Thursday, 21 January 2016

Look at *real* wages to get the full story

What does rising prosperity look like?

There is a misconception abroad that a leading measure of rising prosperity is rising money wage levels. But this ignores what folk actually buy with their money wages. What it ignores is the primary result of rising productivity: which is falling prices.

And the primary effect of falling prices is a faling cost of living—which is to say: rising real wages (real wages meaning, in the classical sense, the good stuff you can buy with your wages).

Politicians [especially] often focus on wages as though they were the only measure of changing living standards. However, this myopic approach ignores other key factors. Examining not only wages, but also the cost of living, is crucial to getting an accurate idea of how living standards have altered. Human Progress Editor Marian Tupy paints a fuller picture by looking at wages, the falling prices of numerous material goods, and the expansion of non-wage benefits, in this recent piece in ‘Reason.’

… the issue of the so-called "wage stagnation," is typically blamed on economic liberalisation that started under President Carter, gathered steam under President Reagan, and peaked under President Clinton. …
     True, adjusted for inflation, average hourly earnings of production and nonsupervisory employees in the private sector (closest approximation for the quintessential blue-collar worker that I could find) have barely changed between 1979 and 2015. … Looking at the average hourly earnings, however, ignores at least three very important factors: expansion of non-wage benefits, fall in the price of consumer goods and rise in price of services, such as education and healthcare.

You will note that the rising prices are in the sector most controlled by government. So while non-wage benefits grew by “as much as 30 or even 40 percent of employees' earnings,” the lion's share of the non-wage benefits is consumed by "the dramatic increase in health insurance costs" in recent years.

But the biggest improvement—an enormous one—has been the dramatic fall in the price of consumer goods. The infographic below features “16 different household items that have fallen by between 52 percent and 96 percent in terms of "time cost" since 1979. Thus, for example “the ‘time cost’ of a 13 Cu. Ft. refrigerator fell by 52 percent in terms of the hours of work required at the average hourly nominal wage, etc.” (Please click on the infographic for larger versions.)

Needless to say, the above price reductions greatly underestimate the totality of welfare gains by an average American, by ignoring qualitative, aesthetic and environmental improvements on commonly used items. (To give just one example, a refrigerator today uses one-third of the electricity used by a refrigerator in the 1970s.)
    From the above discussion it might be reasonable to conclude that Americans are much better off today than they were in the late 1970s, but that would be too simplistic. The cost of education, healthcare and housing has risen at a faster pace than total compensation. It is true that today’s houses are larger, healthcare better, and education more high-tech than in the past, but quality improvements do not seem to account for the entirety of price increases. For example, there appears to be a high degree of academic
consensus that housing price inflation is driven, primarily, by zoning laws. (No such consensus, alas, exists for the rise in education and healthcare costs.)
    The question of standard of living is a complex one. The accompanying infographic refers to merely one part of the debate, i.e., affordability of commonly used items. While we believe that the infographic tells an important story, it should be considered within a broader context, including non-wage compensation and offsetting increases in the cost of housing, education, and healthcare.

Read the whole piece here: Cost of Living vs. Wage Stagnation in the United States, 1979-2015 – REASON

RELATED POSTS:

  • “Incomes have stagnated because the economy has run out of ways to outgrow the state.”
    Government Caused the "Great Stagnation" – Peter Boettke, ANYTHING PEACEFUL
  • “It might seem strange that with falling freedom and diminishing respect for reason and science, the human environment continues to get better, not worse. Historian Scott Powell puts this down to what he calls “The Hank Rearden Effect”—the tremendous ability of entrepreneurs, industrialists and inventors to continue producing, in the face of expanding efforts to slow them down, that ‘has been masking a fundamental decline that now entails a fall.’
        “The great irony is that the race to continue proving Erlich and his friends wrong is between producers on one side, and ranged them on the other side are the vast mass of politicians, regulators and cultural mavens who wish to shackle them.
        “And most of this latter group still take their cue from Erlich, and people like him.”
    “The End of Doom” – NOT PC
  • “Capitalism is a system of progressively rising real wages. … what determines real wages [is] the goods and services that the wage earners can buy with the money they earn, is prices. Real wages are determined fully as much by prices as they are by wages. Real wages rise only when prices fall relative to wages.
        “What makes prices fall relative to wages is a rise in the productivity of labour, i.e., the output per unit of labour. A rise in the productivity of labour means a larger supply of consumers goods relative to the supply of labour, and thus lower prices of consumers' goods relative to wage rates. If we could somehow measure the supply of consumers' goods, a doubling of the productivity of labor would operate to double the supply of consumers' goods relative to the supply of labour and, in the face of the same overall respective expenditures to buy consumers' goods and labour, result in a halving of the prices of consumers' goods in the face of the same overall average wage rates. In other words, it would double real wage rates.
        “The rise in the productivity of labour is always the essential element in the rise in real wages. It is what enables increases in the quantity of money and volume of spending, which are responsible for higher average money wages, being accompanied by prices that do not rise or do not rise to the same extent as wages.
        “And what is responsible for the rise in the productivity of labour is the activities of businessmen and capitalists. Their progressive innovations and capital accumulation underlie the rise in the productivity of labor and thus in real wages.”
    Some Fundamental Insights Into the Benevolent Nature of Capitalism – George Reisman, MISES DAILY

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