Longer Run Recommendations
The BLS should develop a research program to look beyond its current "market
basket" framework for the CPI.
This recommendation suggests that the BLS should develop research programs exploring
"quality of life" issues such as time-saving benefits of new medical procedures
and new communication devices, and changes in the social or natural environment caused by
rising crime or new diseases. Because these things clearly affect our standard of living,
a complete accounting of U.S. economic progress would include them.
We do, however, have a reservation about this recommendation. Implicit in this
recommendation is a suggestion that the BLS should adjust the CPI for these effects.
Valuing changes in time allocation or in the general social environment may well require
too many subjective judgments to furnish an acceptable basis for adjusting the CPI.
Furthermore, arriving at a comprehensive measure of changes in the quality of life would
be quite difficult, yet making such adjustments in only a few selected cases could make
the CPI less accurate if these cases are not representative. Finally, it is unclear
whether "quality of life" valuations really belong in an index used for the
escalation of payments and adjustment of tax parameters. For example, the advisory
commission suggests that the CPI rent index should have made a quality adjustment for
changes in climate as renters migrated to the south.26
Such a quality-of-life adjustment, however, is properly viewed as out of scope
under the current definition of the CPI.27
Most of the uses of the CPI have evolved within the context of an index limited to market
goods and services, and presumably the appropriate uses of an index that incorporated
changes in crime levels, disease incidence, or income tax rates would be somewhat
different from the current uses of the CPI.
In summary, the BLS has no specific plans to implement this recommendation. Measurement
of changes in "quality of life" may require too many subjective judgments to
furnish an acceptable basis for adjusting the CPI. Furthermore, it is unclear whether
"quality of life" valuations are an appropriate part of an index of change in
the price of market goods and services.
BLS should investigate the ramifications of the embedded assumption of price
equilibrium and the implications of it sometimes not holding.
Any systematic method for distinguishing quality change from price change must be based
on some theoretical framework and set of assumptions. In most cases the BLS, like academic
economists who do research in this field, relies on one or another assumption about price
equilibrium. An equilibrium assumption underlies hedonic methods for quality adjustment,
for example, as well as the matched model price comparisons commonly used by the BLS.28 Although virtually all systematic methods for
quality adjustment are based to some extent on assumptions about price equilibrium, the
nature of the assumptions differs between methods. Of the methods used for quality
adjustment by BLS, two (the "overlap method" and the "link method")
are based on a particularly strict equilibrium assumptionthat quality differences
can be inferred from the price differences between individual items.29 The hedonic method, in contrast, allows for
random deviations of prices from equilibrium values and may allow for differences in rates
of price change between items of different vintages.
The commission recommends that the BLS investigate the assumption of price equilibrium
that underlies certain quality adjustment and item substitution procedures. We agree that
reducing reliance upon this assumption can sometimes make the CPI more accurate,
particularly for long run comparisons. Indeed, the BLS already has made considerable
progress in doing this. Recent tabulations indicate that item replacements adjusted for
quality using the methods that embody a strong price equilibrium assumption (i.e., the
"overlap method" and the "link method") declined from about 2 percent
of prices collected in 1983 to 0.62 percent in 1995.30
In addition, the CPI for prescription drugs now reflects consumers savings
from buying therapeutically equivalent generic substitutes for branded products. We plan
to continue research on avoiding bias from unwarranted price equilibrium assumptions.
In summary, the BLS agrees with this recommendation, has made considerable progress in
reducing reliance on quality adjustment methods that require strong price equilibrium
assumptions, and plans to continue research and progress in this area.
The BLS will require a number of new data collection initiatives to make some
progress along these lines. Most important, data on detailed time use from a large sample
of consumers must be developed.
The final longer run recommendation is that the BLS should develop new data collection
initiatives on time use and "quality of life" issues. These data would support
the research programs described in the commissions first longer run recommendation.
We agree that time use data would be valuable to researchers, and we concur with the focus
on using them for supplementary indicators rather than as part of the main cost-of-living
framework. Accordingly the BLS has established a Time Use Working Group that is developing
a set of recommendations for using the Current Population Survey (CPS) sample to conduct a
survey of how individuals spend their time. The Group has been charged with developing a
survey approach, and specifying sample size, data collection methodology, schedule and
budget and staffing requirements. The report will be ready by mid-summer 1998.
In summary, the BLS agrees that measures of time use have research value and currently
is undertaking a study of time use, but considers such studies to be supplementary to
rather than a part of the CPIs particular cost of living framework.
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Last Modified Date: October 16, 2001