More Things Are Getting Better (or There's No Great Stagnation): Phone Service

Steven Horwitz

Having just purchased a new cellphone for one child and about to get a new one for me and the other child, I was curious about what the real cost of telephone service looks like today versus the past.  At one level, the answer is obvious that life is never better when it comes to phones, but critics might say something like "well, it's socially expected that people have a cell now and many people also have a landline for a variety of reasons, so we might be spending more on phone service than ever before because of those rising social expectations."  Okay, so let's take a look.

For reasons related to data availability, my major comparison will be between 1994 and 2011.  But let me start by reminding you what phone service was like in the 1950s and 60s:  one provider, more or less one option for calling packages, rotary phones, and expensive long-distance.  The 1950s/60s base rate for service was about $35/month and it would cost you about $15 to make a 10 minute long-distance call during the day.  As I have done in the past, we can convert this to labor hours at the average private sector wage and note that the $35/month amounted to 14 hours of labor at a 1964 wage of 2.50/hr.  The long-distance call was 6 hours of work. 

Making the 1994 vs. 2011 comparison is very difficult, mostly because of the role of cell phones and because the options for basic phone service are so different.  Below, I make several comparisons.  I use the prices of basic touch-tone phone service in 1994 (yes, even as late as 1994 you had to pay a fraction extra for touch tone instead of rotary) and that of a basic landline package in 2011.  I then look at the average US residential phone bill in 1994 vs. the present.  Next, I add in two different cell plan options, neither of which includes text messaging or data services so as to try to just make the basic comparison on voice calls.  I am ignoring the cost of equipment and installation charges, and just looking at monthly fees.  Finally, I look at annualized expenses as a fraction of median household income.  The table below has this data.

Year	Service	Nominal Cost	Avg Private Sector Wage	Cost in Labor Time
1994	Basic touch tone service – free local, long-distance charged per minute	$19.81	$11.31	1 hour and 45 minutes
	Average residential phone bill	$61.00	$11.31	5 hours and 24 minutes
	Avg. yearly bill as a % of median household income ($32,264)		2.27%
2011	Typical landline phone service, including free local and long-distance	$25.00	$19.33	1 hour and 18 minutes
	Average household cell phone bill	$60.00	$19.33	3 hours and 6 minutes
	Cheapest single-line Verizon plan without texting, and including 450 anytime minutes, unlimited Verizon mobile-to-mobile, no long-distance charges and unlimited nights and weekends, plus voice mail, caller ID, call waiting, 3-way calling, and call forwarding	$39.99	$19.33	2 hours and 4 minutes
	Cheapest Verizon family plan without texting:  provides two lines and includes 700 shared anytime minutes plus all of the above features	$69.99	$19.33	3 hours and 37 minutes
	Combination of landline plus Verizon family plan for two	$94.99	$19.33	4 hours and 54 minutes
	Avg. yearly bill as a % of median household income in 2009 ($49,777)	Basic landline	0.6%
		Avg. cell bill	1.44%
		Basic landline and family plan	2.29%

Based on this data, we can draw a few inferences.  First, the most basic level of phone service is cheaper today, in terms of labor time, than in 1994.  Of course what counts as "basic" has increased significantly.  Most notably, "basic" today includes free long-distance.  Put differently, that $25 landline plan is probably much closer to the average landline bill than the $19.81 of 1994 was to the $61 average because the latter included all the various toll and long-distance charges.  So for what amounts to less labor time, a landline phone today delivers a considerably better product.

Ok, says the critic, what about cell phones?  So suppose we add the most basic calls-only cellphone plan on top of that landline (note that I'm ignoring pre-paid or pay-as-you-go cell plans).  That's another $40 per month, bringing us up to $65/month, which, assuming our cell customer does not go over her minutes, is roughly the average nominal phone bill in 1994.  If we make the labor time calculation, the combo of basic landline and basic cell is cheaper today than in 1994.  And if we make it, instead, the entry level Verizon family plan, our typical household is paying $94.99 for phone service (both landline and two cell lines).  That is still cheaper in terms of labor time than was the average residential phone bill in 1994.

We can also look at this comparison in terms of percentages of median household income.  The combination of a landline and a basic cell package is a smaller percentage of median household income (using 2009 data) than was the average residential phone bill in 1994.  If we substitute the Verizon family plan for the basic cell package, the percentage of median household income is nearly identical to the average residential phone bill from 1994.  So no matter how you slice it, "typical" phone service today is, at worst, equal to the cost of such "typical" service in 1994 if you look at median household income, and cheaper if you do the labor time calculation.

Of course this ignores the really big elephant in the room:  what you GET for your "typical" package is of enormously higher quality today.  That typical package in 1994 was one landline number with free local calls with long-distance on top of that and did NOT include all the call waiting type features that the typical landline and landline-cell combination deliver today.  And the typical package today includes 3 different phone numbers and all the convenience of having a cell with you at all times, not to mention the various features included in the calling package and the things the phone can do (e.g., store contact information and probably serve as a camera and music player).  The mobility of a cell phone is also not just a matter of convenience, but can also be an enormous time saver and life saver in emergencies. Cells have also made life for the homeless better by enabling them to have a contact number for employment and social services in the absence of a permanent residence. 

So even if we take the worst case scenario in which typical phone service today is roughly the same percentage of median household income as it was in 1994, the gains in quality and convenience are so enormous as to almost make it an entirely different good than what was available in 1994, and certainly the decades before.

As noted earlier, I excluded all text and data packages so as to try to focus only on voice services. Certainly adding both of those in would change the numbers (unlimited texts is another $20 on a single line and $30 on a family plan covering up to 5 lines total, and data plans are another $30 per month). Including those really turns the phone into something very different from what it was in 1994.  I was more interested in the exercise of comparing just phone services, but it is not irrelevant that what "phones" can do today is so much more.  By analogy, comparing a black and white TV from the 1950s on which one could only get about 5 or 6 channels to an HDTV model today hooked up to hundreds of channels of cable, not to mention Blu-ray etc, is hardly even talking about the same good.

The most direct apples-to-apples comparison with voice phones is the $61 average residential phone bill in 1994 with the basic landline of $25 with perhaps another $10 or $15 tacked on to get to the average landline bill today (a piece of data I could not find).  Even if that average landline bill is $50 total, it is still cheaper in nominal terms, even ignoring the labor time comparison.

So like pretty much everything else one can do this exercise for, basic landline phone service in the US is dramatically cheaper than in the past, and even if one expands the question to be total phone service including cell, about the worst you can say is that it's roughly the same percentage of median household income, but for a product orders of magnitude better than the 1994 equivalent.

Notes on data: 

All Verizon prices are taken from the Winter 2011 Verizon Pricing Guide.  The data on 1994 telephone expenditures is from this FCC publication.  Wage data is, as always, from FRED at the St. Louis Fed.  The average cell bill of $60 figure is taken from several different websites.  The data on the 1950s/60s is taken from the book Supercapitalism.  Median household income is from the US Census Bureau.



Comments

[Daniel Klein]

In terms of quality of life improvement, consider the following from TMS in connection with Steve's report, as well as Facebook, email, etc. etc.:

"to feel that we are taken no notice of, necessarily damps the most agreeable hope, and disappoints the most ardent desire, of human nature. The poor man goes out and comes in unheeded, and when in the midst of a crowd is in the same obscurity as if shut up in his own hovel."

Now, the "poor man" is chatting with his pals all the way ...

[Richard Ebeling]

One other comparison, Steve.

When Voltaire heard in Paris of the massively destructive earthquake that hit Lisbon on All Saints' Day in 1755, days had passed from the time when the quake had actually struck.

We watched the Japanese earthquake and tidal-wave virtually "live" with modern communications.

And, perhaps, having watched this terrible event in Japan, we might remember a part of Voltaire's poem written about the Lisbon disaster:

"What crime, what sin, had those young hearts conceived

"That lie, bleeding and torn, on mother’s breast?

"Did fallen Lisbon deeper drink of vice

"Than London, Paris, or sunlit Madrid?

"In these men dance; at Lisbon yawns the abyss.

"Tranquil spectators of your brothers’ wreck,

"Unmoved by this repellent dance of death,

"Who calmly seek the reason of such storms,

"Let them but lash your own security;

"Your tears will mingle freely with the flood."

Richard Ebeling

[Glen Woodfin]

Yes I agree with you that cost of call rates before were a lot higher compare today because we can only contact through our landlines and we go through operators who will place our calls. Today it is a lot easy to call at a very reasonable rate. There are also unlimited package for text and calls.

[Jim Rose]

what about increased life expectancy?

In The Quantity and Quality of Life and the Evolution of World Inequality, becker concluded that:

"GDP per capita is usually used to proxy for the quality of life of individuals living in different countries. However, well-being is also affected by quantity of life, as represented by longevity.
This paper incorporates longevity into an overall assessment of the evolution of cross-country inequality. The absence of income convergence noticed in the growth literature is in stark contrast with the reduction in inequality after incorporating recent gains in longevity.
The paper computes a "full" income measure to value the life expectancy gains experienced by 49 countries between 1965 and 1995. Countries starting with lower income tended to grow more in terms of "full" income than countries starting with higher income.
The average growth rate of "full" income is about 140% for developed countries, compared to 192% for developing countries."

[McKinney]

You may have noticed that Lucent will be marketing a new cell "tower" designed at Bell Labs which will handle about a thousand times as many calls as current towers, but will be the size of a bread box and will be mounted on buildings instead of ugly towers.