Constant-Utility Index Numbers of Real Wages

Index numbers of workers' real wages are constructed by comparing observed changes in an index of consumer goods' prices with a measure of changes in their money wages. Four such index numbers, each based on slightly different definitions and drawn from different sources, are shown in Table 1. From 1939 to 1967 they record an increase in real wages of between 59 and 106.5 percent. As measures of the "true" standard of living of the typical worker, each is deficient in a number of respects. For instance, the consumer goods' price index used to deflate wages is the familiar baseweighted type which does not recognize that individuals will alter the composition of the basket of commodities they consume in response to relative price changes. It is well known that such a Laspeyres index overstates increases in the cost of maintaining a level of utility whenever consumers are induced by relative price movements to substitute among the commodities they purchase. Moreover, while the two Bureau of Labor Statistics (BLS) series on real spendable weekly earnings of production workers (as shown in columns (iii) and (iv) of Table 1) include an adjustment for federal income taxes and social security taxes, they do not discriminate between increases in weekly earnings that arise, on the one hand, through increases in hourly wage rates with hours worked constant and, on the other hand, through increases in hours worked with hourly wage rates fixed. An index of the ratio of average hourly earnings to consumer prices (as shown in column (i) of Table 1) TABLE I-INDEX NUMBERS OF REAL EARNINGS