How come today’s workers are making less & not “getting ahead”, when we are more productive than ever?

Every so often, I come across an article or comments that bear along the lines of:

“If today’s worker is more productive then the workers of yester-decade, why aren’t we getting further ahead? Shouldn’t we be all working only a couple of days a week instead of the 35-40+ hour standard workweek?”

Besides the fact that globalization has changed the value of what “productive work” is in America (which is another whole discussion altogether that I’d like to visit at some point), the other costs of living – such as housing and health insurance – may actually be the driving force behind where most of our productivity gains have gone.

Housing is pretty easy to explain.  Just take a look at the following chart, courtesy of Federal Reserve Bank:

FRED - CPI Rent vs Avg Hourly Earnings

In short, housing has kept up over 500%, since the 1970’s.  This easily explains why the “boomers” were seemingly able to purchase a home and fund a number of what appear now to be luxuries with far, far less income.

OK, so housing has gone up – so why have real wages seemingly gone down so rapidly? (i.e. why do most folks feel like they are just ‘treading water?’)

More interestingly – not only has housing increased, but Health Insurance costs may perhaps be the second major component to the problem of “declining wages”  Take a look here:

FRED - Housing + Health

As one can easily see – combining housing + health insurance costs, as a % of total employee compensation (or pay, in short) – steadily increased from 27-30% or so in the early 1970’s – to 56%+ (close to DOUBLE) in the present day.

Understanding the incredible increase in healthcare costs in terms of lost wages may be a bit tricky.  Unlike rent or a mortgage payment which is clearly paid by the employee – health care costs, besides being available with a myriad of options and also having a portion of it being covered by the employer – employees may not be as easy to “see” its true costs .

As a basic example, at my company, a plan with “pretty good” family coverage is about $1500/month. This works out to about $18000/year.

With median household income at less than $60000 a year[1], just healthcare alone is 30% of the PRE-TAX budget of an average family!

“But hold-up.. isn’t New York’s living expenses much higher?
Don’t New Yorkers earn alot more than the average US family?
Shouldn’t that increase be also taken into account?”

OK – let’s look at up… Unfortunately, the increase really isn’t much, at $58003 [2] . Working out the math, we’re STILL at over 30% of PRE-TAX dollars being spent on health insurance.

“But wait… it can’t be 30% of my budget.  Don’t most employers split or cover a portion of the cost of health insurance?”

Therein lies the issue.  Even with productivity increases, the increasing cost of just health insurance alone whittles away at many businesses abilities to increase their employee’s salaries accordingly when average yearly increases were in the realm of 10-11% per year. [3]

Granted, this rate is coming down with ACA / Obamacare being in affect in the past couple of years – but the increases have been happening for a long time.  For this article, let’s take a look at the more historical, longer time horizon perspective.

So, let’s do some quick math.  Let’s assume that:
– Our NY family earns the average $58000 income, pre-tax
– Health insurance takes up about 30% of a family’s actual compensation package / cost.
– The employer covers about 50% of this cost.
– The average annual increase in health insurance cost is 10%

So.. that works out to an average annual increase in $1800/year for insurance, or about  3.1% of the $58000 salary.

With this increase, whether the company or employee pays for it becomes immaterial.  Bottom line – before taking into account inflation, an average family is “losing” ~3% of their income / earning capabilities just because of rising health insurance costs.

Envision this – the company wants to give you a 5-7% raise…  but by the time they either cover the 3% increase in cost themselves, or deduct it off your paycheck – you’re only actually getting a paltry 2-4% NET.

So, forgetting Globalization for the moment, it’s easy to see how the two prongs of ever rising cost of housing plus exponentially increasing health insurance costs can easily cause the average worker’s income is flat-lining (or decreasing really, in real / inflation-adjusted dollar terms).


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[WSJ] Best Books for Investors: A Short Shelf

Jason Zweig, a columnist over at the WSJ, published the following list of recommended books on investing. With the myriad of choices available and limited time, it may be helpful for those looking for some “vetted” reading material.  Enjoy!

Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them

In clear, simple prose, Belsky and Gilovich explain some of the most common quirks that cause people to make foolish financial decisions. If you read this book, you should be able to recognize most of them in yourself and have a fighting chance of counteracting some of them. Otherwise, you will end up learning about your cognitive shortcomings the hard way: at the Wall Street campus of the School of Hard Knocks.

Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk

The late polymath Peter Bernstein poured a long lifetime of erudition and insight into this intellectual history of risk, luck, probability and the problems of trying to forecast what the future holds. Combining a stupendous depth of research with some of the most elegant prose ever written about finance, Bernstein chronicles the halting human march toward a better understanding of risk—and reminds us that, after centuries of progress, we still have a long way to go.

John C. Bogle, Common Sense on Mutual Funds

The founder of the Vanguard Group and father of the index-fund industry methodically sorts fact from fiction. Following his logical arguments can benefit you even if you never invest in a mutual fund, since Bogle touches on just about every crucial aspect of investing, including taxes, trading costs, diversification, performance measurement and the power of patience.

Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists

Neither light reading nor cheap (it’s hard to find online for less than about $75), this book is the most thoughtful and objective analysis of the long-term returns on stocks, bonds, cash and inflation available anywhere, purged of the pom-pom waving and statistical biases that contaminate other books on the subject. The sober conclusion here: Stocks are likely, although not certain, to be the highest-performing asset over the long run. But if you overpay at the top of a bull market, your future returns on stocks will probably be poor.

Richard Feynman, Surely You’re Joking, Mr. Feynman! or What Do You Care What Other People Think?

These captivating oral histories of the great Nobel Prize-winning physicist ostensibly have nothing to do with investing. In my view, however, the three qualities an investor needs above all others are independence, skepticism and emotional self-control. Reading Feynman’s recollections of his career of intellectual discovery, you’ll see how hard he worked at honing his skepticism and learning to think for himself. You’ll also be inspired to try emulating him in your own way.

Benjamin Graham, The Intelligent Investor

Originally published in 1949, called by Warren Buffett “by far the best book on investing ever written,” this handbook covers far more than just how to determine how much a company’s stock is worth. Graham discusses how to allocate your capital across stocks and bonds, how to analyze mutual funds, how to take inflation into account, how to think wisely about risk and, especially, how to understand yourself as an investor. After all, as Graham wrote, “the investor’s chief problem—and even his worst enemy—is likely to be himself.” (Disclosure: I edited the 2003 revised edition and receive a royalty on its sales.) Advanced readers can move on to Benjamin Graham and David Dodd, Security Analysis, the much longer masterpiece upon which The Intelligent Investor is based.

Darrell Huff, How to Lie with Statistics

This puckish riff on how math can be manipulated is only 142 pages; most people could read it on a train ride or two, or in an afternoon at the beach. As light as the book is, however, it is nevertheless profound. In one short take after another, Huff picks apart the ways in which marketers use statistics, charts, graphics and other ways of presenting numbers to baffle and trick the public. The chapter “How to Talk Back to a Statistic” is a brilliant step-by-step guide to figuring out how someone is trying to deceive you with data.

Daniel Kahneman, Thinking, Fast and Slow

Successful investing isn’t about outsmarting the next guy, but rather about minimizing your own stupidity. Psychologist Daniel Kahneman, who shared the Nobel Prize in Economics in 2oo2, probably understands how the human mind works better than anyone else alive. This book can make you think more deeply about how you think than you ever thought possible. As Kahneman would be the first to say, that can’t inoculate you completely against your own flaws. But it can’t hurt, and it might well help. (Disclosure: I helped Kahneman research, write and edit the book, although I don’t earn any royalties from it.)

Charles P. Kindleberger, Manias, Panics, and Crashes

In this classic, first published in 1978, the late financial economist Charles Kindleberger looks back at the South Sea Bubble, Ponzi schemes, banking crises and other mass disturbances of purportedly efficient markets. He explores the common features of market disruptions as they build and burst. If you remember nothing from the book other than Kindleberger’s quip, “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich,” you are ahead of the game.

Roger Lowenstein, Buffett: The Making of an American Capitalist

This book remains the most comprehensive and illuminating study of Warren Buffett’s investing and analytical methods, covering his career in remarkable detail up until the mid-1990s. If you read it in conjunction with Alice Schroeder’s The Snowball, you will have a fuller grasp on what makes the world’s greatest investor tick.

Burton G. Malkiel, A Random Walk Down Wall Street

In this encyclopedic and lively book, Malkiel, a finance professor at Princeton University, bases his judgments on rigorous and objective analysis of long-term data. The first edition, published in 1973, is widely credited with helping foster the adoption of index funds. The latest edition casts a skeptical eye on technical analysis, “smart beta” and other market fashions.

Bertrand Russell, [Sceptical Essays or The Scientific Outlook](Sceptical Essays or The Scientific Outlook)

Russell is Buffett’s favorite philosopher, and these short essay collections show why. Russell wrote beautifully and thought with crystalline clarity. Immersing yourself in his ideas will sharpen your own skepticism. My favorite passage: “When a man tells you that he knows the exact truth about anything, you are safe in inferring that he is an inexact man…. It is an odd fact that subjective certainty is inversely proportional to objective certainty. The less reason a man has to suppose himself in the right, the more vehemently he asserts that there is no doubt whatever that he is exactly right.” Think about that the next time a financial adviser begins a sentence with the words “Studies have proven that….”

Alice Schroeder, The Snowball: Warren Buffett and the Business of Life

With unprecedented access to Buffett, Schroeder crafted a sensitive, personal and insightful profile, focusing even more on him as a person than as an investor—and detailing the remarkable sacrifices he made along the way. If you read it alongside Lowenstein’s Buffett, you will have an even deeper understanding of the master.

Fred Schwed, Where Are the Customers’ Yachts?

First published in 1940, this is the funniest book ever written about investing—and one of the wisest. Schwed, a veteran of Wall Street who survived the Crash of 1929, knew exactly how the markets worked back then. Nothing has changed. Turning to any page at random, you will find gleefully sarcastic observations that ring at least as true today as they did three-quarters of a century ago. My favorite: “At the end of the day [fund managers] take all the money and throw it up in the air. Everything that sticks to the ceiling belongs to the clients.”

“Adam Smith,” The Money Game

In the late 1960s, the stock market was dominated by fast-talking, fast-trading young whizzes. The former money manager George J.W. Goodman, who wrote under the pen name “Adam Smith,” christened them “gunslingers.” In this marvelously entertaining book, Goodman skewers the pretensions, guesswork and sheer hogwash of professional money management. Reading his mockery can help sharpen your own skepticism toward the next great new investing idea—which almost certainly will turn out to be neither great nor new.

Have you read any of these books yourself?  Feel free to share your  thoughts & feedback!

Always check your sources : Question everything

What do anti-vaxxers, folks that swear MSG is a bad thing, and the quote above have in common?

“The info / sources are all faked”

I find it incredibly interesting how many people can simply read something, with really very little data backing up said claims, and accept it at face value.

Worse – when this info can be incredibly damaging – such as in the case of the anti-vax movement, one seriously wonders if this is simply a symptom of the decline of our education system.

Anyways, long story short – always check your sources.  There’s no shame in being ignorant or admitting being wrong – but there’s absolutely terrible to be passing along bad information, especially when that bad info can cost lives.


Sources for the above, for your pleasure:

Retracted autism study an ‘elaborate fraud,’ British journal finds

One Map Sums Up The Damage Caused By The Anti-Vaccination Movement

Why MSG Is Perfectly Safe