and wages over 1979–2007

Source: Lawrence Mishel, Economic Policy Institute, EPI issue Brief no. 348, January 30, 2013

A complete documentation of the growth of wage and benefit levels and inequality is presented in Chapter 4 of the recently released The State of Working America, 12th Edition (Mishel et al. 2012). This paper supplements that analysis by examining the growth of work hours and real hourly and annual wages by gender and wage level from 1979 to 2007.

Key findings include:
-The average worker worked 1,868 hours in 2007, an increase of 181 hours from the 1979 work year of 1,687 hours. This represents an increase of 10.7 percent—the equivalent of every worker working 4.5 additional weeks per year.
-Annual work hours grew more among women (20.3 percent) than among men (4.4 percent) from 1979 to 2007, primarily because women increased their weeks per year in the paid workforce.
-At 22.0 percent, the increase in annual hours between 1979 and 2007 was greater among workers in the lowest fifth of the wage distribution than among workers in the middle fifth (10.9 percent). It was also greater among middle-wage workers than among the top 5 percent of earners (7.6 percent).
-Real annual wages grew from 1979 to 2007, but for the bottom 60 percent of wage earners, this stemmed roughly as much from increased work hours as increased real hourly wages.
-Over 1979–2007, real hourly wages for middle-wage workers (those in the middle fifth of earners) grew 15.8 percent. Most of this wage growth occurred in the late 1990s boom (1995–2000). From 1979 to 1995 and from 2000 to 2007, the total real wage growth among this group was just 5.3 percent, equivalent to annual growth of about 0.25 percent.
-Over 1979–2007, real hourly wages for low-wage workers (those in the bottom fifth of earners) grew 7.7 percent, with most of this wage growth occurring in 1995–2000. From 1979 to 1995 and from 2000 to 2007, real wages among this group actually fell 3.2 percent.
-Over 1979–2007, the real hourly wages of the top 5 percent of earners grew by 30.2 percent—and by 14.8 percent if one excludes the 1995–2000 period.
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Press Release

Rethinking the Role of the Profession on Public Sector Compensation

Source: Thom Reilly, Public Administration Review, Volume 73 Issue 1, January/February 2013
(subscription required)

…Instead of constantly defending postretirement benefits and arguing that public sector employees are paid less than their private sector counterparts, I would like to suggest that the public administration profession take the lead in reforming public pay and benefits. If public managers, along with elected officials and employee and union groups, do not comprehensively address this issue, fed-up citizens will head to the ballot box, and their remedies will likely be much more punitive and draconian than any legislation or policy changes. Our field has been slow to lead in this area.

The field of public administration should be at the forefront, driving the reform agenda and discussion. I suggest four areas in which we could move in this direction.

-Transparency. Our field must insist on transparency in the adoption of public pay and benefits, including an independent analysis of the current cost of any pay or benefit increase, as well as how future costs will be paid for and managed.

-Shared pension (and retiree health care) costs. Similar to Social Society and defined contribution plans, there should be equal employee/employer contribution. Allowing public employees to take reduced pay increases in lieu of sharing in the cost of pensions is problematic and allows for a good deal of gamesmanship. If the pension rate goes up 2 percent and the employee gets a 3 percent cost-of-living adjustment, does that mean he or she would otherwise have gotten 5 percent? The reality is that in many jurisdictions, the public employer has largely picked up employee contributions. Courts have generally held that existing pension benefits are protected, but increasing existing employees’ contributions is generally permissible, which can significantly address a portion of the current underfunding.

-Hybrid and cash-balance pension plans. Our field should take the lead in designing hybrid plans that combine elements of existing defined-benefit plans with a new 401(k)-style system in which money is invested on behalf of the retiree. The Federal Employee Retirement System has adopted such a model. Under cash-balance plans, workers get an individual retirement account to which both the employee and the employer contribute while the employer guarantees a minimum return. These plans have the potential to increase active participation of public employees in retirement planning while transferring some of the risk away from the taxpayer. Moving public employees to these type systems will also allow portability of these benefits so that they can follow workers if they choose to switch jobs and move to the private or nonprofit sector or to another public sector job.

-Retirement security for all. Our field can use the increased national attention on public employee benefits to expand the conversation on the need for retirement security for all Americans. According to data from the Federal Reserve, U.S. Census Bureau, and Internal Revenue Service, 25 percent of American families have no savings at all, and the average amount saved for retirement is $35,000. Our nation is not adequately prepared to deal with this retirement security crisis….

Compensation Matters: The Case of Teachers

Source: Alicia H. Munnell and Rebecca Cannon Fraenkel, Center for Retirement Research at Boston College, State and Local Pension Plans, SLP#28, January 2013

From the key findings:
• Many public sector pension plans have recently cut pension benefits for new hires, thereby reducing compensation.
• The analysis looks at how such cutbacks could affect the quality of teachers.
• One proxy for teacher quality is the average SAT score at a teacher’s undergraduate institution.
• The analysis finds that school districts with higher wages and/or higher pensions are able to hire teachers from institutions with higher SAT scores.
• These results suggest that cutting compensation for new teachers is not costless, as it will likely reduce applicant quality.

Receipt of Unemployment Insurance by Higher-Income Unemployed Workers (“Millionaires”)

Source: Donald Hirasuna, Congressional Research Service, CRS Report for Congress, R42643, January 23, 2013

…To inform the ongoing policy debate, this report provides information relevant to proposals that would restrict the payment of unemployment benefits to individuals with high incomes. Three primary areas that may be of interest to lawmakers are addressed: (1) the current U.S. Department of Labor (DOL) opinion on means-testing UI benefits; (2) the potential number of people who would be affected by such proposals; and (3) policy considerations such as the potential savings associated with such proposals, particularly in terms of federal expenditures. The latter two issues are discussed because a small percentage (approximately 0.02%) of tax filers receiving unemployment benefit income had AGI of $1 million or more in tax year 2009 based on Internal Revenue Service (IRS) data….

…This report addresses many of the questions that have arisen regarding such proposals, including the potential number of people who would be affected and the potential savings to federal and state governments. To place these proposals into context, the report provides a brief overview of the UI system and explains why receipt of UI benefits is not restricted based on income under current law. It then presents Internal Revenue Service (IRS) data on the distribution of household income and unemployment benefits for tax years 2008 and 2009 to shed light on the size of the group potentially affected by such proposals. The report raises policy considerations such as the potential impact of such proposals on federal expenditures, given the joint federal-state nature of unemployment programs. Finally, it summarizes relevant legislation in the 112th Congress…

Changing Sources of Income Among the Aged Population

Source: Barry P. Bosworth and Kathleen Burke, Center for Retirement Research at Boston College, Working Paper, WP#2012-27, November 2012

From the abstract:
This paper focuses on an explanation for the large shift over the past two decades in the composition of the income of the aged (65+), increasing the role of earned income and reducing the importance of income from their own assets. We find that the pattern of change is consistently reported in all of the major household surveys. The increase in the importance of labor income can be attributed to delayed exit from the labor force by workers at older ages. We attribute the increase in work time to a rise in the proportion of more educated workers who choose to continue working, changes within the pension system that previously encouraged early retirement, and a decline in the availability of retiree health insurance. The increase in work time is concentrated among the highest income groups and those with the most education, suggesting that it is largely voluntary. The fall in asset income can be traced to lower interest rates and a reduced propensity for the aged to convert their wealth to annuities. It does not reflect reduced wealth at older ages. A measure of the annuity equivalent of their wealth holdings suggests that there has been no decline for aged units. We also find only a weak relationship between changes in asset income and the decision to remain in the workforce.
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Executive Summary

The Wages of Peace and Justice

Source: RoadMap, DataCenter and the National Organizers Alliance, July 2012
(purchase required)

Retaining and developing talented staff is vital to building strong, sustainable, and high-impact organizations. Yet compensation policies in small to mid-sized social justice organizations have been largely unexamined until now. In collaboration with DataCenter and the National Organizers Alliance, RoadMap has produced The Wages of Peace and Justice, a 2012 National Compensation Survey of Social Justice Organizations. This survey provides invaluable information about salary and benefit trends among community organizing and advocacy organizations and the extent to which these compensation policies reflect social justice values. DataCenter’s researchers alongside with DataCenter interns designed the survey, collected the responses, and analyzed the data to produce the comprehensive report. …
See also:
Executive Summary

Earnings of the Top 1.0 Percent Rebound Strongly in the Recovery

Source: Lawrence Mishel and Nicholas Finio, Economic Policy Institute, Issue Brief #347, January 23, 2013

From the summary:
There has been some discussion over the last year or so that the growth of income inequality—especially the trends favoring the top 1.0 percent—had been reversed in the recent downturn and, therefore, policymakers need not focus on the overall increase in income inequality since the late 1970s.

Newly available data on the labor earnings of the very highest earners are the first indicators available for 2011 enabling a determination as to whether this is indeed the case. These data allow an assessment of how wages grew for the various wage segments of the workforce, including the top 1.0 percent, during the recent downturn and the recovery through 2011. The data also allow us to update our analysis in The State of Working America, 12th Edition (Mishel et al. 2012) of wage growth since 1947—and especially since 1979, when wage inequality began to rise. The data cover annual earnings because they are drawn from the wage records in the Social Security system. Since these data are for annual wages and salaries, the trends identified reflect both changes in hourly wages and changes in annual hours worked (based on changes in weekly hours and weeks worked per year). …

Public-Private Pay Comparisons: An Analysis of Florida

Source: Robert E. Lee, Andrew M. Thompson, Compensation Benefits Review, Vol. 44 no. 5, September/October 2012
(subscription required)

From that abstract:
As state and local governments attempt to manage fiscal stress created by the Great Recession, the level of compensation received by public sector workers has become an increasingly debated policy issue. A significant amount of research exists that addresses national public sector compensation trends, but relatively few state-level studies have been performed. This analysis provides a preliminary analysis of public and private sector compensation in Florida. Using data from the U.S. Bureau of Labor Statistics and the U.S. Census Bureau, sector-level comparisons are made between public and private sector workers within the state with regard to compensation, age and education. This sector-level comparison is then supplemented by an occupational analysis of career fields found in both sectors. The sector-level analysis suggests public sector workers in Florida are, on average, not only better compensated than those in the private sector in aggregate but are also considerably more educated and older. The occupational analysis suggests that public sector workers in Florida are in general less well-compensated than private sector workers employed in the same field, even when older and more highly educated on average.