Friday, April 15, 2016

On living standards

Over the last few months, we have frequently heard politicians (and a real estate tycoon) claim that living standards have not increased over the last 20+ years.  That conclusion is based on comparing the rate of growth of wages (or weekly earnings) to the inflation rate.

Let me illustrate: average wages were $4.96 per hour in March 1976 and were 4.31 times higher ($21.37) in March 2016.  The Consumer Price Index increased by a factor of 4.13.  So the gain in wages after inflation turns out to be quite modest (4 percent over 40 years).

Here's the rub: there are well known problems with estimating average wages and inflation.  For instance, the composition of the work force has changed tremendously; today there are more women and immigrants than 40 years ago and more service and fewer manufacturing jobs.  Also the mix of goods changes a lot; no one bought iPads in 1976 and no one buys typewriter ribbons today.

Another way of looking at the living standards question is to compare consumption patterns.  For instance, one can compare housing, food consumption, and car ownership patterns.  If this shows the same 4 percent growth over 40 years then the Labor Department numbers hold up.

Yesterday's WSJ reported on airline travel.  If we were to time travel back to 1971, 49% of the adult population in the US had flown at least once in their lifetimes; today more than 80% have flown.  If you slice the data to look just at who flew last year, 45% flew in 2015 compared to 21% in 1971.  This is not broken down between business and leisure travel, but the overall implication is that living standards in this dimension have increased.

Of course air travel is a small share of overall spending in today's economy and comparisons of other goods and services undoubtedly will point in the other direction.  Economists use data on total spending rather than physical units consumed, making it hard to separate price and quantity changes. More basic research into consumption of goods and services that can be measured accurately would shed light on this issue.

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