Forbes on falling wages

I always enjoy it when various anklebiters try to Beli-check me by attacking an economics post. Because I don’t make these things up, it’s always easy to cite others who are saying the same thing. In this case, Forbes is pointing out that real falling American wages are actually worse than they appear in dollar terms.

Today’s minimum wage employee works 12 percent longer to earn a gallon of milk compared to 1965, according to the Bureau of Labor Statistics. Today’s senior engineer works almost twice as long to buy a gallon of gasoline, according to the Department of Energy.

So, in real terms, wages have fallen. The drop is larger than it appears. Look at costs to see why.

Dairy farm statistics show that a cow produces two and a half times the milk compared to yesteryear’s cow and the Department of Commerce reports that labor per cow has fallen by two thirds. These two improvements alone—there are others—eliminate about 87 percent of the effort to make milk.

Efficiency is not the only way for companies to reduce costs. Businesses also remove certain features that consumers don’t want to pay for. For example, milk used to be delivered to a home in a glass bottle. Today it comes in cheap plastic containers that consumers pick up at the store. A more recent example is wine, which is moving from expensive corks to cheaper screw tops.

Yet as fewer labor hours go into producing goods, workers work longer to buy the goods. Using the hour as a measure of costs, we can calculate how much more work a wage earner must produce to buy milk today. But it’s harder to measure the reduction of work that goes into production. We know that it’s less by empirical evidence, but we only get a sense of it.

By switching to gold, we can measure both wages and prices on an absolute scale—in ounces—and we can make precise comparisons. To convert the price of anything to gold, just divide the price by the current gold price. For example, in 2011 if a big-screen TV was $785, then divide that by the gold price of that year; the television set cost half an ounce of gold.

The bottom line is that, in terms of gold, wages have fallen by about 87 percent. To get a stronger sense of what that means, consider that back in 1965, the minimum wage was 71 ounces of gold per year. In 2011, the senior engineer earned the equivalent of 63 ounces in gold. So, measured in gold, we see that senior engineers now earn less than what unskilled laborers earned back in 1965.

That’s right: today’s highly skilled professional is making less in real, comparative terms than yesterday’s unskilled worker.

Now, this is not entirely the result of women entering the labor force en masse. But that is one of the primary contributing factors.  One of these days, I’ll go through the issue and rank those factors.  But my guess is that it is probably number three, after increasingly free trade and the consequences of government fiscal and regulatory policies.