From the Telegraph on Wednesday:
Unprecedented pay squeeze signals ‘jobs without growth’ economy. An unprecedented squeeze on workers’ pay has led to a “jobs without growth” economy, with labour productivity and living standards falling, economists warn following record high employment figures.
The UK productivity puzzle lingers…
Which made me wonder just how much of this is being driven by an incorrect measurement of GDP?
In short, are we over-adjusting inflation? Is the GDP figure under appreciating other improvements to quality of life and the influence of “free”. Spending 3 hours on Facebook a day for “free” instead of going to the cinema. Being entertained by YouTube instead of a bunch paid for DVDs. Etc etc. None of these quality of life improvements show up in GDP. Neither Youtube or Facebook revenues do the service justice in terms of the real value added.
Which led me to google for other examples of “overadjusted inflation”.
I found the following extract. It offers some salient points on exactly this phenomenon, yet refers not to today but to Greenspan’s “new economy era”:
“Boskin’s Magic Wand” is the title of an op-ed column by Robert Kuttner in Sunday’s Washington Post. Kuttner says, “Suppose you could wave a wand and make most of our economic problems disappear. That is pretty much what the advisory panel on the consumer price index (CPI) proposes ….We are more prosperous than we thought.
By overadjusting for inflation, the CPI has undercounted the economy’s true growth rate. Median family income, which seemed flat, has actually risen by 36 percent since 1973 if you accept Boskin.
Also solved is the great mystery of why productivity growth slowed down, despite prodigious gains in technology. If we stop over correcting for inflation, productivity has been growing smartly. Best of all, a downward adjustment in the CPI makes it easier to balance the budget ….If this all sounds a little too good to be true, it is. The Boskin panel reaches its conclusions mainly by adjusting the consumer price index for changes in buying patterns and for the quality of products ….The trouble with all of this is that the CPI is an index of prices, not living standards. It is easy to track the price of gasoline, or milk or new houses over time, as the CPI has traditionally done. But try to make precise adjustments for quality, and you are off into a soft, subjective realm that economists find hard to measure ….”