Inequality, Wage Stagnation, and Free Stuff

Recent years have seen much agitation about inequality, and the seeming fact that middle-income earnings have risen very little, if at all, in recent decades. Some see this as the rich “hogging” all the societal wealth gains.

Inequality is a real concern. Society is ever more bifurcated between the well educated and the less educated.

However, there are a number of reasons why that ostensible wage stagnation is not what it seems. First, wage comparisons over time must factor in inflation. But most economists know that government inflation indices are themselves inflated, overstating the true fall in the dollar’s value. Compounded over decades, this significantly understates the current worth of today’s pay.

Also, such wage numbers generally omit fringe benefits, which are increasingly important. The biggest one is health benefits which have risen greatly in both cost and value over decades. When that too is factored in, today’s workers are again seen to be earning more.

A further factor was highlighted by a recent piece in The Economist, which really made me sit up and take notice. It’s the value people get out of the internet. This adds to living standards and the quality of life one has with a given income level. And it’s more significant than you might guess.

The Economist reports how some researchers made estimates of the value of web goodies based on how much money people would demand, when asked, to give them up. These are necessarily crude estimates, yet they are eye-popping.

It’s $900 a year for YouTube and other video; $2800 for maps; $750 for Facebook; and a whopping $16,600 for search engines. (The Facebook estimate seems very low to me in comparison to the others; it may reflect that many people have a love-hate relationship with Facebook, considering it a sinkhole of time). Anyhow, this again gives at least some idea of the value of these services, to the average American.

We get these goodies essentially free. Of course, we do “pay” by giving web businesses data they use to target ads at us. But it’s a very one-sided deal. The Economist notes that, as against the $750 estimated value of Facebook to an average user, Facebook eked just $4.65 in ad revenue.

True, this has still made Mark Zuckerberg very rich. But it points up the fundamental fallacy of the rich getting their wealth at the expense of the rest. Zuckerberg provides users with value over a hundred times what he gets. That indeed is the essence of commerce: businesses profit by selling things for less than their value to buyers. That’s how the whole world gets richer.

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