Are we better off?

It’s quite common to hear that Americans (and Canadians) are not much better off today than they were in the 1970s.  This assertion is based on income levels in real terms among the lower and middle income segments of the public.

Opponents to this view cite innovation and technological breakthroughs as a counterpoint to this view.  They say, in real terms, people eat more high value food, have more high value stuff, drive better cars, have much better telecommunications, better housing, etc.

But I heard an argument not that long ago that was even more interesting (it was on a podcast so I don’t have link to the research).  One researcher in the U.S. looked the immigrant population by source and concluded the average person living in the United States today earns considerably more average income (in real terms) than they did in the 1970s compared to where the people were living in the 1970s.

It’s a subtle but interesting argument.  If the millions of immigrants that have come to Canada and the U.S. are earning 2-3 times more on average (in real terms) than where they lived before that would mean a big increase in standard of living for the average American or Canadian – again compared to where they lived before.

I raise this because I am not sure how to see a real rise in the income level among millions of service industry jobs in North America.  The real income level in many sectors of the economy has risen through innovation and productivity (for example, high value manufacturing) and through union action (particularly in the public sector) but the majority of folks in service industry jobs such as accommodation, food services, personal services, etc. are not unionized and there are limited ways to achieve significant productivity gains.   For example, it takes a certain number of people to operate a hotel – there are limited technilogical breakthroughs to reduce time to do this.

Governments could force up the wages in these jobs via hiking the minimum wage but the very powerful small business lobby has deeply resisted this saying they are unable to pass these increased costs onto their customers.

Not as much in New Brunswick but in most parts of North America that have been growing these jobs have been filled with immigrant workers which has enabled the real wage rates to remain relatively low (but for many immigrants much higher than the alternative).

I don’t want to get too wonky but I agree with the economists that say the only real wage gains (system wide) come from productivity and innovation.    Forcing up wages by union power or government action just shifts the costs onto the rest of the economy. 

When I lived in Alberta I knew two brothers with the same skills and background – one worked for a union shop and made $30/hour as a janitor (in the early 1990s) and one worked as a janitor in a hotel and made $9.50/hour.    If all the janitors made $30/hour and all the non-unionized workers made unionized wages without a corresponding productivity gain – that would just drive up prices to match the increase in wages.  Instead of paying $7 for a combo at McDonalds you would pay $12.

I don’t want to get into a big debate about economic theory except to say that immigrant workers have been used to mitigate wage and ultimately price increases and that when we look at income data over decades this issue of ‘are we better off’ is better set in the context of better off compared to where we lived before rather than better off compared to the set of people that lived in this geography.

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4 Responses to Are we better off?

  1. anon says:

    If you would like to dig dipper into this question, I would recommend reading “The Rational Optimist: How Prosperity Evolves” by Dr. Matt Ridley. He does a great job describing how things are improving through “ideas having sex” and trade-driven innovation. If you don’t have time to read the book, you can get an overview here:

    http://www.youtube.com/watch?v=OLHh9E5ilZ4

  2. I have read this book and found it thoroughly interesting – particularly about Thomas Malthus, the food supply and fertilizer. I tend to agree with him about the general course of progress. I think the transition out of fossil fuels might end up being very hard – but then again that is what Malthus thought about the food supply.

  3. mikel says:

    Not sure I understand a few sentences.
    “this issue of ‘are we better off’ is better set in the context of better off compared to where we lived before rather than better off compared to the set of people that lived in this geography”

    Didn’t you live in NB before? Didn’t most of the people in NB and Canada live in NB and Canada? Since we live in Canada, isn’t the experience of Canada the point? Otherwise, why not just make the blanket statement “You are better off than people who lived in Guatamala in the 70’s” (which may be true, but is our empirical aim really to prove that we’re better off than third world countries?)

    “the only real wage gains (system wide) come from productivity and innovation. Forcing up wages by union power or government action just shifts the costs onto the rest of the economy”

    This is very misleading because productivity and innovation invariably lead to entirely different jobs-not an increase in wages. Innovation replaces what was there before. And what we know is that innovation is largely FINANCED by the rest of the economy. So at the Irving Pulp Mill we know that most of the productivity innovations came from tax credits handed out by Bernard Lord’s government.

    I don’t understand what the ‘system wide’ reference means. Say you have a manual tool and die maker. He stamps out metal parts for car engines. He’s paid $25 an hour. So the company ‘innovates’ and buys a complex computer system for its parts manufacture and now the guy trains in the computer system, and because its ‘more difficult’ but also enables him to produce more, then he gets paid a higher wage. That’s fine, but it also infers that there are more CUSTOMERS, and there may not be, he would be just replacing ten other guys on the line. So the economy ends up paying the price.

    Plus, you are also forgetting the profit motive. McDonalds may not have to charge $12 IF it didn’t have a group of investors that was constantly demanding higher profits.

    You also have to remember that ‘averages’ are very spurious. One immigrant who makes it in the states will have a lot of money, but may be offset by huge numbers living in abject poverty. One multibillionaire can really tend to mess up averages. And again, the claim that ‘you aren’t doing as well as your parents but you are doing better than a Guatemalan’ is a pretty vacant boast.

  4. When I was young in the 1970s you could make a living on minimum wage – I did. You can’t do that today.

    I can accept arguments that there might be some economic gain for society as a whole by keeping minimum wage low, or that raiding the minimum wage will raise prices for everyone – at least, for the sake of argument. But even if these are true, there seems to me to be something fundamentally wrong about creating economic prosperity on the backs of the poorest in society.

    The point of a minimum wage isn’t to improve overall economic development or anything like that, and your casting of it as such in this column is a misrepresentation. It is to ensure that any person working in society earns enough to achieve a minimum standard of living. It’s no surprise that there’s a business lobby opposed to raising the minimum wage, because they do not care about such things. That’s why they should not be allowed to run a government.

    Today’s minimum wage does no such thing. It drops people deeper and deeper into poverty – at which point those self-same business people can then accuse them of misusing credit.

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