The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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December 28, 2005

Are Workers Losing Ground? Part II

Menzie Chinn, taking his turn over at Econbrowser, asks the question "How well are workers doing?"  His answer, to quote pgl at Angry Bear, is "not as great as advertised."  I'm no expert on advertising, but I have waded into these waters before, and have become sufficiently immersed to know that the numbers have become pretty slippery. 

One of Menzie's points is that labor's share of income -- measured by the ratio of paid compensation to gross domestic product -- has fallen way off its 1967-2005 average:


That picture is fairly compelling, but it loses some of its bite with slightly longer perspective.  Here's the same picture, this time for the entire period since 1967:


The last couple of years look strange only when compared with the immediately preceding years -- which themselves look like an aberration in the period after the great disinflation of the early 1980s.  The labor share calculated by the Bureau of Labor Statistics is a wee bit more favorable to the proposition that workers took it on the chin the last couple of years...


... but it is still not clear that this expansion is progressing much differently than the last one.  And, really, this is just where the trouble begins.  My colleagues Paul Gomme and Peter Rupert explain:

... the “historic lows” in labor’s share are observed only in the nonfarm business sector series produced by the Bureau of Labor Statistics. Other measures of labor’s share—for example, for the nonfinancial corporate business sector or the macroeconomy more broadly—are currently near their averages over the last several decades.

Those alternative measures are ones that avoid, for example, the problems associated with allocating rental income and proprietor's income between labor and capital.  (In other words, they avoid imputing things that we don't observe.)

To me, the labor market remains something of a mystery.  The crux of Menzie's post -- and pgl's endorsement -- is that employment growth, the returns to labor, and so on have been less than they should have been. But I still wonder -- what should they have been?

December 28, 2005 in Labor Markets | Permalink


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OK. Total compensation does include the COST of fringe benefits like employer provided health care insurance. But as Kash of Angrybear has pointed out - the cost has risen in the past 5 years even if the value has not. And as the Economic Policy Institute documents, the dip in measured compensation to GDP during the late 1990's was in part due to health care becoming less costly relative to its value.

Posted by: pgl | December 28, 2005 at 05:18 PM

Hi pgl - Although we both agree on the essence of Kash's point, we disagree on its relevance in assessing the "health" of labor markets. A tax, for example, drives a wedge between what employers pay and what workers receive in terms of purchasing power. If we compared two periods that were equivalent except for the wage-tax, I don't think we would conclude that the performance of the labor market was worse in the period with lower after-tax wage payments. I see the health cares cost issue in a similar light. As long as these sorts of benefit payments are linked to employment compensation, they should be included in our assessment of what workers get for working (for better or worse).

Hope you are having a great holiday season, by the way.

Posted by: Dave Altig | December 29, 2005 at 07:41 AM

I'm an executive recruiter working in the healthcare industry. We've seen wages increase from top to bottom increase an average of 7% per year for the last three years. I have an acquaintance who recruits in the Banking industry and he says wages have increased at an average of 10% per year for the past four years.

It's a matter of supply and demand. Manufacturing pay has stayed basically flat (negative if including inflation into the equation) for roughly five years.

Bottom line, the gap between "rich" and "poor" will continue to widen until the peasants elect a socialist gov't into office...and then we're all screwed.

Posted by: Mr. Z | December 29, 2005 at 10:56 AM

If you want to 'improve' this statistic, you should hope for a recession.

Posted by: Lord | December 29, 2005 at 02:26 PM

David - I understand your point. In fact, I have mentioned it as one of the possible real business cycle reasons why the employment to population ratio is lower now than it was in the late 1990's. However, I'm still not convinced that the Keynesian lack of aggregate demand reason has disappeared.

Posted by: pgl | December 29, 2005 at 06:21 PM

Suppose a family were to save a down payment, buy a beach home and rent it out. Their wages would have declined relative to their "GNP". Would a population of such families help explain a decline in wages relative to GNP?

Posted by: Jack K. Miller | December 29, 2005 at 06:47 PM

Dave -- "To me, the labor market remains something of a mystery."

That's quite a statement, Dave. What is that supposed to mean in layman terms?

What baffles you?

Posted by: Movie Guy | December 30, 2005 at 12:49 AM

Jack -- The answer is yes -- what you describe would reduce labor's share. However, one of the things I was suggesting in the post was that it isn't so clear that the falling labor share is a fact.

MG -- pgl really put his finger on the issue. I'm finding it very hard to disentangle what aspects of what we see on the employment/compensation front ought to count as "weakness," in the traditional Keynesian "too little demand" sense. Something really seems to have changed in labor markets post-1982. You can see that in the compensation patterns above, and it is manifested in slow (in historical context) recoveries of employment out of both the 1990-91 and 2001 recessions. This is presumably related to the decline in volatility in economic activity post-1982 -- it is at least correlated with it -- but why? What's the connection? I think we are still pretty much in the dark about this, and am not at all convinced that our traditional macroeconomic framework for thinking about such things is adequate to the task.

Posted by: Dave Altig | December 30, 2005 at 07:53 AM

The reason the employment to population #'s are lower is because more people retired. See the BLS surveys.

Posted by: cb | December 30, 2005 at 12:46 PM

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