Measuring Seven Cents

Looking over some charts done by “lay” people, who think they know how to measure data where Wage rates are measured independently of U3 rates. Of course there’s no correlation, but that’s besides the point.

I’ve long said that the U3 as a means of measuring unemployment, or anything else for that matter, has to be thrown out. It doesn’t do what it’s supposed to do; which is measure something useful.

Indexing is a great tool! It allows us to measure correlated variables measured on two different scales. For example, this chart, which tells us not only the state of money flow, but a social phenomena as well:

PCE to wage index

Here, real wages are measured against spending. Wages are measured on dollars per hour, while PCE spending is measured in billions of dollars. By indexing the two, they become measured on a uniform scale. Then by dividing one index against the other, we come up with a ratio. The denominator is the constant – or the “independent variable.”

We know these two measures are related because of Pearson Correlations (r=.89). But instead of showing us nothing, it shows us something significant. For every dollar people spend (the denominator), they earn $1.07 (the numerator).

7 Cents on the dollar is not a lot of money to sock away!

As I theorized using the Solow Growth Model (here), there’s a point (and environment) where constraining wages mean nothing to the growth of Capital in relation to output (profit, however, is a different Marxian story). It’s the perfect environment for wage constraints.

This is where Economics meets Sociology – and it’s beautiful thing. We not only know WHAT is going on, but we know HOW and WHY as well.

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