Bruce Sacerdote‘s NBER Working Paper, “Fifty Years of Growth in American Consumption, Income, and Wages” provides a nice update on the measurement of CPI Bias. The punchline should be obvious, but it’s great to hear such an eminent economist say it: “Meaningful growth in consumption for below median income families has occurred even in a prolonged period of increasing income inequality, increasing consumption inequality and a decreasing share of national income accruing to labor.”
Highlights:
Table 3 shows estimates of annualized growth rates in wages by decade. The first column shows growth in real wages using CPI deflation. This column show real wages fell by 0.8 percent per year during the ten years January 1975-January 1985 and fell by 0.6 percent per year during the ten years ended in 1995.10 In the subsequent two decades wage growth is positive 0.8 percent per year and 0.7 percent per year respectively.
The next three columns calculate growth in real wages using a) PCE adjustment, b) an assumption of 20% upward bias in CPI growth, and c) Hamilton/ Costa adjustment to CPI. The picture looks progressively more optimistic as we move from left to right. PCE adjustment still has negative wage growth in the first two decades (75-85 and 85-95) but the decreases in real wages are smaller. Hamilton/ Costa bias adjustment implies annual real wage growth of 1.4% during 1975-1985, .2 percent per year during 1985-1995, 1.4 percent during 1995-2005 and .8 percent in the most recent decade.
The table in question:
More:
Consumption for below median income families has seen steady progress since 1960. My preferred point estimates are based on CEX measures of consumption where the price index has been de-biased following Hamilton and Costa. These estimates suggest that consumption is up 1.7 percent per year or 164 percent over the whole time period. These estimates of growth strike me as consistent with the significant increases in quality and quantity of goods enjoyed by Americans over the last half century. And my conclusions are consistent with the findings of Broda and Weinstein (2008). Estimates of slow and steady growth seem more plausible than media headlines which suggest that median American households face declining living standards.
The bias adjusted estimates also provide a more positive outlook on real wage growth in the last 40 years than standard media headlines. PCE adjusted wages appear to have grown at .5% per year during 1975-2015 while the de-biased CPI adjusted wages grew at 1% per year over the same time period.
Key caveat:
Importantly these estimates do not tell us anything about why wages grew more slowly than GDP or why inequality increased. CPI bias does not explain decreases in labor’s share of income (Krueger 1999) or the associated rise in inequality (Pikkety and Saez 2003). Adjusting the price index downward leads to higher estimated real wage growth and higher estimated real GDP growth.
The big unanswered question:
What I do not address here is why Americans feel worse off if consumption is actually rising. There are at least four important explanations that may be at work. First, I am only examining consumption within very large sections of the income distribution and there may be specific groups (for example less than high school educated men) for whom consumption is actually falling. Second, it’s possible that the quality of some services such as public education or health care could be falling for some groups. Third, the rise in income inequality coupled with increased information flow about other people’s consumption may be making Americans feel worse off in a relative sense even if their material goods consumption is rising. Fourth, changes in family structure (e.g. the rise of single parent households), increases in the prison population, or increases in substance addiction could make people worse off even in the face of rising material wealth. A deep future research agenda would be to understand how America has lost its sense of optimism about living standards and whether the problem is one of consumption, relative consumption (relative to other people) or something entirely different.
My favorite candidate for “something entirely different”: false consciousness. Most people embrace a dogmatic pessimistic ideology, and believing is seeing. Hedonic adaptation amplifies the problem. After all, it’s easier to deny that your standard of living is great than to admit that you’re unhappy despite your affluence. The fault is not in our stuff but in ourselves.
READER COMMENTS
Phil H
Sep 19 2019 at 11:17am
Hahahaha!
The feckless poor! Why, they don’t know they’re born.
Mark Z
Sep 20 2019 at 2:46pm
How far back in the past would you honestly rather be born rich rather than be born poor today?
robc
Sep 20 2019 at 3:09pm
1967? Maybe 1966.
I was born in 1969, and I don’t want to be much older than I am. For enough money, 2-3 years tops.
Phil H
Sep 21 2019 at 9:09pm
Hi, Mark. I actually agree with you that it’s better to be poor today than rich at almost any other time in history.
My point was that the story of the undeserving poor is an old one, and a bad one, and a weird one for an economist to be interested in. Old: we did this debate in 19th century Britain. The side that wanted to punish the poor by putting them in jail-like workhouses won. They were wrong, though. It’s a bad argument. And weird for an economist, because it’s explicitly saying, my economics can’t help you. What you poor want, economics won’t give it to you, the only thing to be done is to change your minds.
I see no grounds for such pessimism, and I’m not willing to let economists off the hook that easy. It’s not illegitimate or wrong or false for the poor to not want to be poor.
Matthias Görgens
Sep 19 2019 at 11:19am
I wonder if data from other countries (and other times) would help shed light on the question?
robc
Sep 20 2019 at 8:33am
On the other hand, what would a column look like that measured inflation as the change in per capita M2?
Todd Ramsey
Sep 20 2019 at 9:50am
Are there a significant number of individuals who actually feel worse off themselves, as opposed to feeling like a class of people (possibly including himself) is worse off?
I don’t know the answer; I am honestly asking. A cursory review of a Gallup poll on “Satisfaction with Personal Life” shows satisfaction near an all-time high.
I would appreciate some guidance to more complete data. Thanks!
Michael Pettengill
Sep 20 2019 at 4:46pm
Some people feel worse off even as their cost of living has gone down, mostly because in rural America, the price is zero for many higher quality goods which are by public policy denied them.
Eg, universal service requirement made nearly the best telecom available to rural areas through the 70s. Since, the telcos have been freed to pick their customers, rather than customers choosing to get telco services. It’s not that high speed Internet can’t be provided at the same cost to everyone, but the policy has been to promote monopoly profits everywhere in order to promote limited competition in just parts of a few urban areas.
Rural areas can’t generate profits that now exist generally without government subsidies, so improving services in rural areas await government subdidies. But the most support goes to building infrastructure for the high profit wireless providers, not the rural residents.
People who might have been farmers are now developing urban food production technology. Hydroponic greens, factory produced meat substitutes.
And deregulating telecom did not help the US telecom industry, as opposed to rent seekers. Manufacturing has left the US and the focus has been on eliminating workers, ie, limiting the construction of physical infrastructure to a much smaller number of workers installing imported boxes at cell towers. Based on wireless technology of focused development outside the US under regulations more like those in the US in the 60s/70s.
Tom DeMeo
Sep 21 2019 at 11:03am
As we consume more, we are also delving deeper and deeper into specialization and adding to the effort and complexity of our lives. Our jobs, our houses, our bank accounts, our cars, our food, our education, our healthcare, our radios, tv and phones… almost everything is much more complex.
If you can handle that extra complexity, you find all of this wonderful and appealing, but the water level rises just a bit each year, leaving a slightly larger chunk of society feeling like they can’t keep up, and they don’t understand life anymore.
Thaomas
Sep 22 2019 at 9:04am
What about another possibility that wage growth corrected in whatever manner after the ’80s is less than in the immediate post war years, Les Trente Glorieuses as the Europeans say?
Comments are closed.