Statistics are Indispensable, But….

by Don Boudreaux on November 25, 2006

in Myths and Fallacies

Here’s my latest column in the Pittsburgh Tribune-Review.  In it, I warn against some common mistakes people make when they encounter statistical data.

And here’s a clip from from the column:

The same problem with averages arises when discussing average wage
rates. The average wage rate can fall even though everyone’s wages
rise. Here’s how. Suppose that America’s average wage rate is now $18
per hour. Now suppose that many low-skilled immigrants arrive and find
employment here at wages higher than they could earn in their home
countries. Possessing lower-than-average skills means that the wages
these immigrant workers earn will likely be lower than the U.S. average
– say $10 per hour.

America’s average wage rate will be pulled down even though no
individual’s wages fall. Indeed, it is possible for every American’s
wages to rise and the average still fall.

Let’s be clear: A change in an average might be
evidence of changes in the fortunes of the individuals who compose the
group for which the average is calculated. But it need not be so.

Statistics seem like straightforward, unambiguous facts;
they’re not. Care is required not only in their gathering but also in
your interpretation of them.

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{ 9 comments }

Ray G November 25, 2006 at 11:57 am

Trying to explain this people however, is one of the most frustrating experiences a person can go through in the normal happenings of daily life.

Great post though.

Robert Coté November 25, 2006 at 1:32 pm

All you need assume is that low skilled employees are a pull phenomena rather than a push phenomena and your explaination makes perfect sense.

Too bad the average Joe on the street doesn't have an economic degree. All he thinks now is that his wages are stagnant because low priced labor is cheaper than employers investing in his productivity. Silly me, I see this all the time in my area Ventura County where agriculture is the number one industry. We should be paying a GPS tech, robot tech and a sales rep for a company employing software and mechanical engineers to pick our strawberries but instead the push effect of low priced labor discourages farmers and ranchers from investing in technology.

Low skill workers, regardless of immigrant status, pull down the entire job market for all.

spencer November 25, 2006 at 3:44 pm

Just another example of how we raise our standard of living by paying people less.

Pure classical economics at work.

JohnDewey November 26, 2006 at 6:31 am

spencer: "Just another example of how we raise our standard of living by paying people less."

Who is getting paid less, Spencer? The immigrant workers who were paid 50 cents an hour in Mexico but who now receive $5.25 an hour in the U.S.?

JohnDewey November 26, 2006 at 6:43 am

Robert Cote: "We should be paying a GPS tech, robot tech and a sales rep for a company employing software and mechanical engineers to pick our strawberries but instead the push effect of low priced labor discourages farmers and ranchers from investing in technology. "

Robert, if the agriculture firm could reduce costs by investing in such technology, wouldn't it already be doing so? That seems to imply that cheap immigrant labor is the low cost solution for the agriculture firm. From an economics standpoint, shouldn't the agriculture firm pursue the low cost solution?

The legitimate problem I have heard you make is the social welfare costs of the immigrant workers. If there were some way to charge the employer – and thus the American consumer – for those social welfare costs, would you be any more likely to accept immigrant workers?

The cost to educate the children of immigrant workers is the largest cost I've seen listed in analyses of immigrant costs. If those children are U.S. citizens, then I think we have no choice but to absorb those costs. The real issue to me is the case where those children were not born in the U.S. Like it or not, the Supreme Court has ruled that we must educate them.

Would it be possible to somehow levy higher taxes on agriculture firms that employ immigrant workers? to pay for the social welfare costs of those immigrants? Would that then allow for a better economic decision about workers vs automation?

ben November 26, 2006 at 7:15 am

Spencer

Who is being paid less? In fact, isn't your example falling into the very trap outlined in the article?

Where does classical economics say low pages are required for higher living standards? Oh right, it doesn't.

In fact is there any identifiable group in society that is being paid less over time? Is there any idenfiable group in society whose living standards have not increased over time? Does this complete disconnect not blow your idea out of the water?

Straw man, spencer.

ben November 26, 2006 at 7:16 am

… or even "low wages"… (rather than low pages)

Adrasteia November 26, 2006 at 11:39 am

Actually, the bottom decile of the chinese population has been seeing their real wages decline over the last couple of years.

They can blame the market distortions caused by the PBoC for that though.

happyjuggler0 November 26, 2006 at 1:04 pm

Nice post Don. You stated it much nicer than I did a couple of months ago on this site. I've got a couple of things to add though.

If we have a bunch of low wage immigrants, and at the same time we have a stagnant wages for those born in the USA, then the statistics will *look like* a declining median for Americans. Since we are being constantly told that the median is stagnant based on stats that include low wage immigrants, the logical inference is that the median for born in the USA Americans is *rising*, not stagnant, let alone falling. And of course one can assume logically enough that the immigrants as a group are doing better than they did in their home country or they'd leave.

In order for the median of born in the USA Americans to be declining or stagnant, the official statistics which make no differentiation between such "native" Americans and naturalized Americans or resident workers would have to show a declining median over the past generation where immigration boomed, something we aren't seeing.

The second point is that immigrants can,and often do, take previously unpaid jobs that were done by Americans in their free time, such as mowing lawns, house cleaning, nannying (if that's a word) etc.

Imagine a situation where an educated woman is married to an educated man, and the woman chooses to stay home with the kids instead of taking a job, because her desire to see her kids fabulously raised outweighs her desire to own more clothes and go on bigger and better vacations and eat out at great restaurants more often, etc.

Now imagine she hears about this wonderful Latina immigrant who would be perfect for raising her kid and work for a price low enough that no born in the USA individual who is reliable and trustworthy would reasonably take. She can now hire her, use her education to take a high paying job that raises the national median income(for those who care about the median) and affords her the ability to in effect have her cake and eat it too. She can now have her kids raised fabulously, and have all those luxuries she would otherwise have had to forgo for traditional housewife duties.

In this scenario, no one is out of a job taken by low wage foreigners, the immigrant makes much more than she would in her home country and perhaps also learns a deeper understanding of the importance of education while noting the mother's high income, and the mother makes a high income, indeed an income at all (!), and the mother, father, and kids live a much more affluent life than they would otherwise have been able to. Win-win-win-win-win, with no losers.

A tax policy that makes such an outcome unfeasible due to a marriage penalty or an aftertax income that is "too low" voids this scenario and creates massive deadweight loss. Similarly an immigration policy that prevents such fabulous immigrants from coming over creates the exact same deadweight loss.

Anyone care to guess whether such eradication of deadweight loss is taken into account when people do studies of the costs and benefits of immigration?

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