Tracking the Economy: What's a Living Wage?

September 25, 2007

The Purchasing Power Index (PPI) is a tool for assessing both the purchasing power earned by workers within a particular context and for determining what constitutes a sustainable living wage. The PPI methodology provides data that accurately and simply reflects the ability of workers anywhere in the world to meet their own needs and those of their families. The PPI helps to assess the effects of the global economy on workers, their families and communities, because it considers the intersection of wages, prices and inflation with straightforward data that facilitate more honest comparisons. Below are two examples.

1. Trans-Temporal Comparisons: Purchasing power can be compared over time for any group of workers or for workers in a specific region.

EXAMPLE: Average minutes of Purchasing Power (minPP), at the legal minimum wage, necessary for the purchase of 1 kilo of rice (2.2 lbs.) in Matamoros, Mexico.

1 kilo of rice in 1994 - 34 minPP
1 kilo of rice in 1998 - 38 minPP
1 kilo of rice in 2000 - 67 minPP

(Source: The Market Basket Survey, CREA Inc., Hartford, CT, 1994; Corporate Report, 1998; Mexico Purchasing Power Index Project, 2000.)

2. Trans-National Comparisons: Purchasing power can be compared for different groups or workers doing the same work in different countries.

EXAMPLE: Cost of basic items in the United States and Mexico for General Motors workers doing the same work at entry-level wages in 1994. Prices are in minutes of required purchasing power (minPP).

Item - GM Worker in United States - GM Worker in Mexico

Rice (5 lbs) - 13.5 minPP - 69 minPP
Cooking oil (48 oz) - 11.7 minPP - 113.2 minPP
Coffee (13 oz) - 8.4 minPP - 117.6 minPP
Chicken (1 lb) - 5.3 minPP - 48 minPP
Aspirin (100 tablets) - 19.3 minPP - 153.5 minPP
Bananas (1lb) - 2.3 minPP - 20.4 minPP
Whole milk (1 gal) - 12.2 minPP - 142.9 minPP

The PPI provides a consistent and objective way of assessing the affordability of food, clothing, housing, transportation and other items required for an adequate living standard. Since PPI allows consistent comparisons in these dimensions on an ongoing basis, wage standardizations can reflect a worker’s ability to provide for themselves and their dependents as well as to contribute to the communities in which they live.

Analysis of wages is an essential element in any plan for economic development. Discussion of wages, however, whether they increase or decrease, is misleading if not understood within the context of prices at a particular time and place. If wages, for example, increase as prices increase, then wage increases often become inconsequential. Employers sometimes understand wages by what they perceive as a worker’s immediate and isolated needs, that is, disconnected from community and society. An advantage of PPI is that it attempts to reestablish the need to determine wage levels, not only for immediate needs, but also within the context of a particular society.

Based on the work of the Center for Reflection, Education and Action (CREA),, a faith-based social economic research, education and action center in Hartford, Connecticut.


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