Thursday, October 25, 2007

Wages, Data and Perception

Let me start out by saying that when Tyler Cowen, Arnold Kling (the first article listed), and Greg Mankiw all mention an article, that should be a clue that it deserves attention. So, here's a HT to all three.

The article, "Has Middle America Stagnated?" by Minneapolis Fed economist Terry J. Fitzgerald, is the first in a series examining the economic progress of middle America since 1975. In this first article, Fitzgerald looks at the dichotomy in various microeconomic measures of well-being, two of which show stagnant wages over the period. In explaining the disparate measures, he talks about measurement. He not only explains difference in what is measured, but points out that the data are adjusted for inflation using different measures. By applying a different, (and in my opinion, a broader and more accurate) measure he gets very different results. He also addresses the difference when using mean and median measures.

Fitzgerald also includes a brief section regarding benefits and their impact as a component of wage. This is part of the value received for labor that, unless it is illustrated, many people forget - especially students. This article is useful for economics (and other) teachers for a number of reasons. It not only provides a way of reconciling different views on the economy. It also helps teachers and students understand how economic performance is measured, along with reminding them about the use of statistics.

This will be an interesting series. I hope you find it interesting, as well. Your comments are welcome and appreciated.


Mike Fladlien said...

does it really matter how data is measured as long as it's measured consistently? the difference between using the gdp deflator and the cpi isn't all that great...just wondering....

Tim Schilling said...

I think the spirit of your question is correct and that is the point of Fitzgerald's article. One data series measures one way, one another. And yet we quote both or either as if they were interchangable. They aren't. He just adjusted both by the same measure - in my opinion a more accurate one.

But to carrry this further, I think it does matter. If you're using an inaccurate measure and you use it consistently, you're not only getting consistently inaccurate information (signals to the marketplace), you compound the error.

Witness the effect of using the CPI to adjust wages/benefits. It consistently overstates inflation. If a contract or benefit is adjusted by the CPI, it does not keep the recipient from "keeping pace", rather it provides real net gains.

For the beneficiary, that's not bad. For the provider/payer, it's an undue expense. If the idea is to provide real gains, there are more efficient ways of doing things.

Anyone else care to add to this discussion?