Relative worker impoverishment under capitalism 1970s-2010s

[K. A. Pital]

I've decided to make this thread to be able to discuss the development of worker wages' purchasing power in advanced capitalist nations over the last several decades (1970-present day).

This comparison from the Economist seems to suggest that outside certain countries (Japan, USA, Germany, South Korea) the purchasing power of worker's wages relative to housing has gone down substantially. Because even the price-to-earnings ratio has gone up, and wages in that period grew slower than overall earnings for inequality-related reasons which are already well-known:
http://www.economist.com/blogs/dailycha ... use-prices

Indeed, national charts (such as here for the UK) often suggest the same:

And this for several developed nations:


Does this actually mean what I think it means - I thought. Have the workers become poorer? This chart from Australia seems to indicate that this is the case - most of the price rise has been driven by leverage and mortgage term extension - an increase in indebtedness. The rise of earnings themselves, as well as the rise in number of earners, has contributed very little to the price increase:


Of course, the best possible comparison would be to take the average price of a square meter of property and check against median income for the 1970s and now. Still, this demonstrates that it is impossible to take the "real wage growth" rates at face value when it comes to adjusting for inflation and measuring the evolution of purchasing power, as the housing price rise has massively outstripped the growth in real wages.

Even more alarming is the fact that median wages for younger workers (18-29) seem to have decreased and not increased over the decades (at least, in the US - I haven't had the time to check other nations yet).

[Simon_Jester]

One issue here is that property is likely to be subject to a version of Baumol's Cost Disease, otherwise known as "string quartet syndrome."

Consider any commodity whose supply cannot be easily increased as society develops and technology advances. It will tend to become relatively more valuable over time, compared to commodities whose supply can be increased over time. For instance, clothing is easy to mass produce compared to the status quo 300 years ago, but the supply of land is constant and the population that desires to possess land has increased. Therefore, we expect that the relative value of clothing and land will shift: if you tried to purchase a hectare of land with shirts in 1716 you would need fewer shirts than you do in 2016.

If "real income in constant dollars" is measured in dollars indexed to the price of commodities immune to the cost disease (e.g. clothing, computers, and so on), then the cost of real estate in constant dollars will increase radically. If the constant dollar is measured compared to a basket of commodities, some of which are of constant supply and some of which are not, the cost of real estate in constant dollars will still increase relative to other commodities in the basket. All else being equal this tends to result in the cost of real estate remaining stagnant or increasing over time, compared to the income of the average person.

[Elheru Aran]

I would note that certain commodities, real estate being the best example, the price of automobiles perhaps being another, don't seem to be related to changes in income levels. A more accurate reflection might be in the price of cheap food, say fast food, or a 5-pound bag of rice. I'm not sure where to get statistics for something like that, though.

[Simon_Jester]

Food prices are a good tool for tracking the rise and fall of worker income in a developing society, where food security is a major concern.

In the developed world it is very counterproductive. Food has become almost trivially cheap in the developed world, to the point where virtually the only people who go hungry are:
1) Those who are totally unemployed,
2) Or those who are victims of a broken distribution chain (e.g. "food deserts" in urban areas where there are few or no grocery stores)...
3) Or people whose budgets are so hopelessly dominated by other requirements (like rent) that their food budget winds up being massively, disproportionately low.

Moreover, the developed world is suffering epidemic levels of diet-related diseases caused by consuming huge amounts of bad food that is cheap and tasty but very unhealthy. Arguably this is doing a lot to impair our quality of life; we might actually be better off if food calories were a bit more expensive.

[Elheru Aran]

Fair enough, I probably read something along those lines a while ago and got it turned around somehow.

I've also noticed that food prices can be very variable on a regional basis. Some items are going to be more expensive if they're not locally produced or, conversely, they might be more expensive BECAUSE they're locally produced... but yes, food prices probably aren't that reliable in a developed society because they're going to remain fairly consistent in a proportionate relation with the economy, with possibly some small exceptions such as the price of meat or specific shortages.

[Simon_Jester]

What you really want to track, in the context of a given economy, is things that are:

1) Desirable for a comfortable existence in that economy,
2) Expensive enough that not everyone can afford them easily,
3) Used in more or less the same ways throughout an extended period of time*

Real estate isn't a bad choice to mix into the commodity basket, although it has advantages and disadvantages. The advantage is that its 'real' value is fairly constant over time, in that an acre of land is an acre of land no matter how technology and society change. The disadvantage is that for most people in modern society, the amount of land they really need is somewhat flexible, and particularly in places like the US there are huge numbers of people who have land they don't need, serves only as a status symbol, and which they could be quite comfortable without (e.g. the yard of their house).
____________

*(Which is why comparing the price of, say, telephones from 1970 to today is a bad idea; we use telephones in a lot of ways now that we didn't then, so our telephones are objectively worth more to us now than they were then).

[Elheru Aran]

Uh... I would barely call a yard 'land'. I mean, sure, yeah, technically it is, but it's like... the bare minimum. And especially in subdivisions or areas subject to HOA's, often you can't even do what you want with it. People don't buy houses for the yard (usually), they buy houses for the house and the yard is an afterthought, it's part of the package.

Mind you it will vary on a case by case basis, from postcard-perfect Levittown subdivisions with postage-stamp-sized yards to ranch houses sitting on a few acres, and I will certainly concede that there's technically no *need* for having anything but a scant few yards of space around your house.

In more subjective terms however, I do feel that having at least *some* yard is a material benefit, as it permits you space to expand, allows your family and children space to play and socialize, and gives you a green space of your own that you can garden, plant flowers, whatever in. Say a quarter or a sixth acre.

That's land though. It's worth less without a house on it.

[K. A. Pital]

I think that dwellings represent an even better reference point than land itself. Before land without communications probably was the average state of the land; nowadays the price of land that's connected to electricity, water etc. is different from bare land as it can be utilized in more ways; and a home built on such land would be more comfortable.

I also think that, from a humanist viewpoint, the key items to watch are food, housing, clothing, education and healthcare. These are the five essentials. If the purchasing power of one's income is falling in relation to one or more of these categories of goods, that person is objectively worse-off and the situation in society might be worsening.

[Simon_Jester]

Uh... I would barely call a yard 'land'. I mean, sure, yeah, technically it is, but it's like... the bare minimum. And especially in subdivisions or areas subject to HOA's, often you can't even do what you want with it. People don't buy houses for the yard (usually), they buy houses for the house and the yard is an afterthought, it's part of the package.

It's not that yards are a large amount of land, or that land is totally unnecessary or has no benefit. What I'm getting at is that the amount of land people 'need' is highly flexible. Peasant farmers need much more land than urban clerks, because for clerks land is the place you put a building for them to live in, while for peasant farmers it's the thing that allows them to produce the goods they live on.

I think that dwellings represent an even better reference point than land itself. Before land without communications probably was the average state of the land; nowadays the price of land that's connected to electricity, water etc. is different from bare land as it can be utilized in more ways; and a home built on such land would be more comfortable.

Price of housing as distinct from land does work better, and I agree with your core thesis here:

I also think that, from a humanist viewpoint, the key items to watch are food, housing, clothing, education and healthcare. These are the five essentials. If the purchasing power of one's income is falling in relation to one or more of these categories of goods, that person is objectively worse-off and the situation in society might be worsening.

[His Divine Shadow]

Does this actually mean what I think it means - I thought. Have the workers become poorer?

Based on watching basically every one of Mark Blyths lectures on the subject. Yes, and cheap credit was made to mask this phenomenon and make it think we where all living in an age of plenty for all. This was all stripped away when things went to heck and all the credit bubbles started popping and since then things have been wonky and capitalism is failing to make peoples lives better yet we're still steaming ahead on the same old course just chanting harder that capitalism will save us. Cutting welfare, giving the rich more tax cuts, not carpet bombing tax paradises etc.

[His Divine Shadow]

Case in point
http://www.e-ir.info/2016/08/13/interview-mark-blyth/

"Here’s an interesting one. Imagine it’s 2006 and we said “okay, let’s not even use conditional probabilities, let’s do simple probabilities. I’m going to list a series of events and you’re going to give me the probability from 1 to 0 on each of these events happening and we’re going to add them all up together and we’re going to see where we end up and see how unlikely something is”. So, in 2006, what are the odds of a gigantic crash based in the American housing market reverberating around the world and leading to the near collapse of the entire global financial system? ”Pretty small”. Alright, what are the chances that having successfully stabilized the countries that we recognized as being the leading sort of democracies in the world, they will become the most conservative and will start doing budgetary austerity as in 1930? And in the face of any evidence and in the teeth of rationality they will raise interest rates in the middle of a recession to create a double dip recession, and they will end up generating and sustaining levels of unemployment we haven’t seen since the 1930’s? You get pretty long odds on that. What’s the chances of Russia invading and taking over Ukraine and Crimea and a new Cold War basically being on the with the European Union pushing itself up to the borders of Russia, willy nilly, with no regard for how they feel about their own security and how sensitive that is, and given the fact that the European Union has no army, they are just doing this on the strength of rhetoric and ego? So, let’s just do the comparative, and this shouldn’t happen, yet this is the world we live. What are the chances of global central banks kicking over 12 trillion euros, or pounds, or dollars into the global economy and there being no inflation anywhere, nor a central bank in the world hitting its inflation target? I mean, it’s changed. It has changed so much."

Probably shits gon' get fucked up more.

[Esquire]

Or, to rephrase: economists ( and statisticians generally) are very good at predicting events and values which approximate standard distributions. It is unfortunate that none of the important ones do.

[Ziggy Stardust]

I don't really understand the point of that quotation. Even looking at it in the context of the rest of the interview, it isn't entirely clear what he is talking about. WHAT exactly has changed so much? All he does is blather on about a list of current events and say, "OMG wasn't it surprising when that happened?" Even though most of those events were only surprising due to people observing them from the wrong reference frame or having incomplete information, not because they were actually low probability events to begin with (and I would argue he is deliberately misrepresenting them for dramatic effect anyway; like saying that EU-Russian relations is only a function of "rhetoric and ego"). Is he trying to say events are more unpredictable now than they used to be? If so, why make such a lazy argument without any real supporting facts? Why does someone who is supposed to be a professional economist not understand the difference between odds and probability, anyway? It represents a pretty massive misunderstanding of statistics and probability theory to say that any event that you didn't see coming was a low probability event ONLY based on the fact that you didn't see it coming.

[Esquire]

My interpretation was that the speaker was saying that all of the mentioned events really were low-probability according to most existing models. No model can have perfect information and therefore you need to be very, very careful about depending on them to provide your economic or foreign-policy assumptions; something as simple as not knowing that a certain government functionary missed his last car payment can completely invalidate years of painstaking calculations.

So, yes, the mistakes of the recent past are only due to insufficient information... but that's part of the human condition, not something we're ever going to be able to fix. Anybody claiming otherwise is selling something.

[K. A. Pital]

I think that Simon had a good guess at the start of this thread about the rising land prices. The following short essay by Piketty et al examines the situation in many First World nations and comes to similar conclusions

http://piketty.pse.ens.fr/files/Schularicketal2014.pdf

However, this study omits the comparison with real wages (they only compare with GDP). A comparison of the prices with real wages would've been even more dramatic, as real wages have decoupled from GDP growth in the 1980s.

[madd0ct0r]

Playing devils advocate, does increased indebtness mean a lower standard of livibg?

You could argue it allows you to use an item from an earlier point, then if you had to save up the ticket price.

[K. A. Pital]

Playing devils advocate, does increased indebtness mean a lower standard of livibg?

You could argue it allows you to use an item from an earlier point, then if you had to save up the ticket price.

If the sum of debt you have to eventually pay rises in absolute terms relative to that of your predecessor, that means you are objectively becoming poorer. A larger share of your lifetime income needs to be devoted to paying up, whereas your predecessor was free from this at an earlier point in time and thus a smaller share of his/her lifetime income was devoted to this.

If you die before paying the debt and it is not inheritable, that is a bankruptcy-like event - these types of events would suggest that it is possible to cheat the system by simply not paying down the debt sum at all. But it remains to be seen if even death itself an escape option for the current young workers - especially as medical advances stretch out their lives.

And I think current generations of workers have every right to be concerned. If you look at this graph for Australia, it certainly seems that the debt burden has increased several times and now it is much greater than disposable income (which, I will stress again, is higher than disposable wage income):

[NecronLord]

One supposition on this topic I've recently read is that the steadiness of this increase has also been related to the fact that since the 60s and 70s, there have been no serious increases in speed and capability of transport in western countries, and that such increases in the early part of the 20th century drove the price of land and housing down. One wonders if it's some degree of consciousness of this on the part of the bourgeois that means high speed rail is forever being cancelled, de-funded, or warped in some way or another by conservative governments here.

[K. A. Pital]

That is Schularick's supposition which I linked to above (mistook it for Piketty's paper, my bad). But I am also quite interested in doing my own comparisons when I have some time. Comparing wages and prices can be done in nominal terms, which makes it a lot easier than looking for data with pre-applied deflators.