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Big Mac prices and wages show economic stagnation except for China

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In January, Orley Ashenfelter, a Princeton University economist, presented a study to the American Economic Association using Big Mac prices and wages of workers at McDonald’s restaurants around the world to compare productivity and living standards. The idea was so intriguing that last week I emailed Ashenfelter at Princeton to ask him what he was trying to find out.

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Ashenfelter told me that his study shows wage parity among the developed nations of the world and evidence that before 2007, the developing countries like China, India and Russia were closing the gap with the world leaders. But with the onset of the world financial crisis in 2008, wage growth stagnated everywhere except in Russia and China. In the case of Russia it was a rebound from an earlier financial setback for that country.

Ashenfelter said that in the late 1990s his work took him to India, and like many Americans traveling abroad and having little time to explore, he went to a McDonald’s restaurant where he bought the Indian version of a Big Mac for about 40-45 rupees. He realized he was eating a product essentially the same everywhere in the world, produced by workers with essentially the same skills and training and using identical technology. But to attract local labor McDonald’s needed to pay the going wage for labor in each country, and that wage reflected a country’s overall productivity. Hence, differences in McDonald’s wages (the McWage) across countries were a measure of productivity differences.

By dividing the hourly wage of workers at McDonald’s restaurants by the price of a Big Mac, Ashenfelter had a number that would tell him how many Big Macs workers could buy with an with an hours work, the Big Mac per hour (BMPH). Differences in BMPH across countries measure differences in the real wage, and tell us much about living standards.

The Economist Magazine had already been publishing data on Big Mac prices. Ashenfelter’s contribution was to combine Big Mac prices with wages at McDonald’s.

McDonald’s was not about to give out data on its prices and wages which might help its competitors, so to collect the McDonald’s data Ashenfelter made it known that he would reimburse the cost of the meal for anyone who ate at a McDonald’s anywhere in the world, the more exotic the better. To be reimbursed, all one had to do was to ask the McDonald’s worker who served him what their wage was and record it on the back of the receipt and send it to Ashenfelter at Princeton.

In an interview in 2009 with journalist Romesh Vaitilingam, Ashenfelter says of his request for data, “I've got some from Cyprus and Denmark. People have definitely taken me up on this. … After we realized that we could do it, we collected data from more countries, about 30 or 35 countries.” Now he has data for over 60 countries.

Ashenfelter says, “One advantage of the BMPH is that it doesn’t depend on exchange rates.” And he says that changes in McWage ratios and BMPH over time measure changes in relative productivity and real wages.

A striking feature of Ashenfelter’s data is wage parity among the developed countries, including the U.S., Canada, Japan and Western Europe. Workers in the developed world earned between 2 and 3 Big Macs per hour. Ashenfelter says that among the developed world, “The United States is no longer a high wage country.” Rather, there is essential wage parity in that part of the world, and in Western Europe there are countries with higher real wages than the United States.

Developing countries still lag behind, including India, China, and countries in Latin America and the Middle East. Workers in that part of the world earned little more than a third to little more than half of a Big Mac per hour worked.

Still, the developing countries are in a far better situation than the really poor countries of the world like Bangladesh or Chad or Haiti or Kenya or Ethiopia or Afghanistan where the chances are that the average worker will never, ever afford to buy a Big Mac. In fact, the entry of McDonald’s into a country might be a sign that the country is on the verge of entering into the ranks of those that experience long term growth.

The United States, along with the rest of the developed world, enjoys exceptionally high living standards for most of our population. But we can’t rest on our laurels. In the short run, we need policies to increase overall demand to get us out of our economic funk. And for longer run growth we need policies that will enhance overall productivity and real wages.