Tuesday, 29 May 2012

From BigMac Price Index to Mcwages…

Orley Ashenfelter of Princeton University in a fab paper looks at this issue of real wages. Even more interesting is his usage of wages paid at McDonalds in different countries to arrive at a kind of McWage index:
A real wage rate is a nominal wage rate divided by the price of a good and is a transparent measure of how much of the good an hour of work buys. It provides an important indicator of the living standards of workers, and also of the productivity of workers. In this paper I set out the conceptual basis for such measures, provide some historical examples, and then provide my own preliminary analysis of a decade long project designed to measure the wages of workers doing the same job in over 60 countries – workers at McDonald’s restaurants. The results demonstrate that the wage rates of workers using the same skills and doing the same jobs differ by as much as 10 to 1, and that these gaps declined over the period 2000-2007, but with much less progress since the Great Recession.

So apart from BigMac Price Index to calculate PPP, you also have McD real wages.

I am not getting into the discussion on real wages etc. It is nicely explained in the paper.

The findings of this Mcwage index are really interesting:
There are three obvious, dramatic conclusions that it is easy to draw from the comparison of wage rates in Table 3. First, the developed countries, including the US, Canada, Japan, and Western Europe have quite similar wage rates, whether measured in dollars or in BMPH. In these countries a worker earned between 2 and 3 Big Macs per hour of work, and with the exception of Western Europe with its highly regulated wage structure, earned around $7 an hour. A second conclusion is that the vast majority of workers, including those in India, China, Latin America, and the Middle East earned about 10% as much as the workers in developed countries, although the BMPH comparison increases this ratio to about 15%, as would any purchasing-power-price adjustment.

Finally workers in Russia, Eastern Europe, and South Africa face wage rates about 25 to 35% of those in the developed countries, although again the BMPH comparison increases this ratio somewhat. In sum, the data in Table 3 provide transparent and credible evidence that workers doing the same tasks and producing the same output using identical technologies are paid vastly different wage rates. As we shall see, a straightforward explanation of these vast wage differences attributes them almost entirely to differences in the total factor productivity in these countries, not to differences in skill or human capital.  

Between 2000-07, we see rise in real wages in developing:
In both Canada and the US the real wage rate declines somewhat, while in Japan it does not change.15 In contrast, the growth rate in real wages is over 50% in this period in China and India, while it is over 150% in Russia. The choice of 2000 for the start of data collection is unfortunate in the case of Russia, as it is well known that the Russian financial crisis in the late 1990s resulted in a collapse in living standards. No doubt some of the massive growth in Russia simply represents a return to previous wage levels. The cases of India and China, countries that contain nearly one-half of the world’s population, are especially noteworthy. There have been many anecdotal conjectures about the accuracy of Chinese growth as reflected in official accounts. 

The data in Table 5 clearly confirm considerable growth in real wage rates in China , averaging about 9% per year. Likewise, growth in real wage rates in India was at nearly 8% per year in this  period. There has been much debate about poverty in India over this period. While the data in Table 5 do not speak directly to that issue, workers in McDonald’s restaurants are not highly paid relative to other workers, even by Indian standards.   It is hard to imagine that the scale of growth these data display did not have considerable effects on the welfare of Indian workers more generally.

However from 2007-11, real wage growth has been missing:
Table 6 and the accompanying Figures 13-15 contain data on changes over the recent period from 2007 to 2011 that reflects the current financial crisis and its aftermath.  
The clear message from Table 6 is that, with a couple of notable exceptions, real wage rates have either fallen (sometimes quite sharply) or remained constant over this period. These real wage declines have been associated with both nominal wage and price increases, but the price increases have not been fully matched by corresponding nominal wage increases. 

The two primary exceptions are Russia and China. The pace of real wage increases in Russia is impressive, and much harder to attribute to the recovery from the Russian financial crisis nearly a decade before. China’s growth has slowed down over this period to a rate that is about two-thirds of the growth rate in the pre-crisis period. With these two exceptions, the previous decade’s nearly universal real wage growth in the developing countries has not been replicated in the most recent period.

Nice different paper….

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