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YOU DECIDE: Is it easy to measure progress?

March 21, 2008

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

With talk of recession in the air, we're seeing more stories about whether households have really gotten ahead, economically speaking, in recent years.

Some analysis shows the average household's wages and income actually retreated this decade; indeed; some claim this has been the situation for more than three decades.

Yet other readers of the economic data come to the exact opposite conclusion. After sifting and sorting the numbers, they argue the average household has never had it so good in terms of what they can earn and buy.

How can smart people come to such different conclusions?

You'd think it would be fairly easy to determine if people have made economic progress. However, by the time you finish this article, you may decide it's not!

There are several factors complicating the simple question of "are we better off today?" First is the "we" part; that is, who are we measuring? Incomes for households and families typically show poorer performance than incomes for individuals (so-called "per capita" measures).

There's actually a simple answer to this puzzle. Households and families have been getting smaller over time. Families are having fewer children and more households are now composed of single adults or childless couples.

This means average incomes today have fewer people to cover in each household and in each family compared to the past. So income trends look much better when they are examined for households or families of the same size or when income changes are expressed on a per-person basis.

Another issue is the measurement of income.

Again, while this might be expected to be easy, it's not. The problem: there are many potential income measurements: income earned per hour (the wage rate), total income earned by hourly workers (wages), total income earned by non-hourly workers (salaries) and income earned plus the value of benefits (compensation).

Each one of these can and has had different trends. In general, wage rates have had the slowest increases, while compensation has had the best increases. One reason: benefits (especially health benefits) have risen faster than wages and salaries. So when benefits are included, the income picture of households looks much better.

Then there's the issue that challenges any income comparison over time: how to adjust for changes in the purchasing power of the dollar? That is, how to adjust for inflation. Since prices typically rise over time, we certainly don't want to directly compare dollar values in the past to dollar values today. Some conversion must be made to account for the fact that today's dollars buy less than yesterday's dollars.

Economists know how to make these adjustments - that's not the problem. The problem is that there are many measures of inflation and different measures can give different answers as to whether households are getting ahead. Measures based on a "fixed market basket" of goods and services - meaning it is assumed people buy the same things this year as they did last year - tend to show the highest inflation rates and thus the poorest economic advancement for households.

In contrast, inflation measures that try to account for changes in what people buy show the lowest rates of inflation and better gains in "inflation-adjusted" incomes.

Finally, some economists think the focus on income changes is misdirected, that what matters most is what people can buy. Here the evidence shows the quantity of purchases made by households has increased and the gains have actually been similar for households of different income levels.

So assessing the economic gains of households is more easily said than done.

At a minimum, you must answer these questions: "Who is being measured, what kind of income is being measured and what kind of inflation adjustment has been made?" Also, you must ask if income is more important than spending, or vice-versa? And if things aren't complicated enough, what about the intangibles that money can't measure?

After sorting through all of this, you may very well decide that economic progress is in the eye of the beholder.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at March 21, 2008 08:00 AM