Saturday, February 15, 2014

Wage Stagnation and Increased Purchase Power

I consider myself an armchair economist so what I am about to say might be missing something but I will summarize what I understand to be two sides to an issue.

We know that wages or income have been largely stagnant for most Americans since the mid-1970s. That is, when we take the incomes of Americans 40 years ago and adjust it for inflation, there has not been any improvement. There are a number of things to account for in this statistic and while I can't go into the reasons here, I will say that generally I believe it is true; despite an increase in productivity and increases in GDP since 1975, the average worker is not bringing home more money today than 40 years ago. (I say 'he' because it appears that the glass ceiling notwithstanding, women's income has risen on average since then. But of course the gender pay gap is still quite common and unfairness in pay between the sexes has not been adequately dealt with.)

We are a more productive economy with more things being produced and services being provided per labor hour today than 1975 but (the argument goes) the increase in productivity has not been reflected in wages and salaries for front line workers. However, the top incomes and earners in our economy have seen wealth increases commensurate with productivity gains during the same period. Hence the problem of inequality we are seeing today (and which has cycled to and fro for the past 130 years).

But there is a second side to this argument. There are those who say that despite flat incomes, the purchasing power of our average working person's take home pay buys a lot more today than in 1975 and that's where productivity advances have shown up. Most of the things our flat incomes buy today (the argument goes) are of higher quality, last longer and are more affordable than in 1975.

The automobile is one example that comes to mind. Although I don't have any industry information handy and what I am about to say is based strictly on observation and anecdote, I remember that in the 1970s it was common to purchase a new car every 4-5 years since they tended to break down and become more trouble than they were worth. Today, thanks to Japanese and European engineering and the sharing of that technology, a person can drive their car for 150-200,000 miles easily and keep their car for 10-15 years. Additionally, adjusted for inflation the price of a $4000 car in 1974 comes to about $18,000 today.

A couple of other examples are the microwave oven and the VCR. Although both were introduced in the late 1970s or around 1980, the price of each adjusted for inflation would today be something like $750. Of course both are priced at $100 or less today. So the response to the 40-year stagnant wage argument is that at least the goods for sale today are better or less costly (or both) when compared over the same period.

I can only speculate on the flaws of either argument. Anyone care to comment?

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