The Big Pay Raise You Didn't Know About

"Real Wages Haven't Grown for Over a Decade."

Some version of that headline has found its way to the top of thousands of articles over the past several months.

It's mostly true, particularly among certain groups. The average male earned a wage of $32,817 in 1990, and $32,137 in 2010, adjusted for inflation. He's gone slightly backward over the past 20 years. Some worry about the prospects of a lost decade. Plenty of Americans have already experienced a couple. Sad days, these.

But like so much else in the economy, the story is more complicated than it looks. Most people have actually been given a raise in recent decades. They just aren't looking in the right place.

The Bureau of Labor Statistics keeps detailed historic records on not just the amount an average American is paid, but how they're paid. There are several different ways an employer can compensate a worker. The main one is with a paycheck. But there's also health insurance, paid time off, retirement contributions, and other fringe benefits. Drilling down on those last few is key to understanding why average wages have flatlined for at least two decades.

Interestingly, the total amount employers pay an average worker has gone up by more than 13% in inflation-adjusted terms over the past decade. That's an important point that rarely gets discussed -- average Americans are making more money today than they did 10 years ago.

What's changed is the composition of that pay. Wages have become a smaller part of the total compensation pot, while benefits -- particularly health insurance and retirement contributions -- have become more important:

Sources: Bureau of Labor Statistics.

Another way to look at it: Wages made up about 73% of total compensation in 2000. Today, it's 69.4%. Ten years ago, insurance made up 6.4% of total compensation. Today, it's nearly 9%. In 1995, employer-provided retirement contributions made up an average of 3% of compensation. Today, it's 4.6%.

Those may not seem like big changes, but they make a dent over time. If insurance and retirement contributions as a percentage of total compensation were the same today as they were in 2000, the average household's paycheck would be about $2,000 a year greater. You'd notice that.

This stuff is important for two reasons. One, it highlights how out of control health insurance growth has become. Health insurance premiums more than doubled over the past decade, growing more than twice as fast as the broader economy. Reforms waiting to be implemented as part of last year's health care act could slow that growth by about 1.5% annually. That's a good start, but not nearly enough. Growth in the cost of health insurance premiums would have to fall by roughly twice as much just to stay at a steady percentage of income. Until that happens, more of your work day is going to go toward health insurance, less toward a paycheck. Tough way to make a living.

Second, the disconnect between feeling like your pay hasn't gone up while total compensation has risen is a good example of what psychologists call "availability heuristic." This is the idea that people react to what they vividly remember, not the whole picture. In this case, people are vividly aware that their paychecks haven't gone anywhere in decades. They cash those checks every month. They see the numbers. It's tangible. Fringe benefits like employer-provided health insurance premiums are another story. They're out of sight, out of mind. Even though these benefits cost employers a lot of money, the employees they cover are often oblivious to the costs. This is particularly true at companies such as Microsoft (Nasdaq: MSFT  ) , Whole Foods (Nasdaq: WFM  ) , Rackspace (NYSE: RAX  ) , and Qualcomm (Nasdaq: QCOM  ) , where employees don't chip in a dime for health insurance premiums. Whether they realize it or not, these folks (and most Americans) are getting a big raise through employer-provided coverage of health insurance premiums that become relentlessly more expensive every year. Alas, many likely don't realize it. They focus on stagnant wages, and assume their pay is going nowhere. And the higher those health insurance premiums go, the less likely they are to get wage raises. It's a vicious cycle of ignorance.

I didn't think about this stuff until a small-business owner told me that he cut wages in order to afford burgeoning health insurance premiums for his employees. Those employees actually received a net raise, but they hardly knew it. In fact, they were furious. Easy solution: The owner offered drastically reduced health benefits in exchange for higher wages. Total compensation stayed the same, but employees were happier. They had a better understanding of how much they really earned.

Is more of this needed? I think so. Things work better when everyone knows what's going on. Right now, too many workers are blinded into believing compensation is flat and unaware of how intense the rise in health insurance premiums has become. Anything that shines more light on reality is a step in the right direction.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Microsoft. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Qualcomm, Microsoft, and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Rackspace Hosting, Microsoft, and Whole Foods Market. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (35)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 27, 2011, at 3:53 PM, tyoungsd wrote:

    I have been saying this for years.

    The only way that insurance rates will change is if each consumer has to buy their own. Companies should not be allowed to provide health benefits to their employees. Either require everyone to have it, like car insurance. Or, establish a universal system everyone pays into for a catastrophic care level so everyone is covered, and anyone wanting more can choose to pay for more from the private sector.

  • Report this Comment On September 27, 2011, at 9:38 PM, mountain8 wrote:

    Doesn't inspire a lot of enthusiasm from Social Security recipients!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • Report this Comment On September 27, 2011, at 10:21 PM, TigerPack1 wrote:

    http://finance.yahoo.com/news/Survey-Health-insurance-costs-...

    Yeah! Health insurance costs are up +9% in 2011, so we can all "expect" the same health care insurance (with the same benefits) and even lower real, disposable wages for 2012. Another government takeover of free market based pricing is creating imbalances and inefficiency and rationing of medical care, Yahoo for U.S.!

    When do we get the same health insurance benefits AND a wage increase ABOVE the rate of inflation???? Without such the bottom half of our society will go backwards even further next year.

    Companies are cash rich right now (Motely Fool stories crow how strong profits are for large business), so where are the raises for the average guy still working, and doing the job requirements of 1 and 1/2 or 2 people vs. five years ago????? Time for corporate America to step up and get the economy going again, albeit with lower profits for shareholders!

  • Report this Comment On September 28, 2011, at 6:09 AM, The1MAGE wrote:

    Hopefully the spam above gets eliminated.

    But anyway I have to agree that it is a mistake to associate health benefits with your job. Really I would much prefer the companies give me that money in my paycheck, and allow me to chose my own health care.

    For a short time the company gave my wife the option of picking and choosing the exact health care options. We were able to design the exact plan we wanted. We were ecstatic with all the money we were saving as a result of this. Our biggest benefit was the fact that we put in a fairly large deductible, and a matching max out of pocket.

    We were saving tons of money, and saving a ton for the business she worked for also because they paid 80% of the premium.

    Now this was not us saving money by taking a big risk with a large deductible because we were healthy. In fact my wife has had some real medical issues to deal with, and the need for expensive pharmaceuticals.

    No the secret was that I could actually do math, and I figured out that by having a high deductible, (that we were guaranteed to hit,) that we were still paying less then if the insurance paid more of our bills.

    The funny part is that while this saved us money, and the company she worked for, if you understand it, it doesn't end up costing the insurance company any more money. In fact it is the cost of all those little claims that actually cost an insurance company a lot of money. No not as much as a real big expense, but those little expenses often result in a big hunk of the expense going toward the cost of paperwork, and that makes up a much larger percentage of the small bill costs. After all the paperwork for a large bill is often almost the same as the paperwork for a small bill.

    It is simple things like this that could save people and businesses tons of money that could be applied to higher wages.

    Another problem I have with getting insurance through an employer is the fact that often when a person looses their job, they loose their insurance too. And when a person gets sick, they sometimes can't work. And the time they need that insurance is when they may not be able to keep it because they can't work.

  • Report this Comment On September 28, 2011, at 10:00 AM, FutureMonkey wrote:

    Nice article Morgan (as usual)

    Definitely spot on - Perception is reality.

    As an employer, what my employees see is their hourly wage. This is a tangible yardstick they can measure their progress and advancement with. Regular incremental wage growth is reward for years of service and quality of service.

    I would not say that employees are unappreciative or unaware of the additional compensation. At least they are very aware if it goes away -- witness the labor dispute in grocery store chains here in California (Vons, Safeway, Ralphs). Employees were set to walk off the job over reductions in health care benefits. Labor was asking that they be kept exactly where they are, Management wanted employees to contribute more. It nearly shut down the enterprise.

  • Report this Comment On September 28, 2011, at 12:06 PM, pbk100 wrote:

    Well this is half right - the real cost of an employee has gone up. But the cost is not the same as what the employee gets in return for their labor. If the cost of health insurance doubles without any increase in level of service, then even though the cost to the employer has gone up the benefit received by the employee has not. That's not an increase in compensation - it's just staying exactly where you were.

  • Report this Comment On September 28, 2011, at 2:15 PM, drborst wrote:

    Morgan,

    Niely done. I feel this when I compare the place I work (a large manufacturing company where labor makes up less than 5% of production cost) to my kid's private school (where labor makes up something north of 80% of total costs)

    The school has to raise prices every year, which leads to a small reduction in enrollment, which requires a large price increase the next year... which can turn into a death spiral (and did at the competetor school across town).

    DRB

  • Report this Comment On September 29, 2011, at 9:49 AM, cts1993 wrote:

    I suspect the growing cost of health insurance is even more of a burden to employers (and less of a benefit to employees) than this excellent article indicates. The "average" cost described in the article are probably based on employers' aggregate expense. However, over the past ten years, I believe several employers have either stopped providing health insurance, required employees to pay a greater portion of the cost, and/or offered policies that provide less coverage (e.g., high deductible plans). In other words, while the aggregate cost, in both real and proportionate terms, of health coverage has increased, the amount of coverage provided by that cost has decreased.

  • Report this Comment On September 29, 2011, at 10:50 AM, devoish wrote:

    Morgan,

    While the point you are making is a good theory, I don't think reality backs it up for the majority of Americans.

    Example; in 2000 69.2% of americans were covered under a employer sponsered plan. In 2008 (I am using 2008 because it is before the huge layoffs hit) 62.2% had employee sponsored health insurance. If employers are spending 3.6% more on premiums and spending it on 7% fewer employees then way more than half of employees did not share in that raise. So a few executives have better healthcare, with some gold coverage plans costing companys in excess of six figures, but most Americans did not get a raise by any stretch of the imagination.

    Best wishes,

    Steven

    PS. because of layoffs in 2009 the percentage of workers with company plans dropped to 59.4%, in 2010 58.6

  • Report this Comment On September 29, 2011, at 10:54 AM, TheDumbMoney wrote:

    I follow about a hundred major financial and investment bloggers and financial institutions/sources (mainly the various branches of the Federal Reserve, and financial news sites) on Twitter, and you are the only person so far that I have seen making this point.

  • Report this Comment On September 29, 2011, at 11:03 AM, TMFHousel wrote:

    Devoish,

    62% of Americans still counts as "most Americans" in my book.

  • Report this Comment On September 29, 2011, at 11:10 AM, TMFHousel wrote:

    Further, employers are spending much, much, much more than 3% more on health insurance. 3% is the percentage of *compensation*. On their own, premiums have nearly doubled in real terms.

  • Report this Comment On September 29, 2011, at 1:17 PM, TopAustrianFool wrote:

    I am sure putting many people in their early 20's back into their parents insurance is not going to make it cheaper any time soon.

  • Report this Comment On September 29, 2011, at 1:24 PM, TopAustrianFool wrote:

    "Reforms waiting to be implemented as part of last year's health care act could slow that growth by about 1.5% annually."

    You can't prove that. So basically if, I am not saying it will, but if as a result of "Reforms waiting to be implemented" the cost actually goes up, then I am suppose to believe that it would have been 1.5% more, without them.

    You can't prove it! So you can say anything you want, the constitution protects you.

  • Report this Comment On September 29, 2011, at 5:38 PM, devoish wrote:

    Morgan,

    If I made my point that badly I am sorry.

    Going from 69.2% of Americans with employer sponsored healthcare to 62.2% is not a raise for that 7% for sure.

    Most employers are passing the costs of healthcare down to their employees. Of the 62% that still have an employer sponsored plan, going from 100% employer paid to 60% or 40% employer paid is not a raise, especially if their cash in hand also went down.

    Employees that have to wait 12 months or 6 months to be covered have not seen a raise when it used be 1 month, especially if their cash in hand went down.

    Employees that are laid off after 5 months so they don't have to be given health insurance certainly have not seen a raise.

    Employees that have seen their employers reduce the quality of their plans by reducing percentages covered, illnesses covered, or increasing copays and deductiles have not gotten a raise either.

    Getting less for more is not a raise.

    And from 2000- 2008, 62% of Americans were getting less, not more, in their health insurance. And 7% more got a 100% healthcare reduction.

    In 2008, my CEO made $100k plus a $20k healthcare plan, and the CFO made $80k plus a 20k healthcare plan, and eight other employees averaged $25,000, plus a $7k healthcare plan.

    In 2009, my CEO made $105k plus a $23k healthcare plan, the CFO made $83k plus a $22k healthcare plan, and the employees were asked to kick in $2k for an $8k healthcare plan, they lost.

    2008: (8x 25K)+ (8x 7K)+ 100+20+80+20 = 476/ 10 = 47.6/ employee.

    2009: (24x 8)+ (8x 8)+ 105+ 23+ 83+ 23 = 490/ 10 = 49.0/ employee.

    Average compensation went up $1.4K or about 2%.

    But MOST employees(Americans) did not get a raise, they shared in the cost of increased executive compensation and paid out of their own pockets for the increased cost of healthcare coverage, and took a loss if their copays or deductibles also went up.

    And if they could they made up that loss by contributing less to their 401k retirement plan, or as I like to call it, trickle-up economics.

    Best wishes,

    Steven

  • Report this Comment On September 30, 2011, at 8:07 AM, DJDynamicNC wrote:

    Excellent article. I'll admit, I hadn't really thought that through comprehensively.

    I'd be interested in comparing real wages (including benefits) with our neighbour to north, to see how social provision of health care affects the situation.

  • Report this Comment On October 03, 2011, at 1:52 AM, kmne68 wrote:

    No one seriously believes that putting the government in charge of a greater portion of the nation's healthcare bill is going to reduce costs do they?

    As it is, government involvement is likely responsible for a good portion of past increases in costs. As with the cost of higher education, the use of public money distorts the supply/demand relationship. This distortion exacerbates the problem of third party payers (insurers) removing the incentive to purchase on price thereby depriving us of the benefits (improved products at lower costs) of competition.

  • Report this Comment On October 04, 2011, at 11:21 AM, devoish wrote:

    I do not think that putting a government that believes in subcontracting services that citizens have asked it to provide out to private interests can.

    If you want something done right, hire your own people and make them responsible to the Citizens of the United States, not to business influence, bribes, or the promise of consulting jobs afterward.

    Department of Motor Vehicles in New york had long lines and disinterested counterpeople. Citizens complained, and now the Dept is polite, fast, and helpful.

    You will not get anywhere near the same level of competent help at Sears this holiday shopping season. But at least at Sears the pay doesn't sustain you and the job is temporary.

    Best wishes,

    Steven

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