Carpenters, suits, and gold

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Years ago, a suit model was proposed, by Franz Pick, I am told. An ounce of gold worth $20 bought a custom made man’s suit in 1914. What about today? It’s easy to check internet prices. I have found such prices as $550, $750, 3 for $2200, 2 for $1,700, 2 for $1900, as well as high-end prices of $1,595. An ounce of gold costing $860 can still buy a decent custom-made man’s suit.

This and similar items like t-bone steak give us some confidence that gold’s price today is fairly-valued.
If we assume that gold is a proper numeraire that has stable value, then the carpenter’s real wage has not risen. Indeed, his after-tax income has fallen because the taxes are much higher today than in 1914.

Some of that reduced after-tax pay may return to the carpenter later in the form of Social Security. He can recoup partially by unemployment benefits he gets by going unemployed every so often. (I have seen people in seasonal jobs who make a habit of collecting regularly when they are out of work.) He can recoup some employer-provided health benefits.

What about the prices of goods he buys? Can the carpenter buy more of other things with this wage than he did in 1914? He can buy a greater variety of things. But the things he used to buy in 1914 now cost about the same relative to his wage as then, such as a t-bone steak.

The workday has shortened from 10 hours in 1914 to 8 hours now. Is he moonlighting in the underground economy? Does he work less because he expects Social Security to help him in his old age?

If real income rises at the low rate of 0.5 percent a year due to greater productivity, then between 1914 and 2008, the real wage should have risen by 60 percent. In terms of gold, it has not risen at all and probably has fallen. It is no wonder that the carpenter’s wife is probably working so that they can make ends meet. It is no wonder that they may have borrowed to maintain a standard of living that their parents and grandparents had.

If government had stayed the same size as it was in 1914, does anyone doubt that the carpenter would be much better off today?

10:44 am on October 13, 2008