Germany and UK wages in the 1930's

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Guaporense
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Germany and UK wages in the 1930's

#1

Post by Guaporense » 01 Aug 2012, 16:33

I have cited numerous times the research by Broadberry and Burhop, Real Wages and Labour Productivity in Britain and
Germany, 1871-1938: A Unified Approach to the International Comparison of Living Standards. However, I have noticed their estimate is corrupted. Why? Simple, they failed to correctly compute the PPPs (purchasing power parities).

How PPPs are computed

Imagine two countries, A and B. Assume that prices in A are quoted in Marks and prices in B are quoted in Pounds. Suppose that a apple is 10 marks in A and is 1 pound in B. And an orange is 10 marks in A and 0.25 pounds in B. How do we calculate a PPP between these two countries? The most rigorous way to compute PPPs is to use two weighting baskets, one for A and one for B and take the average of the two.

Let A basket be 100 marks spent on apples and oranges, with 50 marks spent on apples and 50 marks spent on oranges. That basket is 5 apples and 5 oranges and will cost 6.25 pounds in B. Which yields a PPP exchange rate of 16 marks per pound. Let B basket be 10 pounds spend on apples and oranges, 5 pounds on apples and 5 pounds on oranges. This basket has 5 apples and 20 oranges and will cost 250 marks in A. Which yields an exchange rate of 25 marks per pound. The geometric average between the two is 20 marks per pound.

Broadberry and Burhop failed to compute the baskets from both perspectives: how much a German basket would cost in pounds and how much a British basket would cost in marks. What they did was to multiply the German basket weights by British prices, yielding a completely distorted picture.

Their PPP estimate

Here is their PPP estimate with all the data they used:

Image

Notice that they only measure prices by Mark/Pound. This distorts the picture because goods that are relatively cheaper in Britain have a much larger weight in the estimate. For instance, Tea is 43 times cheaper in Britain and hence has weight 43 in the table, while potatoes, which are 1.7 times cheaper, have weights of only 1.7. The correct way would be to compute Pound/Mark prices as well (that's it, Tea has weight 0.023 and Potatoes have weight 0.588), and compute the geometric average between the two prices (that way there is no distortion due to relative price discrepancies, potatoes and tea would have the same weight). It's like in the example they have only measured the value of B's basket which yields a price ratio of 25, without measuring the A's basket cost at B and it's implicit price. Considering that a pound was 10-15 times more expensive than a mark, this means that there is a very strong tendency for distortion.

The Correct Way of Doing the PPP

I have done below, using the exact same data as the paper, the PPP's using the correct method:

Image

I took the geometric average:

Image

I have computed this PPP of 13.6, instead of the 17.2 they found, by using the Pound/Mark prices to correct the bias. This had massive consequences. They estimated that the average real wage in Germany was 85.2% of the British wage. However, using this recalculated PPP's, the real wage in Germany is actually 107.5% of the British wage. As a result, plugging this wage ratio into the historical trend, I have reached these numbers:

Image

Therefore, the conclusion of the paper is wrong: German wages were not smaller than British wages, in fact, they were slightly higher. They reached this wrong conclusion because they multiplied the German basket weights by the ratio of Mark/Pound prices, which meant that they computed a basket of 1 pound distributed in expenditures in Britain with the German weights would have cost in Germany, which is the inverse of what they should have done. Thus, things that were comparatively cheaper in Britain, such as tea, had a much heavier weight in computing their PPP's.

Here are the wages in Germany and UK, by sector and converted to real hourly and annual wages:

Image

Since the Germans worked fewer hours the German hourly wages were 108.2% of the British wages. Still, compared to American wages, I have found, using a much smaller dataset of 5 goods instead of 20, that American wages in 1935 were 126.5% of the German wages (thus, about 135% of the British wages). I have also computed Japanese wages in 1935 comparison to German wages of 1937 as well, using a 5 point dataset as well.

Converting everything into Reichmarks we have these values:

Annual real wages:

USA(1935) ---------- 2,340 marks
Germany (1937) --- 1,850 marks
UK (1937) ----------- 1,721 marks
Japan (1935) ------- 415 marks

Compare with per nominal capita incomes for 1938:

USA ---------- 649
Germany ---- 590
UK ----------- 579
Japan ------- 104

The Japanese discrepancy is greater due to the Balassa-Samuelson effect (which states that prices measured at exchange rates are lower in poorer countries than in richer ones).
"In tactics, as in strategy, superiority in numbers is the most common element of victory." - Carl von Clausewitz

ljadw
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Re: Germany and UK wages in the 1930's

#2

Post by ljadw » 02 Aug 2012, 11:34

And,the conclusion is .....that the whole theory from Guaporense is based on an artificial conversion of RM to pounds or yens (my goodness) and that an attempt to compare the purchasing power in Britain to the purchasing power in Germany,or an other country,is based on quicksand,and,we know what happens is something/someone is falling in quicksand...
May I also mention that "the wages" in Germany do not exist(even by sector),that Guaporense has neglected to indicate if he is talking about wages before,or after taxes(ts:not wise for an economist),that the importance of agriculture,industry and services was different in Germany and Britain.
May I also observe that Guaporense is using for the "price side" only food products(not wise for an economist):why not coal,gaz,electricity,social security?
May I also observe that the comparison of the price of tea in Britain with the price of tea in Germany ,is leading us to a street without exit:this comparison has as much value as the comparison of the price of a Lederhosen in Germany and in Britain .


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LWD
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Re: Germany and UK wages in the 1930's

#3

Post by LWD » 14 Aug 2012, 00:09

Guaporense wrote: ... Imagine two countries, A and B. Assume that prices in A are quoted in Marks and prices in B are quoted in Pounds. Suppose that a apple is 10 marks in A and is 1 pound in B. And an orange is 10 marks in A and 0.25 pounds in B. How do we calculate a PPP between these two countries? The most rigorous way to compute PPPs is to use two weighting baskets, one for A and one for B and take the average of the two. ...
I disagree. This assumes that apples and oranges have the same weight diet wise. If for instance apples are consumed with 10 times the frequency of oranges (in both countries) then that needs to be taken into account. Similarly if the ratios are different between the countries then are those differences due to cost or culture. For instance implying that say tea has the same weith as potatoes is simpy wrong. If we were talking say Japan and Germany it would be even more so. No matter which they can't be ignored.

I note also that you left housing out of your estimate which can have considerable impact on effective wages as well. I think a better way to calculate this would be to determine disposable income and then look at items purchased with it such as alcohol, tobacco, luxury foods, etc.

salvadrbooth
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Re: Germany and UK wages in the 1930's

#4

Post by salvadrbooth » 11 Mar 2013, 14:31

World War affected adversely almost each Country that was part of it. Things would have been more clear if there were post war wages showed.

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