Since Roman times, economists have struggled with the difficulty of measuring the “real-wage rate” across nations: How much product can a given period of work buy? Such a measure could provide a valuable index of the standard of living of workers but is plagued by pitfalls.
Suppose one asks, “How many wagons can a wagon-maker buy with a year’s salary?” Alas, wagons don’t look the same in Estonia, Egypt, or El Salvador and require very different skills to construct. Wagons provide a flawed measure.
To this age-old problem, economics professor Orley Ashenfelter *70 has found a solution: a product that is basically the same everywhere — the McDonald’s Big Mac. Since the late 1990s, Ashenfelter has compiled what he calls the Big Mac Index, which cleverly gauges the real-wage rate in more than 60 countries. (A separate Big Mac Index, by The Economist, calculates the value of international currencies.)
To plug a nation into his Big Mac Index, Ashenfelter requires just two pieces of information: How much does a Big Mac cost locally? And how much does McDonald’s pay its crew there? The Big Mac Index demonstrates that workers are paid vastly different amounts to perform the same tasks, depending on the country.
Not only is the Big Mac standardized, but “workers are doing the exact same thing” when they make one, Ashenfelter says. If they are paid less to make one in the Third World, it’s not because the work is easier or the workers less competent. Developing countries’ economies are less productive, which pushes down prevailing wages. McDonald’s workers may be just as productive in India as in, say, the United States, but they are paid the going wage rate, which is less in India.
Before the Industrial Revolution, real-wage rates were the same everywhere, barely above subsistence level, Ashenfelter says. Ever since, rates have varied, employers being forced by competition to pay workers more in developed countries.
The index shows huge growth in real-wage rates in India, Russia, and China since Ashenfelter began measuring there in the late 1990s. But since the recession, “it’s kind of a sad story,” he says. Among emerging economies, “The least democratic countries are the ones doing the best — Russia and China. India is starting to backslide.”