Jared, I'm going to give you another take on the psychological relationship between rising wages and rising prices and I hope you take it seriously.
When a person gets a pay raise, they are elated, but when they walk into a grocery store and the price of food has gone up, they feel, "There's absolutely no way to get ahead!” They hoped that the pay raise meant they could upgrade their lives, but it just seems they are lucky to not fall further behind.
This is comparable to your team scoring a touchdown, and the other team answering with a touchdown. All the joy of wages going up is flattened by the discouragement of an equal or nearly equal rise in prices.
I don't know how the idea of I deserve my raise, and I am cheated by prices emerged. Is it based on interviews with actual human beings or is it just some economist's bright idea?
I don’t see any difference between your version and the version Jered mentioned. They are both about ascribing different values to gains and equivalent losses. This is a phenomenon that has been extremely well documented and it is called “loss aversion”. That’s not a great descriptive name because of course everyone is averse to losses. But it means that a gain feels less good than the same amount of loss feels bad. Thus, an income gain that is exactly offset by an income loss (which is what a rise in prices is) leaves the person economically the same, but feeling worse about it. It’s been amply documented in the psychological literature. I would recommend reading Daniel Kahnemann’s Thinking Fast and Slow to learn about it and how experimental evidence establishes it as a bona fide phenomenon.
The difference is that people don’t think they earned that touchdown but they do think they earned the wage increase which is different from loss aversion. Both of those things could be factors. I assume that J B, Paul Krugman and other serious economists wouldn’t make that claim without research to back it up but I would like to see the data.
I believe the media should be playing a role here in informing people of the connection between policy and their wages going up when that is a major reason for the increase.
I’m a Buffalo Bills fan. Believe me, we take personal credit when the Bills score! (hah, but you have a point). And yes, there is lots of evidence for loss aversion. The Kahneman book I mentioned has plenty of citations. And I couldn’t agree more on the role of the media. But most journalists aren’t reading economic research. Thats why it’s good we have access to thinking from people like JB and PK who do.
Well, I didn't make up the term loss aversion. It's a well documented psychological phenomenon that pretty much everyone (including me) is subject to, and I was trying to respond to the original question, which was asking whether the phenomenon Jared described was based on interviews with actual human beings (it's very much based on observations and experiments that test how humans think). Sad that my pointy headed response to a question makes people resent me more (I'm not sure how you know how much people resent me now ... I didn't actually know it was anyone, and how you know this will make people resent me EVEN MORE???) I don't think I was suggesting people feel entitled or that I was being dismissive of people's weariness. I do think it's a real question why people feel discouraged when their income gains, at least at times, have stayed ahead of price rises. So it does seem that people feel better if prices stay the same and they get a 2 percent raise, than when prices rise 10 percent and they get a 12 percent raise (either way is a 2 percent rise in their purchasing power). One problem with higher inflation is that there is much more dispersion of real income changes, so there may be more losers (and more gainers) from inflation, as opposed to people whose real incomes are unchanged. But I'm just a pointy-headed guy trying to understand what is going on in the world, just like anybody else. Ok, I'm gonna' go now and try to shave that point down a little.
It just sounds like you have a beef with people who study human behavior and then come up with terms to describe their results (if I said some people have had myocardial infarctions would that be patronizing? It’s also jargon that describes people’s experiences). It’s pretty hard not to use jargon when the jargon is two words and shorthand for something that would otherwise take 100 words to explain. I don’t see how it’s patronizing but if you feel patronized by me, well that was not my intent. I don’t know what general information you have that people feel patronized (is that based on evidence or are you generalizing from your own experience?)
I can say for sure that your contention that economics only treats people as rational self interested actors is a caricature that is decades out of date, if it ever applied. The whole huge field of behavioral economics (which has now resulted in multiple Nobel Prizes in economics) is exactly about studying how people behave and make decisions without assuming they are rational. in fact, loss aversion comes from the psychology literature and is exactly about non-rational behavior. And to be clear, all non-pathological people (of which I include myself) are subject to it. There is also an entire economics literature studying altruism.
If only we could have had this conversation last summer... .
The media focused on high prices only because GOP propaganda focused on it. They managed to make the entire conversation about the "price of eggs", whereas we KNEW, already at the time, that under Biden (and except for the post-global inflation years indeed, so 2021-2022), average wages increased FASTER than the inflation rate. So if anything, and THANKS TO Biden and Democrats, people could buy MORE eggs with their monthly salary, not less.
At the same time, the GOP proposed massive cuts in all the other things that make life more affordable for the 99%: healthcare, education, drug prevention programs, effective crime reduction, etc.
And yet, an important number of people voted for Trump and the GOP "because prices are too high"...
This period in US history will go down as a moment when the GOP went way beyond its Iraq war lies and fooled its own base to an extent that was and is entirely unprecedented.
Personally the reason I feel wages chasing inflation is corrosive a net negative in some respects is because when prices go up the wage fairy doesn’t come out and adjust my hourly rate (except for SSA!). I have to take on this tension of how to strategize getting a raise and confronting those who control my wages. That tension and process takes something out if me, an intangible cost.
The best option is definitely an "indexation", as it is called in Europe, where wages, rents, social security, and inflation are all automatically linked, by law. Combine that with powerful unions, which can step in and negotiate directly with CEOs whenever needed, and the problem you signal disappears.
My father is a meticulous record keeper and he has a graph showing cost of water, electricity and gas from 1963- present. The graph really shows how much water and electricity have increased and it is easy to see how that would affect someone whose earnings have not increased. Wish I could attach the graph!
It seems to me we are seeing a revival of an idea that used to be taught in economics courses (at least, those that i took as an undergraduate in the 1970s) which is money illusion. Once the rational expectations revolution took over academic economics in the 1980s and 1990s, thinking about people being less than 100 percent rational became heretical, but experimental evidence shows these are real phenomena. Thank goodness the pendulum has swung and economists (well, some economists) have decided to see how people think instead of just assuming how they think (the myth of homo economicus).
You nail it completely. My first job was pumping gas at night (outdoors) in a service station for which I was paid 35 cents an hour. Gas was about 18 cents a gallon at the time so I could buy two gallons for each hour worked. The local price of fuel today is less than $3.00 and I feel confident that there are not many people who would take my job today for $6.00 per hour
Of course, now everyone pumps their own gas and they don't even get 35 cents, let alone $6.00, an hour for doing it. DIY can make things more affordable in terms of cash flow, ignoring the value of your own labor
"But affordability at the household level is a function of n*h*w/p, were n is the number of people in the household who are working in the paid labor market, h is their average annual hours of work, and w/p is their average real hourly wage (and that’s just market incomes; non-market incomes, like tax credits, unemployment benefits, etc., also matter)."
Here, I see we need simplifications to try and understand things, as we can't model the full complexity of the economic world.
Still, with that n*h*w/p, and I guess it's really the "p" and maybe a little in with the "w", could there be some oversimplification?
1) Thus, as I take kathleen wiener to be indicating, maybe p (through the CPI or whatever) misses the things people most need. Say housing. What if, as an experiment, we did all the calculation with housing prices instead of overall prices, just to see what's going on in terms of housing affordability. And make that housing prices for young people who have to buy a house, or rent a place, in an area where a good job is available?
2) There is a thing going on that, since say 1950, healthcare has gone up in cost, as a percentage of GDP from I don't know what to 18%. As well, people are living longer due to that healthcare, and a wage has to last longer, as people can't generally work longer in proportion to how much longer they live. I don't know where this fits into "w" and "p". It must be there, inside it, or outside of it (and so needing a correction to the formula).
(I'm fortunately not an economist, so I can leave working on these considerations to others!)
"we must not ignore or downplay the importance of the earnings, incomes, wealth. They are just as important to affordability as prices, and the gap between real pay and productivity—i.e., wage inequality—is an historical factor that has played a key role in not just how people feel about economic fairness, but in how they vote about it." Absolutely. I wonder if most economists, journalists, and consultants/think-tankers view themselves in the "I-earned-my-income-increase" category and not in the I got a raise because of my new union contract, or politically-influenced raise in minimum wage, or because of the whim of management category, and thus the income side is left ralatively unmentioned.
When people perceive wage raises as having been earned, this is not just understandable, it’s coldly rational.
After years of productivity growth that is not matched by wages, anytime someone sees an increase. They know they have earned it because they have been exploited for a very long time.
Timely post in value! Wish Stantcheva could the research to Congressional capacities to redefine everything - own all wins & blame losses on all others. Or get real-time #s from Heritage & Project 2025 as to what THEY believe things actually cost and who earns what. Then again, could well be they just do not care.
Affordability is an emotional term, Asian manufacturing electronics are incredibly cheap, my morning cup of coffee from 2.25 to 2.75 in a year, the coffee increase a major topic of conversation… “spin” rules, …
Discussion about change in terms of the average(median or mean) when no one is ir wants to be average is part of what makes even intelligent people feel irrelevant.
Jared, as you note the credit-making phenomenon is extremely important in this "affordability" issue. I observe that all/most of the current Trump administration is focused on "get rich quick" schemes through their crypto fantasies. I believe the true answer is through being wise consumers who use credit moderately to purchase necessary items first & then extend these purchases as their incomes allow. I know that lower-income citizens need to move up through time & effort.
Jared, I'm going to give you another take on the psychological relationship between rising wages and rising prices and I hope you take it seriously.
When a person gets a pay raise, they are elated, but when they walk into a grocery store and the price of food has gone up, they feel, "There's absolutely no way to get ahead!” They hoped that the pay raise meant they could upgrade their lives, but it just seems they are lucky to not fall further behind.
This is comparable to your team scoring a touchdown, and the other team answering with a touchdown. All the joy of wages going up is flattened by the discouragement of an equal or nearly equal rise in prices.
I don't know how the idea of I deserve my raise, and I am cheated by prices emerged. Is it based on interviews with actual human beings or is it just some economist's bright idea?
I don’t see any difference between your version and the version Jered mentioned. They are both about ascribing different values to gains and equivalent losses. This is a phenomenon that has been extremely well documented and it is called “loss aversion”. That’s not a great descriptive name because of course everyone is averse to losses. But it means that a gain feels less good than the same amount of loss feels bad. Thus, an income gain that is exactly offset by an income loss (which is what a rise in prices is) leaves the person economically the same, but feeling worse about it. It’s been amply documented in the psychological literature. I would recommend reading Daniel Kahnemann’s Thinking Fast and Slow to learn about it and how experimental evidence establishes it as a bona fide phenomenon.
The difference is that people don’t think they earned that touchdown but they do think they earned the wage increase which is different from loss aversion. Both of those things could be factors. I assume that J B, Paul Krugman and other serious economists wouldn’t make that claim without research to back it up but I would like to see the data.
I believe the media should be playing a role here in informing people of the connection between policy and their wages going up when that is a major reason for the increase.
I’m a Buffalo Bills fan. Believe me, we take personal credit when the Bills score! (hah, but you have a point). And yes, there is lots of evidence for loss aversion. The Kahneman book I mentioned has plenty of citations. And I couldn’t agree more on the role of the media. But most journalists aren’t reading economic research. Thats why it’s good we have access to thinking from people like JB and PK who do.
Well, I didn't make up the term loss aversion. It's a well documented psychological phenomenon that pretty much everyone (including me) is subject to, and I was trying to respond to the original question, which was asking whether the phenomenon Jared described was based on interviews with actual human beings (it's very much based on observations and experiments that test how humans think). Sad that my pointy headed response to a question makes people resent me more (I'm not sure how you know how much people resent me now ... I didn't actually know it was anyone, and how you know this will make people resent me EVEN MORE???) I don't think I was suggesting people feel entitled or that I was being dismissive of people's weariness. I do think it's a real question why people feel discouraged when their income gains, at least at times, have stayed ahead of price rises. So it does seem that people feel better if prices stay the same and they get a 2 percent raise, than when prices rise 10 percent and they get a 12 percent raise (either way is a 2 percent rise in their purchasing power). One problem with higher inflation is that there is much more dispersion of real income changes, so there may be more losers (and more gainers) from inflation, as opposed to people whose real incomes are unchanged. But I'm just a pointy-headed guy trying to understand what is going on in the world, just like anybody else. Ok, I'm gonna' go now and try to shave that point down a little.
It just sounds like you have a beef with people who study human behavior and then come up with terms to describe their results (if I said some people have had myocardial infarctions would that be patronizing? It’s also jargon that describes people’s experiences). It’s pretty hard not to use jargon when the jargon is two words and shorthand for something that would otherwise take 100 words to explain. I don’t see how it’s patronizing but if you feel patronized by me, well that was not my intent. I don’t know what general information you have that people feel patronized (is that based on evidence or are you generalizing from your own experience?)
I can say for sure that your contention that economics only treats people as rational self interested actors is a caricature that is decades out of date, if it ever applied. The whole huge field of behavioral economics (which has now resulted in multiple Nobel Prizes in economics) is exactly about studying how people behave and make decisions without assuming they are rational. in fact, loss aversion comes from the psychology literature and is exactly about non-rational behavior. And to be clear, all non-pathological people (of which I include myself) are subject to it. There is also an entire economics literature studying altruism.
If only we could have had this conversation last summer... .
The media focused on high prices only because GOP propaganda focused on it. They managed to make the entire conversation about the "price of eggs", whereas we KNEW, already at the time, that under Biden (and except for the post-global inflation years indeed, so 2021-2022), average wages increased FASTER than the inflation rate. So if anything, and THANKS TO Biden and Democrats, people could buy MORE eggs with their monthly salary, not less.
At the same time, the GOP proposed massive cuts in all the other things that make life more affordable for the 99%: healthcare, education, drug prevention programs, effective crime reduction, etc.
And yet, an important number of people voted for Trump and the GOP "because prices are too high"...
This period in US history will go down as a moment when the GOP went way beyond its Iraq war lies and fooled its own base to an extent that was and is entirely unprecedented.
What a shame.
Personally the reason I feel wages chasing inflation is corrosive a net negative in some respects is because when prices go up the wage fairy doesn’t come out and adjust my hourly rate (except for SSA!). I have to take on this tension of how to strategize getting a raise and confronting those who control my wages. That tension and process takes something out if me, an intangible cost.
The best option is definitely an "indexation", as it is called in Europe, where wages, rents, social security, and inflation are all automatically linked, by law. Combine that with powerful unions, which can step in and negotiate directly with CEOs whenever needed, and the problem you signal disappears.
My father is a meticulous record keeper and he has a graph showing cost of water, electricity and gas from 1963- present. The graph really shows how much water and electricity have increased and it is easy to see how that would affect someone whose earnings have not increased. Wish I could attach the graph!
Whose earnings wouldn’t have increased since 1963?
If I remember correctly, minimum wage back then was about $1.25 an hour
a while is not the same as awhile
It seems to me we are seeing a revival of an idea that used to be taught in economics courses (at least, those that i took as an undergraduate in the 1970s) which is money illusion. Once the rational expectations revolution took over academic economics in the 1980s and 1990s, thinking about people being less than 100 percent rational became heretical, but experimental evidence shows these are real phenomena. Thank goodness the pendulum has swung and economists (well, some economists) have decided to see how people think instead of just assuming how they think (the myth of homo economicus).
You nail it completely. My first job was pumping gas at night (outdoors) in a service station for which I was paid 35 cents an hour. Gas was about 18 cents a gallon at the time so I could buy two gallons for each hour worked. The local price of fuel today is less than $3.00 and I feel confident that there are not many people who would take my job today for $6.00 per hour
Of course, now everyone pumps their own gas and they don't even get 35 cents, let alone $6.00, an hour for doing it. DIY can make things more affordable in terms of cash flow, ignoring the value of your own labor
If Democrats retake Congress in 2026 and then win unified power in 2028, “Affordability” becomes the moral pretext for Stage 5 ignition.
Stage 5 = Doubling Down → Moral Ultimatum → Institutional Overrun
Under unified power, the institutional cascade accelerates:
Housing: federal rent control
Healthcare: expansion toward public option
Student loans: cancellation + federalized funding
Energy: punitive pricing restrictions
Tech: compelled regulation under “price fairness”
Banking: forced equity lending
Food & pharma: price caps
Wages: federally mandated floors
This is when playing economics turns into breaking economics.
When the ideology hits the real-world friction point.
When the electorate expects utopia…
and gets scarcity, backlash, inflation, shortages, and collapse.
And collapse + moral certainty = incendiary Stage 5.
Stage 5 is when:
the moral panic spikes
the rhetoric radicalizes
institutions stop hiding the agenda
“emergency powers” come into play
dissent becomes “harmful”
political opposition becomes “anti-democracy”
enforcement shifts from persuasion to compliance
This is where democratic norms go to die.
Not in a war.
Not in a coup.
But in “affordability legislation.”
Truly chilling.
I see Mr. Bernstein's
"But affordability at the household level is a function of n*h*w/p, were n is the number of people in the household who are working in the paid labor market, h is their average annual hours of work, and w/p is their average real hourly wage (and that’s just market incomes; non-market incomes, like tax credits, unemployment benefits, etc., also matter)."
Here, I see we need simplifications to try and understand things, as we can't model the full complexity of the economic world.
Still, with that n*h*w/p, and I guess it's really the "p" and maybe a little in with the "w", could there be some oversimplification?
1) Thus, as I take kathleen wiener to be indicating, maybe p (through the CPI or whatever) misses the things people most need. Say housing. What if, as an experiment, we did all the calculation with housing prices instead of overall prices, just to see what's going on in terms of housing affordability. And make that housing prices for young people who have to buy a house, or rent a place, in an area where a good job is available?
2) There is a thing going on that, since say 1950, healthcare has gone up in cost, as a percentage of GDP from I don't know what to 18%. As well, people are living longer due to that healthcare, and a wage has to last longer, as people can't generally work longer in proportion to how much longer they live. I don't know where this fits into "w" and "p". It must be there, inside it, or outside of it (and so needing a correction to the formula).
(I'm fortunately not an economist, so I can leave working on these considerations to others!)
What do N* and H* signify?
"we must not ignore or downplay the importance of the earnings, incomes, wealth. They are just as important to affordability as prices, and the gap between real pay and productivity—i.e., wage inequality—is an historical factor that has played a key role in not just how people feel about economic fairness, but in how they vote about it." Absolutely. I wonder if most economists, journalists, and consultants/think-tankers view themselves in the "I-earned-my-income-increase" category and not in the I got a raise because of my new union contract, or politically-influenced raise in minimum wage, or because of the whim of management category, and thus the income side is left ralatively unmentioned.
This essay makes a valid point about wages.
When people perceive wage raises as having been earned, this is not just understandable, it’s coldly rational.
After years of productivity growth that is not matched by wages, anytime someone sees an increase. They know they have earned it because they have been exploited for a very long time.
Timely post in value! Wish Stantcheva could the research to Congressional capacities to redefine everything - own all wins & blame losses on all others. Or get real-time #s from Heritage & Project 2025 as to what THEY believe things actually cost and who earns what. Then again, could well be they just do not care.
Duesenberry’s relative income hypothesis ( 1949) might help explain some of the frustration.
Everyone knows and has watched the life styles of the rich & famous-
but we also know when we are relatively less well off in comparison.
When we work hard but still struggle to not only not keep up with the
Vanderbilts - but can’t even keep up
with Mr.& Mrs. Smith — anger happens.
Affordability is an emotional term, Asian manufacturing electronics are incredibly cheap, my morning cup of coffee from 2.25 to 2.75 in a year, the coffee increase a major topic of conversation… “spin” rules, …
Discussion about change in terms of the average(median or mean) when no one is ir wants to be average is part of what makes even intelligent people feel irrelevant.
Jared, as you note the credit-making phenomenon is extremely important in this "affordability" issue. I observe that all/most of the current Trump administration is focused on "get rich quick" schemes through their crypto fantasies. I believe the true answer is through being wise consumers who use credit moderately to purchase necessary items first & then extend these purchases as their incomes allow. I know that lower-income citizens need to move up through time & effort.