Category: Kevin Cochrane

The Rise of the Millennial Economy


Second Amendment arguments aside, would you pay $500 for a gun?  That’s about what average guns go for these days – sometimes more, sometimes less, so let’s agree on about $500.  However, what if that gun existed – just not in the physical world?  Would you pay $500 for a gun that you could only look at on your computer?

Welcome to the virtual world of online gaming.

Millions of people play online video games every day – sometimes all day!  And while the games themselves are often free, once inside, players are given the option to buy extra lives, or more weapons, or more bullets.  These “micro-transactions” are how game-developers make their money.  Players are willing to pay a buck here and a buck there to get an extra life and make it to the next level.  It’s not so much individually, but in aggregate that the developers make millions every day.

And then there are the “skins.”

Online games reward players’ successes with new guns, or new knives, or missile-launchers, all called, collectively, skins.  These weapons are better, or stronger, or maybe just a different color – and they are unique.  Moreover, not everybody who achieves a certain level in the game will get the same reward.  Developers limit the number of some prize skins, making certain models rare and coveted.

But what if you don’t need that extra purple-striped pistol?  Or better yet, what if you need a little extra cash so you can move out of your parents’ basement?

It turns out that there is an active secondary market to sell these virtual items and plenty of buyers willing to spend and show them off.  Some games have their own marketplaces built in to trade or exchange skins, with players often charging for them through payment platforms like PayPal.  There are even escrow websites that will hold a skin and collect the sale price (taking a small fee, of course), making exchanges even more secure.

How much do these rare and coveted skins go for?  You won’t believe it!

One escrow site reports an average daily trading volume of almost $250,000.  And while most items exchanged go for $20 or $30, the recent sale of a rare gun closed at $61,000!  That’s not a misprint – someone actually paid a real $61,000 to buy a bright yellow virtual rifle that doesn’t exist physically and can be used only in the game Counter Strike: Global Offensive.

Forget about the developers charging players a buck for some extra bullets.  This is the Millennial economy.

When I was in my mid-twenties, my goal was to buy a house for my family.  While most Millennials probably think that is ancient history, it really was not that long ago.  The first house I bought was $18,000 – and that was in California!  Okay, maybe that was a long time ago.  It wasn’t in a great neighborhood, but it was a starter home.  Even adjusted to today’s dollars using the consumer price index, it would still be only about $31,000.  However, the national real estate data company Zillow reports that the average starter home in California today goes for about $300,000.  What Millennial directly out of college, packing some student debt, can afford this?

People buy a home for a variety of reasons – investment returns, pride of ownership, status.   However, when a consumer can’t afford a specific good, economists tell us he looks for a less costly substitute that provides similar amounts of utility.  Enter the virtual purple-striped semi-automatic pistol.  I can’t build a house, just as a lot of videogamers can’t win the best skins.  But we can both buy what gives us status, pride, and yes…even investment returns.

With the rise of online gaming over the past several years, is it any wonder that the purchase of homes by the Millennial cohort has declined?  Priced out of buying real estate, their age group can afford skins.  Moreover, skins are a fairly decent utility substitute for homeownership.  They generally hold or appreciate in value; the owner can show them off in games online; and, depending on the skin, they communicate status.

In the Millennial economy, virtual assets are supplanting physical ones.  Now if they only had a place to sleep…

Kevin Cochrane teaches business and economics at Colorado Mesa University and is also a permanent visiting professor of economics at the University of International Relations in Beijing.

Second Amendment arguments aside, would you pay $500 for a gun?  That’s about what average guns go for these days – sometimes more, sometimes less, so let’s agree on about $500.  However, what if that gun existed – just not in the physical world?  Would you pay $500 for a gun that you could only look at on your computer?

Welcome to the virtual world of online gaming.

Millions of people play online video games every day – sometimes all day!  And while the games themselves are often free, once inside, players are given the option to buy extra lives, or more weapons, or more bullets.  These “micro-transactions” are how game-developers make their money.  Players are willing to pay a buck here and a buck there to get an extra life and make it to the next level.  It’s not so much individually, but in aggregate that the developers make millions every day.

And then there are the “skins.”

Online games reward players’ successes with new guns, or new knives, or missile-launchers, all called, collectively, skins.  These weapons are better, or stronger, or maybe just a different color – and they are unique.  Moreover, not everybody who achieves a certain level in the game will get the same reward.  Developers limit the number of some prize skins, making certain models rare and coveted.

But what if you don’t need that extra purple-striped pistol?  Or better yet, what if you need a little extra cash so you can move out of your parents’ basement?

It turns out that there is an active secondary market to sell these virtual items and plenty of buyers willing to spend and show them off.  Some games have their own marketplaces built in to trade or exchange skins, with players often charging for them through payment platforms like PayPal.  There are even escrow websites that will hold a skin and collect the sale price (taking a small fee, of course), making exchanges even more secure.

How much do these rare and coveted skins go for?  You won’t believe it!

One escrow site reports an average daily trading volume of almost $250,000.  And while most items exchanged go for $20 or $30, the recent sale of a rare gun closed at $61,000!  That’s not a misprint – someone actually paid a real $61,000 to buy a bright yellow virtual rifle that doesn’t exist physically and can be used only in the game Counter Strike: Global Offensive.

Forget about the developers charging players a buck for some extra bullets.  This is the Millennial economy.

When I was in my mid-twenties, my goal was to buy a house for my family.  While most Millennials probably think that is ancient history, it really was not that long ago.  The first house I bought was $18,000 – and that was in California!  Okay, maybe that was a long time ago.  It wasn’t in a great neighborhood, but it was a starter home.  Even adjusted to today’s dollars using the consumer price index, it would still be only about $31,000.  However, the national real estate data company Zillow reports that the average starter home in California today goes for about $300,000.  What Millennial directly out of college, packing some student debt, can afford this?

People buy a home for a variety of reasons – investment returns, pride of ownership, status.   However, when a consumer can’t afford a specific good, economists tell us he looks for a less costly substitute that provides similar amounts of utility.  Enter the virtual purple-striped semi-automatic pistol.  I can’t build a house, just as a lot of videogamers can’t win the best skins.  But we can both buy what gives us status, pride, and yes…even investment returns.

With the rise of online gaming over the past several years, is it any wonder that the purchase of homes by the Millennial cohort has declined?  Priced out of buying real estate, their age group can afford skins.  Moreover, skins are a fairly decent utility substitute for homeownership.  They generally hold or appreciate in value; the owner can show them off in games online; and, depending on the skin, they communicate status.

In the Millennial economy, virtual assets are supplanting physical ones.  Now if they only had a place to sleep…

Kevin Cochrane teaches business and economics at Colorado Mesa University and is also a permanent visiting professor of economics at the University of International Relations in Beijing.



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Wages Are Actually Growing Faster Than They Should!


I have an acquaintance who owns several franchises of a national fast food chain.  He refers to increasing wages for his workers as the 49-cent taco problem.  If he raises wages too much, his cashiers just can’t sell enough 49-cent tacos in an hour to make a profit.  He can raise wages only as fast as he can raise taco prices – and the market rate of inflation determines the latter.  Likewise, he can’t raise wages based on gains in productivity because cashiers already are selling the maximum number of tacos possible per hour. 

It’s actually a pretty simple principle to grasp that wages should be an amount reflective of the value the wage contributes, or produces.  That is to say, if an hour’s labor produces something that can be sold for $10, then the value of that labor should be $10 – after deducting any hard costs for raw materials, capital, etc.  As time goes on, the sale price of that good should increase due to inflation, and wages right along with it.

The headlines, television, newspapers, the internet – they are all on a wage crusade, claiming that real earnings haven’t grown at all.  Most state it as a fact, while many question why real wages haven’t grown, given that unemployment is so low and the job market so tight.

To be blunt – this is all wrong!  Real wages have grown – so much so, they’ve actually grown more than they should.

Income (wages) should grow over time at the rate of inflation plus the rate of productivity gains.  For example, if inflation is 2%, and a worker is 2% more productive, he deserves a 4% pay raise.  To pay him any less would be shortchanging him.  But to pay him any more would be to reward him for inflation that didn’t occur, or productivity he didn’t achieve.

So let’s look at the real numbers and see what’s actually been going on.

The Bureau of Labor Statistics (BLS) produces a quarterly report on wages, benefits, inflation, and productivity.  Looking at its December 2013 report (the last one before Obamacare began and drastically changed employer benefit costs), we can compare the average hourly non-farm, non-government wage and benefit level to December 2016 – a tidy three-year period.  When we factor in the rate of inflation and productivity growth over the same period, it turns out that workers have made massive gains in real income.

Over just that 36-month period, wages grew 15% and benefits 24%, resulting in a total employer-paid compensation increase of 18%.  During that same time, inflation was only 4% and gains in productivity just 7%.  Essentially, workers received increases in wages and benefits that are far greater than just keeping up with inflation or becoming more productive.  Roughly, workers are being paid today about 7% more than should be expected.

So if wages are growing faster than both inflation and productivity together, what’s all the shouting about?  The answer is easy: class envy.  While this extraordinary growth in workers’ real income has been occurring – actually the fastest in 50 years – the top earners’ incomes have been growing, too, and at an even faster rate.  Rather than be thankful for the pay raises they have, workers are angry they didn’t get even more…like the rich people they see on TV.

It’s true.  The income gap between the lower and middle classes and the top bracket has widened – not by much, but it has increased a bit.  However, most of this widening is due to a statistical anomaly.  Let’s compare two hypothetical individuals, one making $20,000 per year and one making $200,000.  The income gap between them is $180,000.  Now, assume they both get 7% pay raises – the rate of inflation plus their productivity gains.  With their new incomes, $21,400 and $214,000 respectively, the gap is now $192,600.  Yes, it has widened in dollars, but not in real terms.  Both workers are equally earning the same inflation-adjusted income, and both are being rewarded for their exact productivity gains.

It’s no wonder workers want even more.  The media continually uses the dollar differences in income levels to demonstrate how “unfair” it is that the rich are getting richer while the poor are getting poorer.  But it simply isn’t true.  In 2013, the lowest 20% of income-earners received 3.1 percent of all national income, and that percentage is the same today.   Yes, that’s a small piece of the pie, but to increase it beyond inflation and productivity gains just doesn’t make sense – particularly in the long term.

No, workers are getting more than their fair share of wage increases.  And the income gap, while marginally widening, is mostly a nonexistent statistical artifact.  What workers should be doing rather than complaining is bracing for the coming flattening of wage increases.  The current low unemployment rate will bump incomes a bit more, but then simple economics will ultimately flatten the rate of wage growth to align with inflation and productivity gains.

In the meantime, I’m going to have another 49-cent taco.

Kevin Cochrane teaches business and economics at Colorado Mesa University, and is also a permanent visiting professor of economics at the University of International Relations in Beijing.

I have an acquaintance who owns several franchises of a national fast food chain.  He refers to increasing wages for his workers as the 49-cent taco problem.  If he raises wages too much, his cashiers just can’t sell enough 49-cent tacos in an hour to make a profit.  He can raise wages only as fast as he can raise taco prices – and the market rate of inflation determines the latter.  Likewise, he can’t raise wages based on gains in productivity because cashiers already are selling the maximum number of tacos possible per hour. 

It’s actually a pretty simple principle to grasp that wages should be an amount reflective of the value the wage contributes, or produces.  That is to say, if an hour’s labor produces something that can be sold for $10, then the value of that labor should be $10 – after deducting any hard costs for raw materials, capital, etc.  As time goes on, the sale price of that good should increase due to inflation, and wages right along with it.

The headlines, television, newspapers, the internet – they are all on a wage crusade, claiming that real earnings haven’t grown at all.  Most state it as a fact, while many question why real wages haven’t grown, given that unemployment is so low and the job market so tight.

To be blunt – this is all wrong!  Real wages have grown – so much so, they’ve actually grown more than they should.

Income (wages) should grow over time at the rate of inflation plus the rate of productivity gains.  For example, if inflation is 2%, and a worker is 2% more productive, he deserves a 4% pay raise.  To pay him any less would be shortchanging him.  But to pay him any more would be to reward him for inflation that didn’t occur, or productivity he didn’t achieve.

So let’s look at the real numbers and see what’s actually been going on.

The Bureau of Labor Statistics (BLS) produces a quarterly report on wages, benefits, inflation, and productivity.  Looking at its December 2013 report (the last one before Obamacare began and drastically changed employer benefit costs), we can compare the average hourly non-farm, non-government wage and benefit level to December 2016 – a tidy three-year period.  When we factor in the rate of inflation and productivity growth over the same period, it turns out that workers have made massive gains in real income.

Over just that 36-month period, wages grew 15% and benefits 24%, resulting in a total employer-paid compensation increase of 18%.  During that same time, inflation was only 4% and gains in productivity just 7%.  Essentially, workers received increases in wages and benefits that are far greater than just keeping up with inflation or becoming more productive.  Roughly, workers are being paid today about 7% more than should be expected.

So if wages are growing faster than both inflation and productivity together, what’s all the shouting about?  The answer is easy: class envy.  While this extraordinary growth in workers’ real income has been occurring – actually the fastest in 50 years – the top earners’ incomes have been growing, too, and at an even faster rate.  Rather than be thankful for the pay raises they have, workers are angry they didn’t get even more…like the rich people they see on TV.

It’s true.  The income gap between the lower and middle classes and the top bracket has widened – not by much, but it has increased a bit.  However, most of this widening is due to a statistical anomaly.  Let’s compare two hypothetical individuals, one making $20,000 per year and one making $200,000.  The income gap between them is $180,000.  Now, assume they both get 7% pay raises – the rate of inflation plus their productivity gains.  With their new incomes, $21,400 and $214,000 respectively, the gap is now $192,600.  Yes, it has widened in dollars, but not in real terms.  Both workers are equally earning the same inflation-adjusted income, and both are being rewarded for their exact productivity gains.

It’s no wonder workers want even more.  The media continually uses the dollar differences in income levels to demonstrate how “unfair” it is that the rich are getting richer while the poor are getting poorer.  But it simply isn’t true.  In 2013, the lowest 20% of income-earners received 3.1 percent of all national income, and that percentage is the same today.   Yes, that’s a small piece of the pie, but to increase it beyond inflation and productivity gains just doesn’t make sense – particularly in the long term.

No, workers are getting more than their fair share of wage increases.  And the income gap, while marginally widening, is mostly a nonexistent statistical artifact.  What workers should be doing rather than complaining is bracing for the coming flattening of wage increases.  The current low unemployment rate will bump incomes a bit more, but then simple economics will ultimately flatten the rate of wage growth to align with inflation and productivity gains.

In the meantime, I’m going to have another 49-cent taco.

Kevin Cochrane teaches business and economics at Colorado Mesa University, and is also a permanent visiting professor of economics at the University of International Relations in Beijing.



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