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Naked Economics by Charles Wheelan
November 13: Chapters 1 & 2
November 20: Chapters 3 & 4
November 27: Chapters 5, 6, & 7
December 4: Chapters 8, 9 & 10
December 11: Chapters 11, 12, 13 & Epilogue
Goals
• Introduce the “Economic Way of Thinking”
• Apply these Ideas to Selected Issues
Review Focus First on Long Term Trends
USA 1800 1900 2010
Income per Person $1,913 $6,624 $41,728
Life Expectancy 39 yrs 49 yrs 79 yrs
Work Time All Mostly Some
www.gapminder.org
How Did We Become Rich?
• Income per Person = Output per Person
• Output per Person = Output per Worker x Workers per Person
• Answer: Productivity (Output per Worker) Rose Dramatically
• Workers per Person also rose: Women joined market labor forc
What Increases Productivity? (1)
• Investment in Physical Capital (Structures and Equipment)
• Investment in Human Capital (Education and Health)
• Technological Advances (Steam Engine, Electricity, …)
What Increases Productivity? (2)
• What Institutions Encourage (provide Incentives for) Work, Saving, Investment, and Technological Advances?
• Answer: Good Governments
– Keep the Peace
– Enforce Contracts and Property Rights
– Do NOT confiscate (all) increases in Wealth
– DO invest in Education and Infrastructure
– Rely on Markets; Avoid Central Planning
– Do NOT isolate themselves from the ROW
40
50
60
70
80
90
100
110
120
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Productivity and Real Wages Nonfarm Business Sector
Index Numbers: 2005 = 100
Output per Hour
Real Compensation per Hour - Deflator
ERP 2012 Tbl 49
“U.S. workers endure ‘lost decade’ of declining wages”
• Bozeman Chronicle: November 18, 2012
• “…real earnings, when adjusted for inflation, have declined across most industries and sectors since the Great Recession. Since 2002, in fact, it’s effectively been a lost decade for workers.”
• “In fact, real wages have been on a mostly downward slope for more than 40 years.”
We are Rich (and Healthy)!
My Reaction
• We are Rich and Healthy
–Compared with 100 years ago
–Compared with most people in the world
• So quit your whining!
$0
$5
$10
$15
$20
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Average Hourly Earnings Private Nonagricultural Industries
Production or Nonsupervisory Workers
Current Dollars
Real (1982-84 Dollars) - CPI
ERP 2012 Tbl 47
40
50
60
70
80
90
100
110
120
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Productivity and Real Wages Nonfarm Business Sector
Index Numbers: 2005 = 100
Output per Hour
Real Compensation per Hour - Deflator
ERP 2012 Tbl 49
Why the Difference?
• Different Price Indices
–Deflator for Nonfarm Business Output (Comparable to productivity measure)
–CPI for Consumer Expenditures (Value of wage to worker)
–But even the latter shows real wages rising
40
50
60
70
80
90
100
110
120
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Productivity and Real Wages Nonfarm Business Sector
Index Numbers: 2005 = 100
Real Compensation per Hour - CPI
Real Compensation per Hour - Deflator
ERP 2012 Tbl 49
Why the Difference?
• Different Price Indices
• Different Measure of Wages: Compensation includes, in addition to wages and salaries, Employer Payments for
– Social Security, Unemployment, Workers Comp
– Retirement
– Health Insurance
– Paid Nonwork (Holidays, Vacation, Sick, Personal)
80
90
100
110
120
130
140
Ind
ex:
Ju
ne,
1989 =
100
Employee Cost Indexes
Constant Dollar
Wage/Salary Benefits Total
BLS http://www.bls.gov/web/ecconst.pdf
Average Annual Premiums for Single and Family
Coverage, 1999-2012
* Estimate is statistically different from estimate for the previous year shown (p<.05).
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012.
$15,745*
Single Coverage Family Coverage
Average Annual Worker Premium Contributions and Total
Premiums for Covered Workers, Single and Family Coverage, by Firm Size, 2012
* Estimates are statistically different between All Small Firms and All Large Firms (p<.05).
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2012.
Cumulative Increases in Health Insurance Premiums, Workers’ Contributions to Premiums, Inflation, and
Workers’ Earnings, 1999-2012
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012. Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), 1999-2012; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 1999-2012 (April to April).
Why the Difference?
• Different Price Indices
• Different Measure of Wages
• Different Workers – Production/Nonsupervisory Workers exclude
more highly paid Supervisors and others whose wages are increasing
High Wage Workers are Gaining
http://www.cbo.gov/doc.cfm?index=12051&zzz=41558
More Education: Higher Wage AND More Wage GAIN
http://www.cbo.gov/doc.cfm?index=12051&zzz=41558
Conclusions
• Worker Compensation (including Benefits) closely tracks Worker Productivity
• At the Risk of Repeating Myself:
• We are Rich because we are Productive
Conclusions (2)
• Common Wage data fail to include Benefits, which are valuable to workers and costly to firms
• Health Care (and other Benefit) Costs are eroding gains in take-home pay
• But may be worth it: “Stents are nice, compared with the alternative.”
Excluding Benefits …
• Real Wages are falling for men with low levels of education (<= HS)
• Real Wages for Women with low levels of education are more or less constant
• Real Wages are rising for both Men and (especially) Women with a Bachelor’s Degree or better
So, Are Workers Better Off?
• Women: Yes
• Men with >= Bachelor’s Degree: Yes
• Men with <= High School Education: Maybe
–Wages are Flat/Falling
–Health Benefits are Better, If Have Them
But in the Short Run …
0
5
10
15
20
25
30
1890 1910 1930 1950 1970 1990 2010
Pe
rce
nt o
f L
ab
or
Fo
rce
Unemployment Rate
Supply and Demand
• Supply: Quantities (and Qualities) of Goods and Services Offered for Sale at Various Prices
• Demand: Quantities (and Qualities) of Goods and Services Buyers are Willing and Able to Purchase at Various Prices
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