Take the evolution of the median wage in the US over the last decades. The trend is nearly flat and one would therefore naturally assume that there have been hardly any income gains for the average US citizen. However, some have argued that this conclusion is wrong because it ignores the composition effect. In this example, the composition of the labor force has obviously changed over the last decades, and has changed dramatically. More women and immigrants have entered the workforce and those tend to be lower income groups, especially at the moment of entry. When they enter the labor force, their incomes go up, obviously, but they bring the average and the median down. When, at the same time, the wages of white men go up, the aggregate effect may be close to zero. And yet, paradoxically, all groups have progressed. The conclusion that the average citizen did not progress would only hold if the composition of the population whose wages are compared over time had not changed.
Now, it seems to be the case that in this particular example there is really no large composition effect (see here). However, this effect is always a possibility and one should at least consider it and possibly rule it out before drawing hasty conclusions from historical time series. If you don’t do this, or don’t even try, then you may be “lying with statistics”.
More posts in this series are here.