Category Archives: cost of living

23/2/20: Fake Data or Faking Data? Inflation Statistics

As economists and analysts, almost all of us are trying - at one point or another - make sense of the, all too often vast, gap between the reality and the economic statistics. I know, as I am guilty of this myself (here's a recent example:

An interesting and insightful paper from Oren Cass of the Manhattan Institute dissects the extent of and the reasons for the official inflation statistic failing to capture the reality of the true cost of living changes in the U.S. over recent years (actually, decades) here: It is a must-read paper for economics students, analysts and policymakers.

His key argument is that: "Economists and families see three things differently:

  • Quality Adjustment. Products and services that rise substantially in price but in proportion to measured quality improvements can become unaffordable, while having no effect on inflation.
  • Risk-Sharing. New products and services can increase costs for the entire population yet deliver benefits to only a very small share, while having no effect on inflation.
  • Social Norms. Society-wide changes in behaviors and expectations can alter the value or necessity of a good or service, while having no effect on inflation."
In other words, over time, official inflation starts to measure something entirely different than the real and comparable across time consumption expenditure. As the result, you can have a paradox of today: low inflation is associated with falling affordability of life. 

An example: "In 1985, ... it would require 30 weeks of the median weekly wage to afford a three-bedroom house at the 40th percentile of a local market’s prices, a family health-insurance premium, a semester of public college, and the operation of a vehicle. By 2018, ... a full-time job was insufficient to afford these items, let alone the others that a household needs."

To address some of the shortcomings of the inflation measures, Cass offers a different metric, called COTI - Cost of Thriving Index - which basically amounts to the number of weeks that a given line of expenditure requires in terms of median income. Or "Weeks of Income Needed to Cover Major Household Expenditures". Two charts below illustrate:

And here is a summary table:

Excluding food, other necessities and looking solely at Housing, Health Insurance, Transport and College Education, the number of weeks of work at an overall median wage required to cover the basics of the necessary expenditure is now in excess of 58.4 weeks. For female workers' median wage, the number is 65.6 weeks. 

Which means that even before you consider other necessities purchases, and before you consider taxes, you are either dipping massively into debt or require a second income to cover these. 

Note: these do not account for income taxes, state taxes, property taxes, dental insurance. These numbers do not cover payments for water, gas, electricity. There is no mandatory car insurance included. No allowances for deductibles coverage savings (e.g. HSAs). No childcare, no children expenditures, no food purchases, and so on.

And even with all these exclusions, median income cannot afford the basics of living in today's America. 

A word from Fed, anyone?

14/8/15: Two Facts About Irish Minimum Wage

Having recently spoken about the issues of minimum wage, especially in the Irish context, here are some facts, based on Eurostat latest data.

Firstly - about the level of minimum wages in Ireland relative to the EU counterparts.

In monthly terms, Irish minimum wage comes in at EUR1,462 per month (1Q 2015 data). Despite some claims that we have the second highest minimum wage in Europe, this puts us in the 5th position just below 4th ranked Germany (EUR1,473 per month) and ahead of the sixth ranked France (EUR1,458 per month). It is worth noting that Denmark, Italy, Cyprus, Austria, Finland and Sweden have no national minimum wage.

However, when comparing minimum wages in different countries, it is worth looking at figures, adjusted for Purchasing Power Parities (controlling for cost-of-living differences, albeit imperfectly). Chart below shows these:

In terms of PPP-adjusted figures, Irish minimum wage is 6th highest in the EU at EUR1,238 per month (PPP). This is quite significantly ahead of the UK (ranked 7th at EUR1,114 per month PPP-adjusted), but below France (at EUR1,337 per month PPP-adjusted).

Another possible comparative is in terms of 'replacement rate' for minimum wage earners - in other words, how much worse-off (relatively-speaking) minimum wage earners are compared to, say, average wage earners. Chart below illustrates that:

Per chart above, minimum wage earners in Ireland earn on average around 41.6% of the gross average wage on a monthly basis. Comparable, but slightly more than their counterparts in the UK.

What the above two charts illustrate is that Irish minimum wage is not set at an extremely high level, as some claim. 

They also show that crucial point for people earning minimum wages is the cost of living in Ireland, rather than just the level of wages they earn. 

My view, within the context of the Irish minimum wage debate is that we must focus more of our efforts on the cost of living side, less on incrementally increasing minimum wage. And more crucially, there is little point, in my opinion, to increase minimum wage by a small (token) amount, as variability of hours worked and zero hours contracts offered will erase much of the benefit to be gained by those still holding minimum wage jobs after the wage increase. 

Sadly, for politicians, small/marginal give-aways to well-defined groups of voters bring in political returns. Large-scale, longer-term reforms bring in dissatisfaction of vested interest groups & lobbies. No prizes for guessing what path Irish Government will opt for ahead of the elections...

Update: with thanks to Seamus Coffey ( @seamuscoffey) here are two charts detailing tax burden for minimum wage earners:

Given the levels of progressivity in Irish tax system, it is quite un-surprising that Irish minimum wage earners are carrying low tax burden on tax side, which does push after-tax minimum wage in Ireland to higher poll position in the league tables. On the other hand, the Eurostat data on which my analysis was based uses 39 hour weeks for computing minimum wage earnings, without adjusting for working days. Which, probably, pushes our minimum wage earners' annual incomes down (especially given the prevalence of low hours and zero hours contracts in some sectors).

Thus, as a note of caution, all of the above data should be read as all economic data should be read: with caution and without attempting to make sweeping generalisations.