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U.S. Cost of Living and Wage Stagnation, 1979-2015

Blog Post | Economic Growth

U.S. Cost of Living and Wage Stagnation, 1979-2015

Looking at average hourly earnings alone ignores at least three very important factors.

The question of the cost of living in the United States is intimately connected to the issue of the so-called “wage stagnation,” which is typically blamed on economic liberalization that started under President Carter, gathered steam under President Reagan, and peaked under President Clinton.

According to a 2015 report issued by the Economic Policy Institute, a pro-labor think tank based in Washington, D.C., “ever since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline. This is despite real GDP growth of 149 percent and net productivity growth of 64 percent over this period. In short, the potential has existed for ample, broad-based wage growth over the last three-and-a-half decades, but these economic gains have largely bypassed the vast majority.”

True, adjusted for inflation, average hourly earnings of production and nonsupervisory employees in the private sector (closest approximation for the quintessential blue-collar worker that I could find) have barely changed between 1979 and 2015. In October 1979, average hourly earnings stood at $6.51 or $21.20 in 2015 dollars. In October 2015, average hourly earnings stood at $21.18 – slightly below the inflation adjusted 1979 level.

Looking at the average hourly earnings, however, ignores at least three very important factors: expansion of non-wage benefits, fall in the price of consumer goods and rise in price of services, such as education and healthcare.

First, in recent decades, non-wage benefits expanded. Today they include relocation assistance, medical and prescription coverage, vision and dental coverage, health and dependent care flexible spending accounts, retirement benefit plans, group-term life and long term care insurance plans, legal and adoption assistance plans, child care and transportation benefits, vacation and sick paid time-off, and employee discount programs from a variety of vendors, etc.

It is not easy to put an exact figure on the value of those non-wage benefits, but they could amount to as much as 30 or even 40 percent of the workers’ earnings. The lion’s share of the non-wage benefits, as my Cato colleague Peter Van Doren wrote in 2011, is consumed by “the dramatic increase in health insurance costs.” “The fixed costs of health insurance,” Van Doren shows, “are a much larger percentage of the total compensation of lower-earnings workers.”

Second, many, perhaps most, big-ticket items used by a typical American family on a daily basis have decreased in price. Over at Human Progress, we have been comparing the prices of common household items as advertised in the 1979 Sears catalog and prices of common household items as sold by Walmart in 2015.

We have divided the 1979 nominal prices by 1979 average nominal hourly wages and 2015 nominal prices by 2015 average nominal hourly wages, to calculate the “time cost” of common household items in each year (i.e., the number of hours the average American would have to work to earn enough money to purchase various household items at the nominal prices). Thus, the “time cost” of a 13 Cu. Ft. refrigerator fell by 52 percent in terms of the hours of work required at the average hourly nominal wage, etc.

Needless to say, the above price reductions greatly underestimate the totality of welfare gains by an average American, by ignoring qualitative, aesthetic and environmental improvements on commonly used items. (To give just one example, a refrigerator today uses one-third of the electricity used by a refrigerator in the 1970s.)

From the above discussion it might be reasonable to conclude that Americans are much better off today than they were in the late 1970s, but that would be too simplistic. The cost of education, healthcare and housing has risen at a faster pace than total compensation. It is true that today’s houses are larger, healthcare better, and education more high-tech than in the past, but quality improvements do not seem to account for the entirety of price increases. For example, there appears to be a high degree of academic consensus that housing price inflation is driven, primarily, by zoning laws. (No such consensus, alas, exists for the rise in education and healthcare costs.)

The question of standard of living is a complex one. The accompanying infographic refers to merely one part of the debate, i.e., affordability of commonly used items. While we believe that the infographic tells an important story, it should be considered within a broader context, including non-wage compensation and offsetting increases in the cost of housing, education, and healthcare.

This first appeared in Reason

CNN | Cost of Services

Cheap Robotaxi Rides Rattle China’s Taxi Drivers

“The fleet of 500 vehicles operating in the city belongs to Apollo Go, a unit of Chinese tech giant Baidu. They serve an area that covers roughly half of Wuhan’s population, according to a May company release.

A major selling point is the price. Base fares start as low as 4 yuan (55 cents), compared with 18 yuan ($2.48) for a taxi driven by a human, state media Global Times reported on Wednesday.

The service launched in 2022 and started to gain traction during the first half of the year. The company aims to double its fleet to 1,000 cars by the end of 2024. Wuhan currently has around 17,000 regular cabs, according to the city’s transport bureau.”

From CNN.

Blog Post | Tourism & Leisure

Cruising Has Never Been More Abundant

Over the past 50 years, the time price of a Caribbean cruise has dropped over 70 percent. Blue-collar and unskilled workers now get 3.4 cruises for the time price of one in 1972.

Summary: In the last 50 years, the time price of a Caribbean cruise vacation has dropped significantly, making it accessible to blue-collar and unskilled workers. Ted Arison’s Carnival cruise line, starting in 1972, transformed cruising from an exclusive luxury to an affordable vacation for many. Today’s cruises offer vastly improved experiences and illustrate how entrepreneurial vision can make luxuries accessible to all.

Entrepreneur Ted Arison launched his first ship, the Mardi Gras, on March 11, 1972. At the time, cruising was considered an expensive luxury for older rich people. Over the past five decades, Arison’s Carnival cruise line made this high-end experience affordable for everybody, including plumbers, schoolteachers, and college students. The Mardi Gras sailed for 20 years and created the market we enjoy today. It even gave life to a popular TV show, The Love Boat, which aired from 1976 to 1990. Carnival cruise line managed to grow from a one-ship line to the largest cruise company in the world. The first Mardi Gras cost $5 million and accommodated 1,248 passengers on 10 decks.

1972 Mardi Gras

You could book a seven-day cruise from Miami to the Caribbean for $240 to $595. Blue-collar workers at the time were earning around $4.59 an hour in wages and benefits. At $240, a cruise would cost them 52.3 hours. Unskilled workers were earning closer to $2.14 an hour, making their time price around 112.2 hours.

In 2021, Carnival launched its new Mardi Gras. This $950 million ship accommodates 6,500 passengers and approximately 2,000 crew members. It hosts “Bolt” the world’s first shipboard roller coaster, along with a water park and a sports center and is powered with liquified natural gas. The quality of the experience has vastly improved in 50 years with better food choices, entertainment, comfort, and safety. The new Mardi Gras weighs 180,000 tons, around 6.6 times more than the 27,284-ton original. This larger size dramatically reduces sea sickness.

2024 Mardi Gras

Today you can book a seven-day cruise from Carnival’s new $163 million, 188,000-square-foot terminal at Port Canaveral, Florida, to the Caribbean for $549. Blue-collar workers are now earning around $36.15 an hour in wages and benefits, putting their time price at 15.2 hours. Unskilled workers are earning closer to $16.51 an hour today, making their time price around 33.3 hours.

For these workers, the time price has dropped more than 70 percent. For the time it took them to earn the money to buy 1 cruise in 1972, they get 3.4 today. Cruise abundance has increased 240 percent. If you “upskilled” from an unskilled worker in 1972 to a blue-collar worker by 2022, your cruise abundance increased by a factor of 7.38, or 638 percent. Everybody floats first class now.

The larger the market, the more affordable things become for everyone. Adam Smith wrote about this in 1776. From 1972 to today, US population increased 131 percent from 208 million to around 340 million. Every 1 percent increase in population corresponded to a 1.83 percent to 4.87 percent increase in personal cruise abundance.

It’s visionary entrepreneurs like Ted Arison that take on enormous risks and create whole new markets and then get fabulously rich by making luxuries affordable for everyone.

This article was published at Gale Winds on June 28, 2024.

Blog Post | Air Transport

Flying Abundance (And Safety) Has Increased Dramatically

Get 10.8 flights from New York to London today for the time price of one in 1970 and be 80.4 times safer.

Summary: Since the Wright brothers’ pioneering flight in 1903, the aviation industry has made remarkable strides in safety, affordability, and accessibility. Comparing flight prices from 1970 to today reveals a staggering 90.8 percent decrease in the time price of flying, with transcontinental flights now affordable for the average person. Additionally, advancements in aviation technology have made flying dramatically safer today than it was in 1970, and are likely to improve flying safety in the future.

The Wright brothers launched the era of aviation on December 17, 1903, with a 12-second flight. Since then, aeronautical engineers and market innovators have made the experience safer, faster, and much more affordable.

For example, in 1970 the price for a roundtrip ticket from New York to London was $550. Blue-collar workers at the time were earning around $3.93 an hour in compensation (wages and benefits). This suggests a time price of around 140 hours.

Today, the ticket price has dropped to around $467. Blue-collar workers are now earning closer to $36.15 an hour, putting the time price at 12.9 hours. The time price has fallen by 90.8 percent: for the time required to earn the money to buy one flight in 1970, you can get 10.8 flights today.

Flying abundance has increased by 980 percent, compounding at an annual rate of 4.5 percent over the last 54 years. During this same period the global population increased by 4.3 billion (117 percent), from 3.7 billion to more than 8 billion. Every 1 percentage point increase in population corresponded to an 8.4 percentage point increase in flying abundance.

This graphic highlights how flight abundance has increased to 10.8 times the amount it was in 1970.

Now transcontinental flights are affordable for almost everyone. Free-market entrepreneurial capitalism isn’t about making more luxuries for the wealthy, it’s about making luxuries affordable for the average person.

While it is true that the 1970s flights may have had roomier cabins and better dining, flying today is dramatically safer. The Aviation Safety Network tracks airline accident data. Revenue passenger kilometer (RPK) is a standard metric used in aviation. Using this data, Javier Mediavilla plotted the ratio of fatalities per trillion RPK from 1970 to 2019 using five-year averages. The ratio decreased by 98.76 percent, from 3,218 to 40, during this 49-year range. Flying is more than 80.4 times safer today than in 1970, and safety has been improving at a compound rate of around 9.37 percent a year.

This graph highlights how the number fatalities per RPK has seen a steep decline since 1970.

Considering both the time price and safety, flying has become 868 times more abundant since 1970 (10.8 x 80.4 = 868). If there had been no innovation in flying since 1970,  New York to London airfare would be around $5,059 today. Only the rich could afford transatlantic flights in 1970.

The 3,442-mile flight takes around seven hours. The supersonic Concorde could fly it in less than three. While there are no commercial supersonic flights available today, Boom Supersonic, a private company based in Colorado, aims to bring them back to US airlines by 2029. Perhaps spending half as much time on flights will allow people to use their most valuable resource for other value-creating activities.

This article was published at Gale Winds on 3/26/2024.

Nature | Noncommunicable Disease

New Car-T Cancer Therapy Is Now Made At One-Tenth the Cost

“A small Indian biotechnology company is producing a home-grown version of a cutting-edge cancer treatment known as chimeric antigen receptor (CAR) T-cell therapy that was pioneered in the United States. CAR-T therapies are used mainly to treat blood cancers and have burgeoned in the past few years.

The Indian CAR-T therapy costs one-tenth that of comparable commercial products available globally.”

From Nature.