Work & Wages — Are You keeping Up?

If you’ve been getting more money each year and maybe a bonus here and there you might think you’re doing pretty well. After all, part of the American dream is to get better at what you do and therefore earn more money as a result.

Unfortunately, you’re likely to notice that even with a bigger number on your paycheck money somehow does not go as far. What you’ve seen is right — and how right you are may be surprising

Falling Wages

The Federal Reserve says between 2004 and 2007 — boom times for the American economy — that “the share of family income attributable to wages and salaries fell 5.2 percentage points.”

Huh? Wages fell? If the country was doing so well how is it possible that families were earning less?

The answer is that while the country was doing well during the past few years — at least on paper — not everyone did equally well. Indeed, many fell behind.

For instance, the IRS reports that the nation’s 400 richest taxpayers are actually getting richer. The average filer in this group earned $263,306,000 in 2006 — that’s up from a mere $74,709,000 in 1996. The percentage of all income earned by our top 400 represented 1.31 percent of the total gross income in 2006. In 1996 the top 400 filers earned .66 percent of all income.

In other words, the income of the very rich doubled relative to everyone else’s in a ten-year period.

Wage Trends

Okay, what about workers? If you look at real hourly wages — how much people earn corrected for inflation — you can see that income remains about where it was in the early 1970s, more than 30 years ago. The chart below by Stan Sorscher, which was posted originally by WashingtonPolicyWatch.org, shows how wages have fared over the years.

Economists usually say that wealth is derived from four basic sources: land, labor, capital and entrepreneurial ability. As a society during the past few decades we have come to value land (think of rising home prices), capital (think of stocks and bonds) and entrepreneurial ability (folks who start new companies). Left in the dust have been people who actually work.

• Smith makes $100,000 in profit from the sale of a prime residence owned at least two years. The federal tax? Zero. Notice that there is no Social Security tax on real estate profits.
• Jones starts the Whatever Corporation. The company develops a new way to change TV channels and gets a patent for the idea. Jones sells stock in the company 14 months after he started the firm for $100,000. His tax? Because the money is a long-term capital gain from the sale of an asset he pays 15 percent, or $15,000. Again, notice that there is no Social Security tax on capital gains profits.
• Green has worked at the North company for 15 years. By working overtime he has an adjusted gross income of $99,950. The tax? $21,971 — PLUS Social Security taxes.

What you’re seeing here demonstrates the value of lobbyists and PAC contributions. People don’t pay smaller taxes because they’re virtuous or saintly, they pay less because they have more power in Washington.

Inflation

There is little doubt that you earn more than your parents. Indeed, even if you have the same job and the same skills as your parents there’s no doubt that you are earning more — at least in cash terms.

However, the real measure of wealth is not how many dollars you have, it’s what those dollars buy. A few years ago I was in Romania and had a dinner which cost roughly 500,000 old Leu. While 500,000 is a huge number, the cost of the dinner in terms of dollar values was about $13.

We need more dollars today in part because inflation over time has made money less valuable. For instance, imagine that someone made $20,000 in 1980. Today you would have to make $51,503.16 to have equal buying power.

What To Do

Your real financial goal is not so much to have more money, though that would be nice, as it is to have more buying power. There are several steps you can take to advance your personal finances.

1. Save. You cannot buy a home or stock or anything else without savings. Moreover, you need savings if you lose a job or have a sudden expense.
2. Get as much education and training as possible — these are resources which can never be taken from you.
3. Even if it means a lower salary, look for jobs with benefits. You’ll be grateful after just one medical bill.
4. Buy a home with a fixed-rate mortgage. See if you qualify for FHA financing or, if you have military service, for a VA loan.
5. Get married. Seriously. A good marriage is one of the keys to financial success.

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