Several investigators have studied the role of import competition in explaining wage behavior, with apparently conflicting results: Some have found a significant effect of import competition on wages in manufacturing, while others have found no such effect in the aggregate. This paper highlights the role of the nontradable goods sector--not addressed in previous studies--to reconcile these results. The model demonstrates that a fall in the relative price of tradable goods has an ambiguous effect on aggregate real wages: while the lower price of tradable goods leads to lower labor demand in the tradable sector, it also leads to higher labor demand in the nontradable sector. Empirical results show considerable support for the model when tradable goods prices are measured by import or export prices, but not when they are measured by the real exchange rate.

We survey the evidence bearing on measurement error in the CPI and provide our best estimate of the magnitude of CPI bias. We also identify a "weighting" bias in the CPI that has not been previously discussed in the literature. In total, we estimate that the CPI overstates the change in the cost of living by about 0.6 percentage point per year, with a confidence interval that ranges from 0.1 to 1.2 percentage points. Roughly half of this bias is accounted for by the CPI's inability to fully capture the welfare improvement from quality change and the introduction of new items. Our bias estimate is smaller than that found in several earlier studies, in part because the BLS has recently made a variety of improvements to its procedures; our study highlights several potential areas for further improvement.

We survey the evidence bearing on measurement error in the CPI and provide our best estimate of the magnitude of CPI bias. We also identify a weighting bias in the CPI that has not been previously discussed in the literature. In total, we estimate that the CPI overstates the change in the cost of living by about 0.6 percentage point per year, with a confidence interval that ranges from 0.1 to 1.2 percentage points. Roughly half of this bias is accounted for by the CPI's inability to fully capture the welfare improvement from quality change and the introduction of new items. Our bias estimate is smaller than that found in several earlier studies, in part because the BLS has recently made a variety of improvements to its procedures; our study highlights several potential areas for further improvement.