Here's an attempt.  I am not sure all economic indices properly adjust for quality.  So if you compare, say, income levels (properly adjusted for inflation) there still may be this "implicit price" problem caused by quality changing over time. 

Example: You can look at how many hours it takes for the average worker to buy a new car, comparing across years.  And that's a nice, concrete necessity to focus on.  But how can one meaningfully compare, say, a 1960 entry level sedan with a 2007 one?

Newer cars -- even entry level ones -- are better quality.  They are safer on the whole, and cost relatively less to maintain (longer times between brake jobs, etc.). They are more comfortable (standard air, better audio) and tend to ride better.  If they are in fact safer, long terms medical costs may be avoided.

So when looking at things like what goods should be measured in the Consumer Price Index, economists have to figure out how to keep the market baskets the same, while taking quality changes into account.  It is better said in the opening sentences of this piece (read down to "hedonic regression, at which point my head rolls over):
http://www.ottawagro...

It may be that price indices have an upward bias (by not properly incorporating quality increases).  This is a common problem that has been worked on for years by the Bureau of Labor Statistics.  Here's a case study they did on quality changes in television sets.  http://www.statcan.c...

Think of the first music system you had.  The older you are, the bigger piece of crap it was compared to what is available now.  I spent $550 for my first CD player.  (I still regard it as a worthwhile investment even though the price kept coming down.)  I spent less than 40$ on an equivalent one -- actually a better one because it plays DVDs -- for my low tech music system in my home office.

So that's a partial explanation.  I'll try to think of more.  It's a great question.

I'm thinking of similar "quality" issues, which morph into selection issues.  My parents (and their generation) could keep all their clothes in one small closet.  Wine drinkers did not have much of a selection in most parts of the U.S.  We watched B&W televisions, and the only pro football games I saw were NY Giants or Eagles games.  Cable had just started.  No one from my small town ever went anywhere on a plane.  A typical vacation was to the beach, exotic Ocean City (when there were almost no buildings past the old downtown -- actually Ocean City has decreased in quality.)  The list goes on and on.

As a wine drinker, I think that aspect in the increase in the global economy has been wonderful.  Spanish, Australia wines, etc.  Now, how do you measure quality differences between wines?  For a few dollars more than a jug wine you can get quite a decent bottle.  The selection is leaps and bounds over what it once was. I am not sure any price index can satisfactorily capture these quality changes.  So for the middling wine drinker who can no longer tolerate jug wines, it is possible to get a decently rated wine for a few dollars more (with careful looking).  Forty years ago that was not possible. 

More thoughts later.  And I don't mean to suggest the bias issues all go in one direction.  Not all of the "improvements" in life make us happier or better off. 

So, now that AnonymousIsAWoman showed how globalization will bring income down, your answer explains how the reduction of income also translates into lower prices. So yes, workers earn less money but it also takes less money to buy high quality goods.

I have been thinking about this ever since I read your entry, and I will say that, at least in the U.S., this seems to be correct. Clothes, shoes, and electronic products are a lot cheaper, and there are more choices. And there are many ways that one can substitute buying retail since there is a big market of used but working items.

So, if every service had kept its cost low, most Americans wouldn't have noticed the decline of their income.

But some key services, such as education, health care, and housing, did go dramatically up. And this may the pressure point for those whose salaries declined or remained stagnant.

The standard free market myth is that higher productivity will eventually lead to an increase in wages for workers.  It's a meme the Washington Post has confidently repeated for years in their economic reporting.

The way it supposedly works is that as workers produce more and the economy expands, consumers buy more products.  Eventually, the demand for goods becomes greater than what a set number of workers can produce and upward pressure causes employers to hire more workers.  This creates more demand for the supply of workers and puts pressure on wages to rise.  Also, prosperous bosses will share their profits by increasing employees' wages, the so-called trickle down theory.

This was indeed the model for American prosperity during the Golden Age of Affluence in the late 50s and early 60s.

What changed?

Actually as workers got more efficient and as more tasks became automated, the demand for workers decreased.  It took fewer workers to produce the same amount of goods, or even greater goods. In addition, lots of companies moved out of America in search of cheaper labor in countries like China, which is a big producer nation while we've become a consumer and service nation.  And then you add outsourcing and guest workers programs and even illegal immigration to the mix and the demand for workers shrinks more.  With more out of work employees competing for the same job, businesses can offer less pay.

The biggest factor is that high paying manufacturing jobs have been replaced by low wage service jobs.  We currently produce very little and have a large trade deficit, which in addition to being bad economically, also puts us at a security risk. Too much of our debt is held by the Chinese and other Asian nations.  They could call in their debt, demand payment and cause an economic crisis.  In addition, a blockade could prevent us from getting goods we need.  A nation that flips burgers, sells appliances, and landscapes your lawn but produces no goods is a nation waiting for an economic or national security crisis to happen.

A big reason, though, for low wages is the weakness of unions.  During that golden age in the 50s and 60s when ordinary working people were experiencing a prosperity unseen anywhere else until that time, union membership was at its highest and labor unions were at the peak of their influence in this country.

Even today, look at the states where unions still have some strength, like New York and New Jersey, and those states will have comparatively higher wages than say Mississippi where unions are at their weakest.  The average person also has a higher standard of living in those Northeastern states.

There was no magic reason why the free market paid factory workers more than waitresses or secretaries.  In fact, until the manufacturing sector was organized, assembly line workers were the worst paid and most overworked employees, not the highest paid.

Here's a factoid.  In 2003 when productivity was soaring at 6%, wages were flatlining and people were being laid off.  That says it all about productivity, off shoring and the New Economy.

Thanks for explaining the standard free-market theory of how productivity is connected with higher salaries. So management shares the profits by paying higher salaries in a tighter labor market.

It seems that a weak point within the standard explanation is the assumption that more production equals more consumption. That seems to assume that the consumer has money to buy the extra widgets that higher productivity brings. But if one is trying to understand the dynamics of the standard theory, I suppose that higher productivity means that the product can be sold at a cheaper price, and this can entice the buyer to consume more. But it still assume money on the hands of consumers.

The system only works when you have a finite labor pool. If one suddenly finds other sources of labor, then the basic free-market dynamics model will predict that worker's income will decrease.

I share your concerns about how our service and information economy is potentially setting the country up for failure. I grew up in Mexico, and its dependency for food and goods to foreign countries is one of its major weaknesses (among many, many other :P ).