Published for www.johnbtaylorsblog.blogspot.com, May 22, 2012
One of the most important things for students to learn in introductory economics is that differences in productivity are the main reason for differences in real wages over time and across countries.
In his presidential address this year before the American Economic Association, Princeton economist Orley Ashenfelter provides an interesting and novel way to calculate and compare real wages over time and across countries. He divides the nominal wage rate of McDonald’s workers ($/hour) by the price of a Big Mac ($/Big Mac) to get an estimate of Big Macs Per Hour (BMPH) which ranges from 3.09 in Japan to .35 in India. In other words it takes about 19 minutes of work at a McDonalds to earn enough buy a Big Mac in Japan and about 3 hours in India. As Ashenfelter puts it, the advantage of this approach is that “international comparisons of wages of McDonald’s crew members are free of interpretation problems stemming from differences in skill content or compensating wage differentials.” And by dividing the sample period in two–from 2000 to 2007 and from 2007 to 2011–he delves into macroeconomics and shows how devastating the financial crisis and the big recession have been to the economic prosperity of most people around the world.
Here is a terrific Big Macro video of an interview with Ashenfelter on Canadian public TV on the subject of his Big Mac studies. He explains in simple, candid, and interesting terms what is going on and why productivity makes such a difference.