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Improved Apple Watches won't get more expensive? Hmmm

Hedonic adjustments and valuing stuff over time

Worstall on Monday It really is true, economists are a bit weird, and this rubs off on those interested in the subject. Most people when confronted with the Christometer seem to think about the bling value.

Or, when presented with the iPhone itself, those same people instead think about how great it is to do email while sitting on the lavvy. To me, the most shocking piece of information about them both is that they're not in fact subject to hedonic adjustment.

Quite what this is we'll get to in a moment, but the end effect is that we're overstating inflation and thus understating the way that wages are rising. And, given that the entire world is up in arms about how all the benefits of economic growth are going only to the one per cent, this is actually a fairly important point.

At the most basic level, if we're going to talk about how well off the average gal is on her wages, we need to look not only at the nominal sum she receives for her work; we also need to look at the value of that money she's receiving. We're all aware that a five per cent pay rise in a time of 10 per cent inflation is actually cut in real wages. Just as we grok that a three per cent rise in a time of one per cent inflation is a rise in them.

This makes measuring what the inflation rate is really rather important: figuring out what nominal wages are is easy by comparison. One of the things we know about this over in the US is that inflation just isn't being properly measured. There's a number of levels to this, though.

Scott Sumner talks about the inflation rate that is generally used to measure what inflation is with respect to wages. We're not, in fact, using the right inflation rate when we measure those US real wages. Sure, the difference is small but it is there.

We can go further, too, into the mainstream political discussion, which is that because US average wages (or median) haven't been rising then that's a failure of capitalism. Obviously, all the money is going off into profits instead. Yet we debunked that belief (using UK figures, as the US tends not to break them out in this form) back here. It just isn't true to say that wages are falling as a portion of the economy and therefore profits must be rising. As the economy is not a binary option between profits and wages, there's also self-employed income, taxes and subsidies on production and consumption to consider. The reality is that those last two have been rising. So, yes, labour share (for the UK) is falling and yet the profit share isn't rising.

Yet again we can go further into the US political discussion, where it is said that average wages should rise with productivity (quite correct) and yet they haven't been rising and so this is proof of yet another crisis of capitalism. Except saying this is to piss about with the definition of “wages”. We can – and the US statistical bods do publish it – look at wages paid to people in their paycheques. But this isn't “wages” in the sense of what should be keeping up with productivity. It is “wages” meaning the total cost to an employer of getting a job done: what in technical terms is called compensation to the worker.

In the US system that includes, just like everywhere else, the employer-paid taxes (social security/NI contributions) on employing someone, something that has risen over the decades. Plus, of course, pension contributions and so on. Specifically in the US that includes health care insurance (the vast majority do get it through their employer; Obamacare is something of a sideshow). Which has been rising in price quite a lot in recent decades. Compensation has been rising, even if wages haven't.

Take a third look into our “lies, damned lies and statistics” spectrum: the claim that median household incomes haven't been rising. This is quite true, in fact, but fails to note that household size has been falling over the decades. Meaning that income per inhabitant of a household has been rising: really rather the thing that you would hope we would be measuring.

This isn't to claim that the US is worse in this sort of manipulation, just different. Gordon Brown famously changed the method of inflation measurement that he was going to use to uprate benefits, tax bands and so on, from one that included housing costs (RPI) to one that didn't (CPI) in the middle of a housing boom. My word, that's a surprise. St Maggie and others have been no better. Old age pensions have been, variously, linked to price inflation and wage inflation over the years (a couple of bounces either way). Amazingly, they were always linked to wages when wage inflation was less than price inflation and always to prices when price inflation was less than wage inflation.

Really, who would have thought of it?

So we're not exactly surprised about people playing silly buggers with the measurements of inflation and how that can be presented as political propaganda over whether wages are rising or not. All sides play the game.

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