Graph of the week: Big Mac Wages
You've surely heard of the Big Mac Index – it’s an interesting way to measure the plausibility of the law of one price, or to be more precise the purchasing power parity (PPP). It’s published by the Economist on an annual basis. Acording to the PPP theory "in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries."
With the Big Mac Index, they compare how much is a currency overvalued with respect to the dollar (taken as the basis currency, i.e. the basis price of a Big Mac in America).
The Big Mac Wage Index is a bit different.
|Source of graph: WSJ blog.|
It tells us how many minutes of work does it take for a McDonald’s employee in a given country to earn enough money to buy a Big Mac. Basically it’s a measure that compares real wages across countries.
"A real wage rate is a nominal wage rate divided by the price of a good and is a transparent measure of how much of the good an hour of work buys. It provides an important indicator of the living standards of workers, and also of the productivity of workers."
So tells us the author of the idea to compare real wages this way, Orley Ashenfelter of Princeton University, in his new paper. To measure wages this way is credible since the objects of measurement - McDonalds employees - do the same job everywhere. This makes it easier to compare (same company, same product, same required skills) and to conclude on the huge wage gap between countries.
Looking at the graph it would infer that the wage gap between India and the US is higher than, for example, China and the US. Does it make it more realistic this way? Not necessarily.
First of all, I’m assuming the prices of the burgers as well as employee wages are taken as averages across the country? (Note: I didn't read the paper). There is a difference in prices of burgers based on the location of the restaurant. McDonalds operates on a franchise basis, which means that owners of different restaurants have the courtesy of determining their own prices, which cannot differ much, but can reflect the attractiveness of a location. Also, I'm wandering if the price of the Big Mac used by the author is adjusted for the Big Mac Index differential. India's currency, for example, is the most undervalued against the dollar, according to the Economist's measurement.
In conclusion the Big Mac Wage index, hardly a breathtaking discovery, can only do so much to inform us on the world inequality and the widening real wage gap. It can do so in a more precise way but it’s still a proxy. Having said that, I think it’s an interesting way to look at real wage differences, just like the Big Mac Index, amid its faults, is an interesting way to look at the purchasing power parity theory.