ECONOMIC READJUSTMENT. ARE YOU READY TO KEEP WORKING MORE FOR LESS, OR JUST ACCEPT LESS?

Despite worker productivity gains in recent years, wages have been stagnant, or falling in real terms. The productivity gains remain in the pocket of the employer and do not end up in the hands of the employee.

Worker productivity is a measure of how much value a worker adds to a product or service. Usually, these productivity gains are the result of management decisions on how to deploy the worker or the implementation of better tools (machinery, software, hardware) that enables the worker to produce more for less labor cost expenditure.

Productivity gains are, of course, a good thing. But if productivity continues to rise and wages remain stagnant or fall, in real terms, workers feel the pressure. Unless the costs of goods and services they purchase fall due to productivity gains in those industries, workers fall behind.

There are lots of reasons for this phenomenon. One is strong competition in the labor market depressing wages. Wages here in America and in foreign countries compete against each other. So if you are a factory worker in Pierceton, Indiana making widgets and widgets are also made in China, then your wages (in relation to other costs of production), will not grow. Tough it out, chump! Just feel lucky you still have a job.

Or go back to school and learn a better-paying skill.

INFLATION, ANYONE?

Costs of goods and services rise, relative wages fall. Not a pleasant proposition. But a real one. And many economists agree that the current formula for the Consumer Price Index (CPI) understates inflation. There are two reasons that the CPI understates inflation. The first is that the most often cited CPI does not include the “volatile costs of food and energy”. The rationale of this is that food and energy prices suffer from wide and frequent swings. For example, an unexpected freeze in California can ramp up the price of fresh fruit and vegetables. Or a hurricane in the Gulf of Mexico may shut down oil refineries for a few days, causing gas prices to rise.

But these swings are nearly always followed by declines in prices once the triggering events are over. So with this type of volatility, exclusion of these commodities makes some sense.

FROM $25 PER BARREL TO CLOSE TO $100. IN JUST SIX YEARS. HOW DID TWO “OIL MEN” MANAGE THAT?

In 2001 oil was about $25 barrel. Relatively cheap, the Author recalls. Today it is about $92. That is an increase of 368%. If oil had just risen relative to inflation, a $25 barrel of oil would have risen to $29.25. (Based upon the Federal Reserve’s inflation calculator, which relies upon the CPI, $1.00 of goods and services in 2001 cost $1.17 in 2007.)

Go figure. Please, go figure. The link to the site is http://woodrow.mpls.frb.fed.us/research/data/us/calc/

OH BUT WAIT, MR. WIZARD, GAS IS “CHEAPER” NOW THAN IT WAS IN THE 1970s.

The Author often hears pundits repeat this line in the media. Pundits will say that the price of a gallon of gas in 2007 is “cheaper” than it was in 1973. (Gas was about $.33 early in 1973, the Author recalls.)

These pundits say it is “cheaper” in 2007 because wages have risen since 1973 and gasoline costs less as a relative percent of your income. Or maybe improvements in gas mileage had something to do with it. Or at least that is what the Author thinks they are saying. They really ought to tell us.

But the same inflation calculator operated by the Federal Reserve says otherwise. If you take a product that cost $.33 in 1973 and inflate it to 2007 prices, that product would cost $1.58. Hard to argue with that, although some pundits might try.

SO HOW CAN GAS COST TWICE AS MUCH?

Gas prices vary a bit around the country, but a price of $3.16 per gallon is not too far off the mark. And $3.16 is twice $1.58, the inflation adjusted price of gas from 1973 to 2007.

The reasons gas had doubled in inflation adjusted terms are the oldest reasons that explain pricing. Supply and Demand. Supply is down due to the invasion of Iraq and the unexpected declines in that occupied country’s oil production.

The other is demand. The rapid growth in India and China fuels greater demand.

So if you long for cheap gas, you are between the rock of lower supply and the hard place of greater demand. YOYOMF.

THERE ARE PROBABLY WORSE PLACES THAN BETWEEN A ROCK AND A HARD PLACE, BUT AT LEAST NONE IN THE DESERT OF THE REAL!