Earnings vs. Compensation

Mark Warshawsky was the guest on EconTalk recently and discussed what he claimed was a mistaken impression of increasing income inequality, the idea that the rich are getting richer and the poor are static.  If one looks at earnings, the conclusion that high paid workers are seeing greater increases than lower paid workers is absolutely correct.  However, that doesn't take into account employer-provided benefits.  Thus, income + benefits = compensation.  For example, Nancy the Office Manager at Mega Corp might take home $40,000 in salary but healthcare, 401K matching, etc. might add an additional $5,000.  Thus, her earnings are $40K but her compensation is $45K.  Rachel the Chief Financial Officer might be paid $100,000 in salary and her benefits are not much more costly than Nancy's, adding $6,000.  Her compensation is $106K.  Mega Corp finds that healthcare costs are skyrocketing.  Warshawsky reports that they tripled from 1992 to 2010, having doubled from 1999 to 2006.  So, going back to the Mega Corp example, healthcare costs double.  Nancy finds that her income is stagnant, not budging from the $40K.  However, her benefits package is now worth $10,000.  Her earnings are flat but her compensation has risen 11%.  Meanwhile, Rachel's benefits also doubled, now worth $12,000 and her earnings have increased to $105K.  Therefore, she has seen a 5% increase in earnings but only a 10% increase in compensation.  Based on earnings, income inequality is getting worse but based on total compensation, it is getting better.  I love economics!

 

Here is the podcast and here is the working paper.