Reich video

by Russ Roberts on August 4, 2011

in Standard of Living

A number of people have sent me this video by Robert Reich that purports to explain “The Truth About the Economy” in under two minutes.

I stopped after 31 seconds when he said the economy has doubled in size since 1980 but wages are flat.

1. The deflators for GDP and wages are different. The one for wages overstates inflation–it does a bad job correcting for quality improvements. (The GDP deflator may also overstate inflation, but my point is that wages aren’t flat. My impression is that the GDP deflation ends up weighting computers differently but that’s an issue for another post.)

2. Wages aren’t what you want to use. You want to use compensation which includes benefits. Benefits have become a bigger part of compensation since 1980. By leaving out health benefits and using a deflator that includes health care inflation, you further bias the calculation.

3. There has been a great deal of immigration since 1980. The average immigrant is lower skilled than the average native worker. That pulls down the average and the median but doesn’t mean that the average worker is falling behind.

More here.


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