Friday, December 17, 2010

Comment To Blinder's "Our Dickensian Economy" On The Fairness Of Wage Increases Less Than Productivity Increases

Comment I posted to Alan Blinder's Wall Street Journal article, "Our Dickensian Economy: Since 1978, productivity in the nonfarm business sector is up 86% but real compensation per hour is up just 37%. Is that fair?":
Blinder misses the point that productivity improvements also go to lowering prices. The question is not only are there wage raises, but what can a worker buy today compared versus 35 years ago. Today, the average worker, because of productivity improvements and lower prices, has a computer, a cell phone, a dishwasher, a microwave, can buy cheaper shoes and clothes at Walmart, Target, Kohl's, a flat screen tv, eats out more often, etc than 35 years ago.

To a consumer, a lower price nominally and as a percent of a wage are equivalent to a wage increase.

Christian Broda and John Romali, both from University of Chicago, found in their research that prices of consumer goods purchase by the higher income groups grew much faster than inflation and prices of consumer goods purchased by the lower income groups actually declined. See their research paper, "The Welfare Implications of Rising Price Dispersion" http://economics.missouri.edu/seminars/files/2009/102309.pdf.

In other words, the workers without substantial wage increases were able to buy more goods over time because prices declined, while higher income earners saw substantial price increases in consumer goods.

Average CPI is overstating the cost of goods to the lower income and understating the cost of goods to the rich.

So to answer Blinder's fairness question: Yes, it is fair that all or most of the productivity improvements did not translate into wage increases because they translated into lower prices for consumer goods.
Also, see my earlier post, "Much Of Income Inequality Disappears With Adjustments For Different Inflation Rates For Upper And Lower Income Groups."

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