Real Wages: Big Mac Edition

Global investing is becoming extremely important, as so much dynamic growth is located overseas.  In the last decade, it seems like China has grown tremendously.  In fact, if you listen to Congress, they see China as a threat to take American jobs.  Maybe this article from the Wall Street Journal will surprise you like it did me.  It’s a genius way to look at real wages.

Comparing wages across countries can be difficult, but one economist has come up with a way to track people doing identical jobs to make an identical product all across the world: McDonald’s employees.

Just comparing how much money workers make across countries is too simplistic. A better guide can come from taking a wage rate and dividing it by a good, which allows economists to see how much of that product an hour of work buys — a so-called real wage.

In order to calculate a real wage across countries Orley C. Ashenfelter of Princeton University found an excellent example using McDonald’s employees. In his paper published by the National Bureau of Economic Research, Ashenfelter notes that McDonald’s workers across the globe by design are asked to perform the same tasks to build the same product: a Big Mac. By calculating how many hours of work it takes an employee to earn enough to afford a Big Mac, he can show how wages change across countries.

You’ve got to admit that’s pretty clever.  (But Mr. Ashenfelter has been pretty clever in other areas as well.)  The graphic that goes along with it is the surprise.


Source: Wall Street Journal

Western Europe, the US, and Canada are all high wage areas.  China is significantly cheaper—but look at Latin America and India.  They are another magnitude lower in wage rates than China.  Usually other factors, including political stability and the rule of law, come into play before a company decides to locate jobs offshore.  This suggests that other low-wage areas could boom if they develop political structures that are conducive to business.  Maybe China will export jobs to India!

“Real wage rates seem to have been remarkably similar across countries before the industrial revolution,” Ashenfelter says. Since then “real wage rates have diverged across countries, with catch up taking place in different countries at different points in time.”

How can any individual investor keep up with all of this information?  No one person is going to be able to synthesize information about so many central banks, political administrations, and legal systems.  But guess what—asset prices do that all the time.  If prices in Mexico or Columbia or India start to rise, maybe the market is expecting some positive changes.  If the price change persists and results in a high degree of relative strength, that becomes notable.

This is just another way of pointing out that money goes where it is treated best.  Global tactical asset allocation using relative strength is one way to track these changes as they occur—and to create the opportunity to profit from them.

4 Responses to Real Wages: Big Mac Edition

  1. Adam Butler says:

    Mike, I’m really surprised by your aversion to active volatility management. We obviously agree with the dominance of momentum as a long-term return factor, but it has been evident for some time that absolute and risk-adjusted returns to almost any portfolio can be improved via volatility management. For example, I would be keenly interested in your response to the following study, summarized here by CXO: Avoiding Momentum Strategy Crashes .

    Further, in the pension and retirement space volatility management is even more critical due to the actuarial sensitivity of sustainable funding rates to portfolio volatility and negative skew. Volatility management improves the Sharpe ratio in every portfolio we’ve tested, but perhaps more importantly it normalizes the return distribution, making actuarial funding estimates more robust.

    I have the deepest respect for your work, but your apparent bias against volatility management is confusing. I look forward to your thoughts.

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