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

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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)

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90

100

110

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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 …

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1890 1910 1930 1950 1970 1990 2010

Pe

rce

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ab

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Fo

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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