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
120 110 100 Productivity and Real Wages Nonfarm Business Sector Index Numbers: 2005 = 100 Output per Hour Real Compensation per Hour - Deflator 90 80 70 60 50 40 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 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!
$20 $15 Average Hourly Earnings Private Nonagricultural Industries Production or Nonsupervisory Workers Current Dollars Real (1982-84 Dollars) - CPI $10 $5 $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 ERP 2012 Tbl 47
120 110 100 Productivity and Real Wages Nonfarm Business Sector Index Numbers: 2005 = 100 Output per Hour Real Compensation per Hour - Deflator 90 80 70 60 50 40 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 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
120 110 100 Productivity and Real Wages Nonfarm Business Sector Index Numbers: 2005 = 100 Real Compensation per Hour - CPI Real Compensation per Hour - Deflator 90 80 70 60 50 40 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 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)
Index: June, 1989 = 100 140 Employee Cost Indexes Constant Dollar Wage/Salary Benefits Total 130 120 110 100 90 80 BLS http://www.bls.gov/web/ecconst.pdf
Average Annual Premiums for Single and Family Coverage, 1999-2012 $15,745* * Estimate is statistically different from estimate for the previous year shown (p<.05). Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012.
Average Annual Worker Premium Contributions and Total Premiums for Covered Workers, Single and Family Coverage, by Firm Size, 2012 Single Coverage Family Coverage * 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
Percent of Labor Force But in the Short Run 30 Unemployment Rate 25 20 15 10 5 0 1890 1910 1930 1950 1970 1990 2010
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