Inflation is a curious concept. It is intended to capture the amount by which prices are rising. But the way in which it is computed involves surprising subtleties. There is the definition of a “basket” of goods, and the weighting of each category within the basket (if food prices rise, how much of that is chicken, and how much is lamb?). There is the decision of whether to omit volatile categories like food or energy. There is the substitution effect, captured in so-called “chained” measures. And there is the question of which prices to consider — the prices consumers pay (CPI), the listed prices for things consumers pay for (PCE), or the price of everything (GDP-deflator).
One of the most complicated adjustments is the “hedonic quality adjustment”. In an explainer for Vox, Matt Yglesias describes it in the following way:
During the mid-aughts when most Americans were shifting from low-definition televisions to higher-definition televisions, many people found themselves buying more expensive HDTVs. A very superficial analysis might have concluded that the price of televisions was rising. In reality, the price of both HD and non-HD televisions was falling. BLS quality adjustment methods are intended to take into account this kind of shift and record it properly as a decline in prices. In the case of goods that have well-defined feature sets (like televisions) this can be done in a reasonably unambiguous way but it can be more challenging for other categories.
Related, but not identical, is the idea that there are genuinely new goods that we have now that we did not have decades ago. These effects are essentially ignored by inflation indices. To quote Yglesias again,
An inflation index can tell you that the price of an iPhone 5 has fallen considerably since the introduction of the iPhone 5S. But it can’t tell you much about the fact that 10 years ago there were no touchscreen smartphones with LTE service, whereas today such smartphones are broadly accessible to the middle class….You can use the CPI to translate a 1964 income into a 2014 income, but that doesn’t change the fact that many classes of goods were unavailable 50 years ago. This is most obvious in the realm of digital gadgets. But it’s also true of important aspects of medicine (cochlear implants), transportation (airbags), foods (pluots, broccolini), and other realms of everyday life.
Conservatives have used these ideas to argue that increases in living standards are understated by real wage measures (i.e., wages after accounting for inflation).
“People are not as badly off as you think,” said Aparna Mathur, resident scholar at the American Enterprise Institute, a right-leaning organization.
About one-third of the lowest income households had either LCD or plasma TVs. Granted, that’s less than half the share of the highest income group, but conservative researchers say it’s a sign that the consumption gap is narrowing.
Mathur also points to other appliances and electronics that are now commonplace in the homes of those with the lowest incomes, including microwaves and air conditioning.
“This is not what you think of when you think of poverty,” she said. “The fact that people can afford these things suggests improvement in living standards over time.”
(As an aside, conservatives are now making the opposite argument: that, during COVID, the quality of goods and services has declined, with supply chain snafus and such, and therefore official measures are in fact understating inflation.)
It strikes me as slightly absurd to argue that those suffering from rent, education, and healthcare price hikes are being greatly helped by their access to fancy new electronics, but that’s not the point of this essay. I would instead like to focus on an area in which “hedonic quality adjustments” are often ignored: the labor market.
Anyone who has worked a job understands that there can be vast differences in quality between two jobs with the same nominal wage (or salary or total compensation). A healthy job market gives workers the opportunity to make a “lateral” move, accepting a job which pays the same but ranks higher on these more qualitative measures. And, the reverse is also true: a market in which few new jobs are being posted consigns workers to jobs they would rather leave, and often gives management the license to make conditions at those jobs worse. I do not mean to suggest that allowing inflation to outpace nominal wage gains is a good thing: it is obviously not! But, I think it is important to recognize that nominal wage gains are not the only thing that count, even if they might be the only thing that can be counted.
I was looking for a job for the last 4 months. The job offer I ended up accepting pays more than my previous job (although this is total compensation, not salary — my “wage”, as would be measured by official statistics, actually decreased). But the difference in benefits and working conditions is even more stark. My vacation days went from “unlimited” (read: very limited) to 23. My 401(k) match went from 1% to 3%. My paternity leave, as a secondary caretaker, would be 1-2 months at the old job but 6-8 months at the new one. I get a $300/month food allowance at my new job: a benefit that did not exist at my old one. I have the freedom to work from the office or from home, as opposed to having a “return to office” deadline constantly looming (but, because of the unpredictable nature of Covid, never actually being triggered). I get to work with a boss I don’t hate. I am a member of a team that is adequately staffed to do the work the company expects us to do. I have a technical recruiter to help me hire new team members, as opposed to crawling through new applications on Greenhouse myself. I will work less and with less stress. The list goes on.
It seems quite blinkered and simplistic to capture this job transfer in official statistics as “-1%” (the change in my salary) or “12%” (the change in my total compensation). I am not faulting the statistics either; they are not intended to measure the types of things I’m talking about! But it points to the deficiencies in the metrics-only picture used by most economists. It might be true that, per UMass Amherst economist Arindrajit Dube, wages for the top quartile have hardly kept pace with inflation over the last year (see figure at the top of this post). But, at least in my narrow sphere of tech bros and tech broettes, the opportunities to get a better job, broadly defined, have also never been better.
Evidence for this effect exists all across the economy, even if it is largely anecdotal. The “hedonic” quality of a job can matter just as much as the W-2. Goldman Sachs junior traders have been fighting over work-life balance and protesting against 100-hour work weeks. Arguably, for these workers, the marginal utility of a 10% wage increase is much smaller than that of a 10% decrease in working hours. (And, before you complain that I’m valorizing finance bros, let me clarify that these jobs probably shouldn’t exist, but, if they do exist, they should be as luxurious and worry-free as those in tech.) Lower on the income scale, workers are striking, or outright quitting, jobs over issues that are only partly related to pay. Derek Thompson writes in the Atlantic,
Leisure and hospitality workers might be saying “to hell with this” on account of Americans deciding to behave like a pack of escaped zoo animals. Call it the Great Rudeness. Airlines in the United States reported that, by June 2021, the number of unruly passengers had already broken records—doubling the previous all-time pace of orneriness. The Atlantic writer Amanda Mull has chronicled America’s epidemic of bad behavior, from Trader Joe’s tirades to a poor Cape Cod restaurant that had to close briefly in the hope that its clientele would calm down after a few days in the time-out box. Cabin-fevered and filled with rage, American customers have poured into the late-pandemic economy with abandon, like the unfurling of so many angry pinched hoses. I don’t blame thousands of servers and clerks for deciding that suffering nonstop rudeness should never be a job requirement.
In the healthcare sector, nurses and other hospital workers have been leaving in droves. These workers have been suffering from the conditions created by America’s collective failure in dealing with the Covid crisis. Patient per nurse ratios have increased; medical staff have seen suffering and death of an immense and unparalleled scale; and, all the while, half the country refuses to change its behavior to reduce their burden (and also appoints itself as medical experts, as this horrifying firsthand account explains). Sacrificing one’s well-being to respond to a temporary crisis is laudable, but our crisis has lasted almost two years now, and adrenaline and stress can only sustain one for so long. Like Thompson, I don’t blame them at all.
The recent surge in labor actions in various sectors, not just healthcare, reflects dissatisfaction with pay, to be sure, but also with two-tier working contracts, inadequate benefits packages, long workdays, unsafe working conditions, burnout/mental health, and other uncountable things that most certainly count.
All of this has been enabled by Jerome Powell’s tight labor market, and, I would argue, is as much a reason to maintain that policy as the marked drop in unemployment rate or the increase in labor force participation.
It also occurs to me that the quality of jobs and inflation are intimately related. Much (although not all) of this interaction is zero-sum, sadly. If a delivery worker works less intensely, your box of useless shit from China takes on average longer to be delivered. If an ICU nurse is responsible for fewer patients, more nurses must be hired, and your healthcare bill will increase. If we make positive quality adjustments to the jobs at the bottom of the wage scale, this is reflected as a negative quality adjustment, or a price increase, of the corresponding good or service. When conservatives, like the ones I cited above, complain about shipping delays, or, conversely, laud the cheapness of new electronics, they are implicitly encouraging the “workers pissing in bottles” or “sweatshop labor in China” business models that make those things possible. Of course, it is not always zero-sum, and productivity gains can allow us to have our cake and eat it too. But, in the short-run at least, there is a constant tension between workers getting jobs with the wages and quality they desire, and consumers getting goods and services with the prices and quality they desire. Inflation is never a good thing, but if it is primarily a product of people working more humane jobs with better benefits and less stressful conditions (as opposed to price gouging or corporate profiteering), then that seems to me to be a trade worth making.