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Data and anecdotes

May 1st, 2008

Among the outcomes produced by a market economy, real wages are arguably the most important single variable for most people. With inflation rising around the world, and sensitive prices like those of food and petroleum going up a lot, most people’s living standards depend mainly on whether wages grow faster than prices. I got a couple of pieces of info on this today, which illustrate the difference between data and anecdote.

In my morning email, the US Bureau of Labor Statistics (pdf file) advised that the US employment cost index (hourly wages + benefits) rose by 3.5 per cent last year, less than the inflation rate of about 4 per cent*. This continues a trend of declining real wages since 2003.

This afternoon, I looked at the NY Times to see a story about stagnant real wages in Europe, which began with a lengthy voxpop about a couple who had bought a breadmaker because baguettes were too dear, and continued in much the same vein. Deep within the article was the information that eurozone prices have risen by 22.5 per cent since 1999. But despite various claims about the declining purchasing power of wages, there is not a single piece of statistical evidence on wages anywhere in the story. Instead, we got a lengthy and inevitably inconclusive discussion of what constitutes the “middle class.

A quick visit to Eurostat reveals that Eurozone wages have risen about 30 per cent since 2000. German wages have increased by about 20 per cent, so the article’s claims of stagnation appear to be about right for Germany, but not for the EU as a whole. Of course, to do things properly you’d want to consider the impact of food prices on low-income households. But given the focus on the middle class, it seems reasonable to suppose that the price index measures the standard of living for the average middle class household reasonably well.

It seems sad that the NY Times has to cover issues like this by anecdote, but I guess it gets them a lot more readers than the BLS email statistics series.

* The US Fed prefers to focus on the “core” inflation rate, excluding food and energy prices, a use of “core” even more impressive than John Howard’s. so it says the rate is about 2 per cent. And the reforms to the CPI introduced by the Boskin Commission in the 1990s reduced the measured inflation rate by a percentage point or so, meaning that the current rate is comparable to 5 per cent inflation on the measures used in the 1970s and 1980s.

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  1. jack strocchi
    May 1st, 2008 at 22:43 | #1

    Pr Q says:

    The US Fed prefers to focus on the “core� inflation rate, excluding food and energy prices, a use of “core� even more impressive than John Howard’s.

    Of course Pr Q conveniently forgets to mention that Howard delivered on his core promise of making Australian’s “richer, stronger and prouder”. And it seems that the poorest Australians did reasonably well off the Howard govt. The Melbourne Institute of economic research reported:

    THE incomes of the nation’s poorest households rose more dramatically than those of the richest Australians in the final years of the Howard government, buoyed by rising wages and bulging welfare payments.

    While lone parents, indigenous Australians and the disabled still struggled, overall the poorest households have enjoyed the largest rise in income over the past six years.

    At least Howard made a start on improving the situation of indigenes. Law and order is the foundation of all civil progress. So a bit of adult supervision up North has not gone astray, given the standard of leadership shown by the “activist” industry.

    THis follows the general pattern of the Cultural Left which promises secular progress and delivers sectarian regress. Its policies unleashed an orgy of child rape through remote indigeneous communes and racist, myscoginst hate crime spree by ethnics gangsters.

    A pity that a gifted academic such as Pr Q chooses to turn a blind eye to this mostrous hypocrisy of his ideological confreres whilst waging a relentlessly partisan campaign against the former govt. No enemies to the Left or friends to the Right, it seems.

  2. TerjeP
    May 1st, 2008 at 23:41 | #2

    Yes but if your wages had been denominated in gold grams then would things be different now. :-)

  3. jquiggin
    May 2nd, 2008 at 06:31 | #3

    Jack – please avoid off-topic rants like this in future. Howard’s only relevance here is to illustrate the potentially misleading nature of “core”.

  4. conrad
    May 2nd, 2008 at 08:32 | #4

    The other real problem with the comparison is that trying to treat the EU as a whole is not especially meaningful (and less so the US) if you are thinking about social outcomes and the effect of real wages due to the distribution of wealth vs. the distribution of people. In this respect, given that the poorer countries have generally done well whereas the already rich countries haven’t (or at least not as well), the outcome is probably far better than the figures suggest.

  5. Socrates
    May 2nd, 2008 at 09:34 | #5

    Do these figures ignore the other obvious “elephant in the room” – the cost of housing? Considering that only about 1/3 of Australian households are paying off a mortgage, it obviously doesn’t affect all. But the effect on those who are is considerable. Again, if we are interested in differential equity, it should eb considered. I recall that there was a significant change in the 80s to the basket of goods that measured Australian CPI regarding mortgages and rentals.

    I also recall that the ABS used to calculate a statistic for Real Average Wages which ceased in 1978 with the demise of cost of living wage inncreases in favour of productivity based decisions (a great leap backwards for equity). I tried putting it together for Australia in the 80s and 90s and the results were stark. Real average wages in Australia dropped dramatically under Fraser and Hawke. They only returneed to 1974 levels in around 1996! So no wonder workers are cynical about economics – the benefits of restructuring are rarely shared equitably. Also I don’t wish to turn this to a Labour vs Liberal issue either – in my experience all governments will massage statistics to hide their failures, e.g. Hawke on unemployment and Howard on (lack of)investment.

    As a slightly related aside on the question of the realism of statistics, I posted a comment on teh Monday open thread wondering about recently quoted US economic data, showing that growth was not negative for 1st quarter 2008. I found that very hard to believe. Are our statistical measures obsolete now, in an era where trillions in funds are exchanged weekly, while economies are still measured in billions? See
    http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

  6. May 2nd, 2008 at 10:48 | #6

    Could this European pessimism about living standards and a belief that Europe is falling behind(Pew Centre research showed voters globally are much more inclined to compare their national economy with those of others than in the past)generate a European constituency for economic liberalism just as in the US the perception of falling living standards increases support for social-democratic policies?

  7. frank luff
    May 2nd, 2008 at 10:52 | #7

    While the basis of stats is suspect, I suspect, reading for worthwhile meaning is a fog. I first remember govt tampering with the input many years ago when unemployment figures were the reason govts were in or out. Tampering for outcome has made reading stats today a nonsense for the average punter.
    The most remembered was when “unemployed” were moved to “unemployable” transfered to “health support” anywhere so they didn’t appear in “unemployed”
    fluff4

  8. smiths
    May 2nd, 2008 at 11:01 | #8

    this is from the latest harpers about the complete lies of official data in the US and how inflation is really somewhere between 10-15%

    everywhere i go lately people of all walks of life are talking about the massive increase in costs

    http://bigpicture.typepad.com/comments/files/HarpersMagazine-2008-05-0082023.pdf

    jack strochi, a myopia as acute as yours must be truly debilitating, my condolences

  9. May 2nd, 2008 at 11:36 | #9

    It would be good to get beyond simple measures of income and expenditure and more towards things like wellbeing measures

    http://www.communityindicators.net.au/measuring_wellbeing

  10. Andrew
    May 2nd, 2008 at 12:37 | #10

    Which measure of inflation you want to use I guess depends on what you are using it for. An all-encompassing classification is the best measure if you’re trying to compare inflation with real wages to determine whether people are actually better off or not.

    If you’re using inflation as a yardstick to measure how much the economy is ‘overheating’ to be able to set nmonetary policy correctlt – then I question why you’d include factors that won’t be affected by monetary policy. For example – why include fuel costs? They are set by global markets and no amount of RBA interest rate adjustment will compensate for imported fuel inflation.

  11. smiths
    May 2nd, 2008 at 12:53 | #11

    andrew #8

    which measure of inflation you want to use is the same for 98% of the poulation,
    that is, how much does everything cost compared to my wage, and which one is rising faster,

    when i negotiated a pay rise late last year and the accountatnt mentioned inflation during that negiotation, he wasnt talking about setting monetary policy,

    he told me that a pay rise of 15% was ridiculous since inflation was only about 3%, i told him that real inflation was surely over 10% and a pay rise that matched inflation was no pay rise at all

  12. Andrew
    May 2nd, 2008 at 13:18 | #12

    Yes Smiths – that’s my first measure of inflation – the all-encompassing one! At least you got a pay-rise last year, mine went backwards!

    My point was to raisethe question about what measure of inflation the RBA should use when it adjusts interest rates. It seems a bit silly to me that they would use a broad measure of inflation. They run the risk of adding even further to the burden on struggling families who now have to contend with high inflation and high interest rates. I understand the logic about using interest rates to slow economic activity to contain inflation – but if the wrong measure of inflation is being used then the RBA may well step on the brakes too hard. No amount of interest rate rises will affect petrol prices. So if the petrol keeps going up – the RBA will keep raising rates for no reason.

  13. smiths
    May 2nd, 2008 at 14:03 | #13

    it raises another question as well,

    is the oil going up as some suggest because easily extractables have passed peak as demand rises,
    or is a large part due to monetary inflation and the

    oil then just reflacts that devauation of currency which our reserve bank definately plays a part in, albeit it to a lesser degree than the US feb or the bank of england say

  14. swio
    May 2nd, 2008 at 15:01 | #14

    “…the Boskin Commission in the 1990s reduced the measured inflation rate by a percentage point or so, meaning that the current rate is comparable to 5 per cent inflation on the measures used in the 1970s and 1980s.”

    Have you got a source for that? According to another source I look at (http://www.shadowstats.com the pre-Clinton era inflation measure is currently running above 7%. I’m always scratching my head about the inflation stats as they never seem right to me and it rarely seems to be acknowledged that the way it is measured has changed over time so comparisons between today and yesteryear are not apples to apples. Considering that inflation is crucial in working out GDP I am always surprised that economists seem to accept the inflation figures without comment or question, especially when you realise that they are at least a little subjective and you see how much economists love to debate everything else.

  15. Bruce Bradbury
    May 2nd, 2008 at 15:11 | #15

    Smiths: That Harpers article by Phillips is a very poor piece of economic reporting. I’m not familiar with all the CPI changes discussed, but the way he ignores the serious points made by the Boskin Commission makes me doubt anything else he says.

  16. gerard
    May 2nd, 2008 at 19:28 | #16

    everyone knows that Europe is groaning under the weight of socialist schlerosis and needs a nice spell of American-style reforms if they are to emulate America’s perennially wonderful and always superior economic situation. The NYT doesn’t need to spell this out or give any figures it is just a given and as an academic economist you ought to know this Fact as well as anyone.

  17. pablo
    May 2nd, 2008 at 20:42 | #17

    I have a concern about the loose way the issue of ‘confidence’ (in the economic sense)is used in the media. For example today we had Westpac spokesman, Bill Evans talking about how with business confidence at an all time low the chances of an interest rate rise..etcetera which was followed a few hours later with a regional news opinion that consumer confidence was undented etcetera. Sorry I can’t link and apologies if this is off subject but it really annoys me the way this term is spruiked.

    Evans

  18. Peter Whiteford
    May 2nd, 2008 at 21:12 | #18

    I posted this over at Crooked Timber and will add it here!

    I think that one of the main explanations why some European countries have a lively debate about “purchasing power� which seems to be lacking in some of the “Anglo-Saxon� countries is that in fact the purchasing power of net wages varies widely.

    Have a look at Table 1.3, in particular, in http://www.taxjustice.net/cms/upload/pdf/Taxing_Wages_2003.pdf. This unfortunately is a bit out of date and a more up-to date version can be found on the OECD website at http://www.oecd.org/document/57/0,3343,en_2649_37427_40255097_1_1_1_37427,00.html but not one with the same table. (Those with OECD access might be able to find a more up-to-date version.)

    It can be seen that the gross cost of employing someone at the average production workers wage is actually very similar in France, Italy, the US and the UK – around USD 34,000 to 36,000 (PPP adjusted), but while around 29-31% of that goes for taxes in the US and the UK, in France it is 48%, with employer social security contributions being the largest component (and 45% in Italy). Because employer social security contributions are paid directly from business to government they tend to be invisible to workers, or not very transparent at least.

    So disposable incomes for similar workers are about one-third higher in the UK than in France in purchasing power even though the cost of employing production workers is about the same in both countries.

    Now of course for your higher taxes in France you are getting a very good health care system, extremely generous unemployment benefits for the middle class (the most generous in the OECD), much higher public retirement pensions, free schools and universities, great public transport etc etc. However, you do have less money left over for discretionary spending, so when the price of life’s little luxuries or necessities goes up, you tend to notice it more immediately.

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