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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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July 21, 2006


What Does Labor Compensation Measure?

In one of my posts yesterday I staked out an old position of mine: Payments made to workers should be broadly measured, including both explicit monetary remuneration and non-cash benefits.  Not surprisingly, I received several comments arguing that increases in labor compensation have, in the recent past, been driven by rising health care costs.

In making sense of all this, I think it helps to consider two different questions we might want to ask when considering payments to workers.  The first is, "What does it cost a business to purchase one hour of a worker's time?"  To answer this question, a broad (benefit inclusive) measure of labor compensation is clearly the right one.

Now consider the second question: "Does an increase in payments made by firms to workers make workers better off?"  On this issue, the answer may very well depend on the difference between compensation paid in dollars and compensation paid in benefits.

Maybe, but not necessarily.  Consider two workers, both of whom receive the same total amount of compensation, and both of whom spend exactly the same amount on health care.  Now suppose that those expenditures rise by 10% for both workers.  We'll further suppose that worker 1's wages rise by 10%, while worker 2's employer holds his or her salary constant but picks up the tab for the higher medical costs.  Would you say that worker 1 is better off than worker 2?  Neither would I.

The issue, of course, is that, left to their own devices, worker's would not choose to purchase the same quantity of health care when prices rise.  They therefore would not be indifferent between a dollar received in cash -- which they could allocate as they wish -- and a dollar received in health care benefits -- which they have no option to spend any other way.

That is an argument to which I am extremely sympathetic, and I am all for policies that disentangle the provision of insurance from employment. (A good debate on these issues can be found here.)  But it is an issue that has little to do with macroeconomic performance.

So, if you what you are interested in is what sorts of payment arrangements generate the highest level of well-being for employees, using narrow wage-and-salary measures of labor compensation may be justified (though not totally -- those benefit payments probably still yield utility).  But if what you are talking about is how well the economy is doing in generating income for workers, an inclusive measure of labor compensation is a must.

UPDATE: Although you probably read it there before reading it here, Greg Mankiw shares my sentiment, Brad DeLong does not. Brad does make the point -- I'm paraphrasing -- that if you are worried about the distribution of labor compensation, and if the payments to people in the part of the income-distribution you care about are well-captured by average hourly earnings, that would be a reason to prefer the series that excludes fringe benefits.  Fair enough, but I'll repeat my earlier argument that it would serve everyone well to be explicit that we are than using a notion of economic well-being that discounts average performance and focuses on who gets what. 

Meanwhile at Angry Bear, I believe that, as is often (though not always) the case, pgl and I have converged.   

UPDATE, AGAIN: The Liberal Order suggests:

... let's not also forget to account for workplace safety regulations and other observed changes in safety. For example, the manufacturing jobs that exist today are on average much safer than those of thirty and forty years ago. The increases in safety act as a compensating differential. This means that increases in productivity must also be weighed against increases in workplace safety.

A key issue is whether these changes add to the marginal cost of labor or simply the average cost of labor (as would be the case, for example, if safety provisions are more like fixed capital).  It's an interesting point, and an interesting question.

UPDATE ONCE MORE: knzn has some thoughts as well.

July 21, 2006 in Labor Markets | Permalink

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What you need to bring into the analysis to understand the comparisons is the tax impact.

In your example the person who pays for his own insurance has to pay for it out of after tax dollars while the individual that
has his insurance paid for by his employeer is receiving the benefit on a pre-tax basis.

In your example where one individual gets a wage increase to offset the 10% rise in insurance costs will be worse off because he will have to pay income come tax on the income and so will not get an aftertax increase large enough to offset the rise in health insurance costs.

The reason insurance is entangled with employment is because the tax treatment make it cheaper for the employeer to provide insurance as a benefit. If the tax rate is 25% the employeer can buy $75 worth of insurance for $75 on a pre tax basis but must pay the worker $100 for the worker to be able to buy $75 worth of insurance out of his aftertax income..

Posted by: spencer | July 21, 2006 at 04:07 PM

What about pension and retirement benefits that are promised but not delivered? These aren't even accounted for on the paycheck stub, so cutting back doesn't show as a loss.

Posted by: Lord | July 21, 2006 at 04:34 PM

Dave - "But if what you are talking about is how well the economy is doing in generating income for workers, an inclusive measure of labor compensation is a must."

Ok. Let's do it for private industry.

Results: First quarter 2006 real compensation per hour is in negative territory, along with real wages, for private industry employees.


Employment Cost Index news release
March 2005 Release
http://www.bls.gov/news.release/eci.nr0.htm

"Compensation costs in private industry rose 2.6 percent in the year ended March 2006, slowing from a 3.5 percent increase in March 2005."

But real compensation is down compared to the 2005 annual rates for most if not all employment sectors. (And that's without challenging the manner in which some compensation benefits are calculated, including healthcare insurance.) Services may be a slight exception. But very slight.

"Private industry workers wages and salaries increased 0.7 percent during the March 2006 quarter, compared with a 0.6 percent gain in the previous quarter. Private sector benefit costs rose 0.4 percent for the March quarter, following a 0.7 percent gain in the previous quarter."

But real wages are down. And Bernanke, unfortunately, was off the mark with his testimony before Congress yesterday on this point. Real wages are down. Period.

The 12-month percent changes in wages and salaries for each of the major employment sectors are in negative territory for the second year in a row, ranging from -0.4% to -1.0%.

Employee compensation benefits continues to show growing weakness.

Benefit Costs, Private Industry, 3-month percent changes:

Jun 2004 - 1.6%
Sep 2004 - 1.0%
Dec 2004 - 1.2%
Mar 2005 - 1.5%
Jun 2005 - 0.8%
Sep 2005 - 0.9%
Dec 2005 - 0.7%
Mar 2006 - 0.4%
----

National Compensation Survey - Compensation Cost Trends
BLS
http://www.bls.gov/ncs/ect/home.htm

Select this interactive link:
Create Customized Tables (multiple screens), NAICS basis
http://data.bls.gov/cgi-bin/dsrv?ci

2006, Otr 1 vs. 2005, Qtr 4
12-month percent change
Value of Compensation: Total benefits, not seasonally adjusted:

All workers - 3.0%, down from 4.0% in Qtr 4, 2005
All union workers - 2.9%, down from 3.3%
All nonunion workers - 4.2%, down from 6.0%
Blue-collar occupations - 2.1%, down from 2.9%
Management, professional, and related - 3.2%, down from 4.8%
Sales and office - 3.3%, down from 4.4%
Service occupations - 3.3%, up from 3.1%
Natural resources, construction, and maintenance - 3.2%, down from 3.7%
Production, transportation, and material moving - 1.4%, down from 2.4%
White-collar occupations - 3.2%, down from 4.6%
Manufacturing - 0.7%, down from 4.2%
Aircraft manufacturing - (-18.5%), down from 40.6%
Goods-producing industries - 1.3%, down from 3.8%
Service-providing industries - 3.5%, down from 4.1%
----

PRODUCTIVITY AND COSTS
First Quarter 2006, revised
1 June 2006 release
ftp://ftp.bls.gov/pub/news.release/prod2.txt

Review Table 1.

Real Compensation Per Hour:

Business sector - 121.5, down from 2005 annual rate of 121.6
Nonfarm business sector - 120.6, down from 2005 annual rate of 120.8
Manufacturing sector - 126.8, down from 2005 annual rate of 128.2
Durable manufacturing sector - 123.9, down from 2005 annual rate of 125.1
Nondurable manufacturing sector - 130.6, down from 2005 annual rate of 132.4
Nonfinancial corporate sector - 118.5, down from 2005 annual rate of 118.7
>>

Posted by: Movie Guy | July 21, 2006 at 05:30 PM

We have converged.

Posted by: pgl | July 22, 2006 at 10:06 AM

Counting safety regulations as worker compensation is ridiculous. These are to reduce the employers expense of lawsuits from injuries. The employee may benefit from not being injured but it is the employer that benefits from not have to pay for it.

Posted by: Lord | July 22, 2006 at 01:16 PM

«Counting safety regulations as worker compensation is ridiculous.»

Counting safety regulations is a fantastic way of doing a ''hedonic'' adjustment of wages, like for the various price indices. Very politically useful to argue that even if salaries are doing not that well and prices are doing pretty well, the cost of staying alive is not becoming worse.

By the same token, any extension of life expectancy should be taken as extra compensation too...

And of course what about the present monetary value of having an administration with such a record of tough anti terrorist wars? That is worth a lot of money to all those feeling better protected. :-)

«These are to reduce the employers expense of lawsuits from injuries.»

Well, the theory of course is that a safe workplace is not a right, but a valuable concession that generous businesses voluntarily bestow on workers. After all, workers are instantly replaceable, and businesses could instead just fire any partially or terminally damaged ''bulk headcount''... :-)

Or better, businesses could encourage accidents to collect faster on their insurance policies:

http://BattlePanda.blogSpot.com/2006/07/we-value-all-of-our-employeesreally.html

But with civic generosity they grant their workers raises in the form of reduced workplace danger.

I think out century badly needs a MarkTwain or as someone said a Mencken to address the amazing logic from some quarters...

Posted by: Blissex | July 23, 2006 at 05:00 PM

Spencer -- My example was just that: An example. You are, of course identifying why we attache health benefits to employment, a practice that I think is not a good idea.

Lord and Blissex -- Any payments made as a result of employing one more unit of labor represents a relevant cost of labor, independent of whether the government taxes and throws it away, whether the worker values payments made on their behalf the same as cash, or whether we think those costs ought to be incurred by firms for good social reasons. The problem with treating OSHA type regulations as compensation is not the economic principle, but the probability that such regulations do not represent a *marginal* cost to labor.

MG -- I have no beef with analysis like yours. If everyone would do as a good a job, we's have a good basis for further discussion.

Posted by: Dave Altig | July 24, 2006 at 07:17 AM

Any payments made as a result of employing one more unit of labor represents a relevant cost of labor

But you would also have to count the costs of lawsuits and offset reductions in the growth of such to the cost of safety regulations. Counting costs but ignoring benefits, one cannot identify true costs.

Posted by: Lord | July 24, 2006 at 01:54 PM

The value of pension and retirement benefits that have been jettisoned over the past, say, 25 years, probably amounts to 10-20% of income, so there probably hasn't been much true real growth of compensation over that time period. What we have been measuring as growth is largely borrowed future consumption.

Posted by: Lord | July 24, 2006 at 02:08 PM

More to the point, the "cost of safety" is like the "cost of quality". It is not safety or quality that cost, it is the lack thereof. Rather than speaking of the "cost of safety", we really should be speaking of the "benefit of safety". It is likely to have contributed to the productivity and profits we see.

Posted by: Lord | July 24, 2006 at 06:34 PM

Dave - "MG -- I have no beef with analysis like yours. If everyone would do as a good a job, we's have a good basis for further discussion."

Kind words, Dave.

I'm sitting here struggling with a package of Ritz crackers (in the nonopenable tube, of course). Where are the pliers? They used to be so EASY to open. Man, what happened to this product? I want a refund.


Posted by: Movie Guy | July 24, 2006 at 10:26 PM

Dave,

Here's another piece of information displayed graphically.

Health insurance, private industry,
12-month percent change in employer costs per hour worked
EMPLOYMENT COST INDEX—SUPPLEMENTAL DATA
http://www.bls.gov/ncs/ect/sp/echealth.pdf

Note the numbers and chart from this one page summary document.

Employer health benefit costs peaked in 2002, and have been on a downward track since then. The costs during 2006 are down significantly, apparently, based on the large drop in the twelve month change. Yes, fourth quarter probably provided a major contribution to the drop, but first quarter 2006 must not have been a growth issue.

Employer total benefit costs peaked in 2004, and have been on a downward track since then.

How do we explain this?

Posted by: Movie Guy | July 24, 2006 at 10:28 PM

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The Yuan Float, One Year Later

Nouriel Roubini and I debate the issue, in the latest edition of the Wall Street Journal Online's Econoblog feature.  I'm a bit distressed, though not really surprised, that so few questions have been resolved since Nouriel and I last met on the Econoblog battlefield.

July 21, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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» Yuan float - questions unresolved from New Economist
Dave Altig and Nouriel Roubini debate The Yuan Float, One Year Later over at the Wall Street Journal Econoblog column. Dave comments on his weblog that:...I'm a bit distressed, though not really surprised, that so few questions have been resolved since... [Read More]

Tracked on Jul 21, 2006 3:22:15 AM

» Chinese Yuan Rising? -- But What About China? from China Law Blog
Today's Wall Street Journal has an interesting article on the Chinese Yuan. Will it appreciate? When, by how much, and what will its impact be? The article is in the form of a back and forth exchange between two leading economists, Nouriel Roubini and ... [Read More]

Tracked on Feb 2, 2010 1:16:39 PM

Comments

Hi Dave,

He he, yes the question of the yuan float and subsequent appreciation certainly seems in a stalemate. The show troddles on in other words ...

On that note ... have you seen this from China Law Blog?

http://www.chinalawblog.com/chinalawblog/2006/07/chinese_yuan_ri.html#comments

'These guys [that would be you and Roubini] obviously know their economics, but I fault them for essentially ignoring China's reality on the ground in their discussion, as though that will not play a huge part in what happens to the Yuan. They both talk about China's overheating as a fact and they both cite Chinese growth statistics as though they are wholly accurate.'

I am not chosing side here, just pointing to another angle.

Cheers

Claus

Posted by: claus vistesen | July 22, 2006 at 05:20 AM

Hi Claus -- I had not seen that. Thanks much for the heads up.

Posted by: Dave Altig | July 24, 2006 at 07:20 AM

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July 20, 2006


The Chairman Speaks: Bernanke vs. Krugman On The Minimum Wage

Paul Krugman last week, via Hypothetical Bias:

Krugman says raise the minimum wage to reverse growing income inequality

Krugman says ($):

Can anything be done to spread the benefits of a growing economy more widely? Of course. A good start would be to increase the minimum wage, which in real terms is at its lowest level in half a century.

Ben Bernanke yesterday:

... I agree that inequality is potentially a concern for the U.S. economy...

That, however, is a development, a trend, that's been going on for about 25 years now, according to most of the studies. And it's therefore a big challenge to think about what to do about it....

But I do think that, fundamentally, the increased importance of skilled jobs and of technology in our society puts a higher premium on people with more education, more experience and more skills.

And I think that, really, the only long-term solution to this problem is to try to upgrade the skill levels of our workers...

Then, on to a question about the minimum wage specifically:

The research on this is controversial. Some people argue that the effect is very small. Others think it's larger.

My inclination is to say that you'd like to find ways of increasing the return to work which don't have the effect of potentially shutting some people out of the workforce.

And so I think I would agree that -- and I've said this in previous testimony -- that the earned income tax credit, which provides extra income to people who are working, and skills and training, increased training for increased skills and productivity, are in my opinion probably more effective ways to approach this question.

You may now choose sides.

July 20, 2006 in Federal Reserve and Monetary Policy, Labor Markets | Permalink

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Krugman used to be an economist. What happened?

Posted by: Lee | July 21, 2006 at 12:53 AM

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The Chairman Speaks: Why Don't Rising Productivity Tides Raise All Boats (Equally)?

The New Economist makes this observation:

Until around 1995, postwar labour productivity grew much faster in Europe than in the United States. But since 1995, Europe’s productivity catch-up ground to a halt and then reversed. The ratio of EU-15 relative to US average labour productivity, using 1995 PPP exchange rates, was 77% in 1979, reached 94% in 1995, and by 2004 had slipped back to 85%. About half of this reversal was from the US surge in productivity growth, which has been much analysed. But the other half of the story, Europe's productivity slowdown, hasn't.

Whad'ya know. It turns out that Chairman Bernanke also had some things to say about this topic yesterday as well (in response to a question from Rhode Island Senator Jack Reed):

I think the primary source of the productivity gains are two.

First is the improvements in information and communication technology we've seen over the last 20 years or so.

But secondly, the United States has done a lot better at using those technologies than a lot of other industrialized countries. And I think that relates to the fact that we do have very flexible product and labor markets, we have deep capital markets that provide funding for new ventures, and we have an economy that has an entrepreneurial spirit. So we made better use of those technological changes than some other countries.

I think that is the primary source of our productivity gains...

There's some very interesting research done by the McKinsey Corporation. It's looked at firms around the world and looks at their productivity gains. And what it finds is that firms that are exposed to competition, as unpleasant as that might feel, they increase their productivity gains much more rapidly.

And so, one of the benefits, I think, of a more open trading system, a more open economy, where we compete with and trade with countries around the world, despite the fact that it does create stress and sometimes changes and dislocations, is that competition forces productivity gains and has been, I think, a source of growth for us as well as for our trading partners.

For what seems like a quite different take on the issue, check out the paper highlighted in The New Economist post linked to above, which claims it is European tax cuts that have slowed their productivity growth.  My instinct is to side with some version of the Bernanke explanation.  But there is rarely a single factor that provides a fully satisfactory explanation of any particular set of facts, and I haven't read the paper cited by TNE.  So I'll leave it as an open question. 

July 20, 2006 in Economic Growth and Development, Federal Reserve and Monetary Policy | Permalink

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» Tigers, tortoises and textbooks from New Economist
Until around 1995, postwar labour productivity grew much faster in Europe than in the United States. But since 1995, Europe’s productivity catch-up ground to a halt and then reversed. The ratio of EU-15 relative to US average labour productivity, using... [Read More]

Tracked on Jul 21, 2006 4:04:06 AM

Comments

I always ask people that think China and India are absolutely going to leave the US in the dust why. China and India are certainly going to be huge economic forces. However, China has big trouble in its banking system. While they have a nice looking GDP, with no inflation, what happens when they let their currency float and they have to deal with real capital markets? Right now, they can control everything. In the future, the market will. They remind me of the Japanese in the early 80's.

I am so glad that Big Ben recognized the American entrepreneurial culture. It is a big deal.
The government needs to recognize this and nurture it through tax policy.

Posted by: jeff | July 20, 2006 at 08:31 PM

The competition story used to make a lot of sense about 6 years ago when profits were lower and interest rates were higher. Today, though, we’re seeing huge aggregate profits despite what appears to be a very low global cost of capital, yet productivity growth has actually accelerated relative to what it was in the late 90s and 2000. As I recall, competitive equilibrium implies a “zero profit condition.”

There are two explanations I can think of that would still allow one to apply the “competition raises productivity” story to today’s economy. The most promising is heterogeneity: competition is not making Microsoft and Exxon more productive, but maybe it’s making some less successful industries more productive. The other explanation is a risk premium: the risk-adjusted cost of capital is still very high, so the apparent profits are really just the required return on capital. That one I have trouble with: considering all the cash corporations collectively are sitting on, it shouldn’t be so hard to start a price war, risk premium or not.

Posted by: knzn | July 21, 2006 at 10:24 AM

In that paper, I don't think we so much disagree with Bernanke's explanation as argue that there is more to the story (as you say). If you break the LP growth gap into TFP and capital deepening, TFP accounts for the majority -- that's what Bernanke is referring to. The problem is, TFP is pretty tough to talk about -- it;s just a residual.

When Bob and I talk about the effects of tax rates, we're referring to capital deepening. It's also important to note, as have other papers recently, that capital deepening in the US recently has been driven by low hours worked, rather than high investment -- slightly troubling.

Posted by: Ian D-B | July 21, 2006 at 05:33 PM

Ian -- Of course. Thanks very much for the clarification.

Posted by: Dave Altig | July 24, 2006 at 07:24 AM

The over-emphasis on productivity gains begins to sound like the Fed (since Greenspan) has found the Holy Grail of economic activity. Nothing could be further from the truth.

Productivity is difficult to measure because it is calculated from aggregate statistics. This aggregate performance shows performance gains but it doesn't necessarily indicate either where or why.

The American economy, like that of the UK in Europe, is in the midst of migrating from the Industrial Age to the Information Age. The Information Worker is taking the place of the Shopfloor Manual Worker as America continues to offshore manufacturing capacity, whilst specializing in R&D and engineering - both highly amenable to Information Technologies.

In this passage, it is clear that the services sectors are taking the most benefit from Information Technologies. What remains, therefore, are the lesser skilled jobs that is not transferable to offshore production. This does not mean that these jobs are necessarily cheaper. Due to scarcity, plumbers, elections and even gardeners can demand (and obtain) good revenues.

Lesser skilled jobs pervade the economy and there is little productivity enhancement from IT. Hands holding scissors and a comb cut your hair. A hand holding a hammer builds your house. Etc., etc., etc.

However, these jobs constitute the very fabric of economic activity and represent, still, the overwhelming percentage of GNP.

What does it all mean? That productivity spurred by hi-tech has been strong, but like any cyclic phenomenon, it too can become part of the landscape. It is neither "special" nor necessarily "durable" in time. Also, the sort of productivity enhancement making the headlines is likely highly concentrated.

Posted by: Tony PERLA | July 24, 2006 at 07:51 AM

Tony -- I think it is highly concentrated, hence the issues associated with inequality trends in the US, even when we move outside of the top 1%. As with other great technological leaps one would expect to see the benefits become more diffuse, even as their growth cosequences diminish over time.

Posted by: Dave Altig | July 24, 2006 at 08:11 AM

Tony,

While you're right that for many sorts of production, such as construction, IT doesn't play a huge role, you'd also be surprised at the places it pops up. Retail is a huge sector of the economy, and a large part of its productivity growth has been driven by IT capital. All the inventory control that Wal-mart has, and all the automatic checkout lines you see in the grocery store are IT capital deepening.

Think about UPS -- they're doing a pretty mudane thing delivering packages, but they now have online tracking and those wireless things you sign whenever you get a package.

Posted by: Ian | July 24, 2006 at 09:33 AM

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The Chairman Speaks: The Savings Glut Persists

More from Chairman Bernanke's exchange with Senator Bennett during yesterday's testimony:

BENNETT: Do you still believe there's a global savings glut and that we can expect people to continue to want to put their money here?

BERNANKE: I think there still is a global savings glut. It may have moderated somewhat because of increased growth in some of our trading partners. But on the other hand, there's also been, of course, these large revenues that the oil producers are accumulating because of the high price of oil. They are not able to absorb - - use those revenues at home very quickly. So they are taking that money and putting it back into the global financial system. And so that's contributing to this overall global savings glut...

So I think there has been some change, but the broad idea that the global savings glut is out there I think is still valid.

Of what Mr. Bernanke speaks, in pictures:

   

Middle_east

Ni_asia

Developing_asia

   

Still looking pretty gluttish.  The data, if you are interested:

Download savings_glut.ppt

UPDATE: Shame on me.  I should have added this part of the discussion:

BENNETT: So you're suggesting that foreign investment in the United States is not about to dry up at any point soon?

BERNANKE: I don't think it's going to dry up. I do think that over a period of time we should become more reliant on our own saving and reduce the current account deficit.

Emphasis added.

July 20, 2006 in Federal Reserve and Monetary Policy, Saving, Capital, and Investment | Permalink

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The savings glut leads me to believe that responsible monetary policy is to continue raising interest rates. The cost of money is still CHEAP.

Posted by: jeff | July 20, 2006 at 08:34 PM

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The Chairman Speaks: How Should We Measure Labor Compensation?

Whenever a Fed Chairman testifies before Congress, the question and answer part of the session is often the most interesting.  This time around was no different, and here is one of the exchanges that caught my attention:

[Senator Robert] BENNETT: ... Chairman Bernanke, we've had a lot of conversation about wage growth compared to inflation. I find it hard to get a single statistic on this. If you look at the narrow measure of labor compensation that's labeled average hourly earnings, which does not include any benefits, then you get one answer. If you look at the more comprehensive measures of labor compensation, such as those that come from the Bureau of Labor Statistics productivity statistics and the Employment Cost Index from their National Compensation Survey, you get another answer...

BERNANKE: ... depending on what sector you're looking at, you might choose one or the other. For purposes of looking at household income -- that's how much income consumers have to spend -- you would probably look at the nonfarm business compensation...

BENNETT: When I was an employer, I learned very quickly that you cannot look at your labor costs in terms of what shows up on the W-2. Your labor costs are based on the entire compensation package, which includes all of the benefits.

Yes!  If I had my way, appeals to the BLS average hourly earnings series would be banished from commentary about wages and the fortunes of the workers -- unless the the commentator explains why that measure is a truer measure of labor compensation than those that include in-kind payments to employees (that is, benefits).

I've linked to this before, but if you are relatively new to this blog, or this issue, check out this article by Joseph Meisenheimer II for a nice overview of the differences between various measures of labor compensation.

UPDATE: My campaign is off to a bad start.

July 20, 2006 in Federal Reserve and Monetary Policy, Labor Markets | Permalink

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Appeals to average hourly earnings might be warranted when making the argument that what matters most for workers is their take-home pay, not their total "compensation package." If employers have to pay more each year for health plan that just gets worse, is that a raise in workers' living standards? Or if the boss has to pay into the company's pension plan because he's been raiding it, is that an improvement in workers' immediate standard of living?
Personally, i think the employment cost index is the better gauge of worker pay, because it's adjusted for composition of jobs, but even there, i think you need to look at BOTH wages and benefits. Take home matters, even if the only time Sen. Robert Bennett ever saw a paycheck was when he was a boss.

Posted by: fred c. dobbs | July 20, 2006 at 06:15 PM

As Kash noted, much of the increase in fringe benefit compensation relates to much more in $$$ going to pay for the health insurance of employees. I'd say we have an index number problem in terms of measuring real compensation.

Posted by: pgl | July 20, 2006 at 07:04 PM

"If employers have to pay more each year for health plan that just gets worse, is that a raise in workers' living standards?"

No, it wouldn't be. But that's not what's happening. The real cost of the same procedure or drug that you got 20 years ago is lower today. But there are a lot of newer, better, and more expensive procedures available. Apparently, people seem to regard a plan that pays for the state-of-the-art in 1986 and a plan that pays for the state-of-the-art in 2006 as getting the same benefit. It isn't.

Posted by: David Wright | July 21, 2006 at 12:48 AM

Ok. Let's do it for private industry.

Results: First quarter 2006 real compensation per hour is in negative territory, along with real wages, for private industry employees.


Employment Cost Index news release
March 2005 Release
http://www.bls.gov/news.release/eci.nr0.htm

"Compensation costs in private industry rose 2.6 percent in the year ended March 2006, slowing from a 3.5 percent increase in March 2005."

But real compensation is down compared to the 2005 annual rates for most if not all employment sectors. (And that's without challenging the manner in which some compensation benefits are calculated, including healthcare insurance.) Services may be a slight exception. But very slight.

"Private industry workers wages and salaries increased 0.7 percent during the March 2006 quarter, compared with a 0.6 percent gain in the previous quarter. Private sector benefit costs rose 0.4 percent for the March quarter, following a 0.7 percent gain in the previous quarter."

But real wages are down. And Bernanke, unfortunately, was off the mark with his testimony before Congress yesterday on this point. Real wages are down. Period.

The 12-month percent changes in wages and salaries for each of the major employment sectors are in negative territory for the second year in a row, ranging from -0.4% to -1.0%.

Employee compensation benefits continues to show growing weakness.

Benefit Costs, Private Industry, 3-month percent changes:

Jun 2004 - 1.6%
Sep 2004 - 1.0%
Dec 2004 - 1.2%
Mar 2005 - 1.5%
Jun 2005 - 0.8%
Sep 2005 - 0.9%
Dec 2005 - 0.7%
Mar 2006 - 0.4%
----

National Compensation Survey - Compensation Cost Trends
BLS
http://www.bls.gov/ncs/ect/home.htm

Select this interactive link:
Create Customized Tables (multiple screens), NAICS basis
http://data.bls.gov/cgi-bin/dsrv?ci

2006, Otr 1 vs. 2005, Qtr 4
12-month percent change
Value of Compensation: Total benefits, not seasonally adjusted:

All workers - 3.0%, down from 4.0% in Qtr 4, 2005
All union workers - 2.9%, down from 3.3%
All nonunion workers - 4.2%, down from 6.0%
Blue-collar occupations - 2.1%, down from 2.9%
Management, professional, and related - 3.2%, down from 4.8%
Sales and office - 3.3%, down from 4.4%
Service occupations - 3.3%, up from 3.1%
Natural resources, construction, and maintenance - 3.2%, down from 3.7%
Production, transportation, and material moving - 1.4%, down from 2.4%
White-collar occupations - 3.2%, down from 4.6%
Manufacturing - 0.7%, down from 4.2%
Aircraft manufacturing - (-18.5%), down from 40.6%
Goods-producing industries - 1.3%, down from 3.8%
Service-providing industries - 3.5%, down from 4.1%
----

PRODUCTIVITY AND COSTS
First Quarter 2006, revised
1 June 2006 release
ftp://ftp.bls.gov/pub/news.release/prod2.txt

Review Table 1.

Real Compensation Per Hour:

Business sector - 121.5, down from 2005 annual rate of 121.6
Nonfarm business sector - 120.6, down from 2005 annual rate of 120.8
Manufacturing sector - 126.8, down from 2005 annual rate of 128.2
Durable manufacturing sector - 123.9, down from 2005 annual rate of 125.1
Nondurable manufacturing sector - 130.6, down from 2005 annual rate of 132.4
Nonfinancial corporate sector - 118.5, down from 2005 annual rate of 118.7
>>

Posted by: Movie Guy | July 21, 2006 at 05:33 PM

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Data Independence

This really is not much of a surprise, but I think this pattern of intraday probabilities estimated from fed-funds futures options is interesting:

   

Intraday

   

There are plenty more more pictures in this spirit at Econbrowser

July 20, 2006 in Fed Funds Futures | Permalink

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July 19, 2006


The Chairman Soothes, The Data Don't

Chairman Bernanke did his duty today, and completed his semi-annual discussion, on behalf of the Federal Open Market Committee, with the Senate Committee on Banking, Housing, and Urban Affairs.  The market reviews were good.  From the AP, via ABC News:

Wall Street shot higher Wednesday after Federal Reserve Chairman Ben Bernanke soothed investors with his view that economic growth seems to be moderating and inflation remains contained. The Dow Jones industrial average gained more than 220 points, while Treasury bonds recovered from early losses to close sharply higher.

Those early losses were due to the now-forgotten news of the day: The CPI report for June was not good, not good at all.  Here's the short version:

   

Table_1_1

Table_2_1

   

Find any comfort there?  Me neither.  But wait.  It gets worse.  Here is the distribution of price changes (weighted, as usual, by expenditure shares):

   

Distribution_2

   

So, just over 60 percent of weighted price changes have been rising at a annual pace in excess of 3 percent. And it ain't just energy:

   

Nonenergy_distribution_june

   

Rent and owner's equivalent rent are certainly implicated...

   

Oer_1

   

... but together these components only represent about 30 percent of the CPI market basket. 

These inflationary impulses may very well be temporary -- I'm still guessing they are -- but they are very definitely broad based. 

UPDATE: Mr. Naybob agrees that the price pressures are broad-based, and implicates energy-price pass-through.  But Brad DeLong might disagree with my assessment of the report, advertising the news as "A Slightly, Slightly Unfavorable CPI Report." But The Skeptical Speculator says the news was bad (and does its standard exemplary job of putting things in the context of the broader global context).  Mark Thoma notes that the inflation reports are not helping the case for a pause in FOMC rate hikes.  The Capital Spectator thinks the answer to whether yesterday's market optimism was warranted "awaits in the enxt CPI report."

On Mr. Bernanke's testimomy, Jim Hamilton views the comments as more optimistic than he expected, and more optimistic than he thinks warranted.  Calculated Risk also expresses some skepticism about the Chairman's characterization of the country's economic health (here and here). Toni Straka was disappointed that there was no discussion of the nation's fiscal situation. Stock Trading Update advises that the Bernanke bounce is likely to be short lived.

July 19, 2006 in Data Releases, Federal Reserve and Monetary Policy, Inflation | Permalink

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» Reading the yield curve from Econbrowser
What are the implications of the current shape of the yield curve? [Read More]

Tracked on Jul 24, 2006 11:36:09 PM

» A pause it shall be from Econbrowser
The last month has been something of a cliffhanger for Fed watchers. But today the market seemed to make up its mind. [Read More]

Tracked on Aug 4, 2006 3:02:29 PM

Comments

Nice post.

I could make it uglier, but I'll wait.

Posted by: Movie Guy | July 19, 2006 at 09:47 PM

I dont think Bernanke was trying to soothe the markets. He just tells it like it is. The markets expect him to provide guidance and he just gives us a lecture in economics.

Posted by: vincentm | July 19, 2006 at 10:04 PM

I still feel that high energy prices have yet to work upstream, and CPI will slowly get larger. May not be huge increases, but may slowly creep up past historical averages.

Posted by: Mcwop | July 20, 2006 at 09:32 AM

The year over year change in the CPI is exactly the same as it was when Nixon imposed price controls in aug. 1971.
But of course we have redefined the CPI down since then so really the inflation rate is higher now.

Posted by: spencer | July 20, 2006 at 09:32 AM

Shouldn't any CPI numbers BEFORE the dramatically large BOSKIN adjustments be adjusted downwards to allow for a more reasonable comparison?

Posted by: bailey | July 20, 2006 at 01:19 PM

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July 18, 2006


Same Old Story

From Tim Ahmann, at Reuters:

U.S. producer prices rose a steeper-than-expected 0.5 percent last month as food prices jumped, the government said on Tuesday, leading markets to boost bets for another Federal Reserve interest rate hike.

However, the core producer price index, which strips out volatile food and energy costs, rose just 0.2 percent, matching Wall Street forecasts and helping to temper inflation fears.

Plus:

During the first six months of the year, producer prices have risen at just a 2.1 percent annual rate, after a 7.5 percent increase in the second half of last year.

But:

The slowdown reflected a moderation in energy price gains. That moderation, however, could prove short-lived if violence continues unabated in the Middle East.

U.S. crude oil prices hit a record high of $78.40 a barrel on Friday, but were trading around $75 a barrel in mid-afternoon on Tuesday.

What's it all about?  Mixed opinion on that.  From the New York Times (bringing you tomorrow's news today):

“The report showed more price pressures at earlier stages of production,” a team of Goldman Sachs economists wrote in a research report yesterday. “While not as large as May’s jumps, these are still relatively big month-on-month increases, and suggest more upward pressure on core inflation later in the year.”

But Kenneth Beauchemin, an economist with Global Insight, noting that much of the increase in June related to higher food and energy costs, wrote, “Given that these price movements are the consequence of bad luck on the supply side, and not fundamental inflationary pressures, the Fed will be satisfied with the downward move in the core rate.”

Me?  I basically agree with this:

An increase in wholesale prices does not necessarily mean that prices at the retail level will rise, because companies often absorb higher costs without passing them along to the consumer. So last month’s data may not foreshadow a rise in the Consumer Price Index, which is more closely watched for signs of inflation. Consumer price data for June is to be released today.

OK, then. I'm keeping my fingers crossed for that CPI report.

An aside: If you're the type who thinks a weak economy is great inflation news (I'm not), there were some hopeful negative signs for you today.  Back to Reuters:

The National Association of Home Builders, an industry trade group, said its index of home-builder sentiment dropped 3 points to 39 in July, its lowest since December 1991.

Two other reports showed U.S. chain store sales slowed last week from a week earlier, suggesting warmer-than-normal weather and high gasoline prices deterred shoppers.

A report from the International Council of Shopping Centers and UBS showed a 0.6 percent drop in chain store sales, and only a 2 percent year-on-year gain, the smallest in nearly 1-1/2 years. In its report, Redbook Research said chain store sales last week were up only 2.4 percent from a year earlier.

Sleep well.

UPDATE: The Capital Spectator suggests "there's reason to worry." The Nattering Naybob sees "a definite sign of more stagflation to come" (though I wasn't really aware we had any in the first place.)

July 18, 2006 in Data Releases, Inflation | Permalink

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sleep well? You're kidding right? Maybe I'd sleep better if someone would tell me when we redefined the word, "volatile" from, " Tending to vary often or widely, as in price: the ups and downs of volatile stocks."
How many years & how much do food and energy prices have to increase before Economists describe their changes in terms more reflective of their effect on our economy?

Posted by: bailey | July 19, 2006 at 11:10 AM

Dave, PLEASE HELP! Why does BB think "savings will increase over the next couple of years"? Depression era savers are gone, people no longer save as if they fear for tomorrow. Clearly, people now save when they're encouraged to do so, & they spend when they're so encouraged.
Just yesterday I received ANOTHER two credit cards offering 0% interest until 2008 on balance transfers & purchases. And, rhetoric aside, the Fed has done NOTHING to tighten its banks absurdly loose mtg. lending practices.
Where's the incentive for people to save when they are being begged to borrow & spend?

Posted by: bailey | July 19, 2006 at 12:56 PM

bailey --

1. Yes, I was kidding.

2. I think what the Chairman had in mind was the idea that housing equity has been increasing household perceptions of their wealth, out of which they were consuming. With the slowdown in hoising price appreciation there will a shift to wealth accumulation in the form of traditional saving.

Posted by: Dave Altig | July 20, 2006 at 11:25 AM

He's sure in a tough spot. I wish a few academic economists, i.e. Krugman, would more forcefully argue to elevate the argument to "savings". That seems to me what it's all about.

Posted by: bailey | July 20, 2006 at 01:23 PM

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July 14, 2006


More On Owner's Equivalent Rent

You may already be aware of this, from the July edition of the Cleveland Fed's Economic Trends ...

OER—the costs that homeowners would assume if they rented their homes instead of owning them— accounts for nearly one-quarter of the CPI market basket. Monthly growth in OER has accelerated since the beginning of the year. OER jumped 6.8% in May, well above its 3.1 average monthly percent change. Some of the recent rise can be tied to decelerating utilities costs, which are subtracted from this housing cost measure, but some part of the rise seems to come from a rental market that is growing stronger after several years of relative softness.

... but I'm not so sure this is widely appreciated:

The recent pressure on the OER component of the CPI may be with us for the summer. Since 1995, the monthly OER index has been computed from six-month rent changes, a procedure that reduces its monthly volatility but also causes the measure to exhibit some persistence. In other words, monthly changes in OER tend to influence the CPI’s behavior over a period of several months.

Emphasis added. Of course, today we saw another northward run in oil prices, duration unknown. As suggested above, and noted in the June issue of Economic Trends:

Because residential leases often include utilities provided by the landlord, the Bureau of Labor Statistics subtracts these utility costs from rents when calculating OER. During periods of rising energy prices, the growth in OER may be understated until these higher energy costs are reflected in higher rents.

So, it may be a challenge to figure out how rising rents and the effects of averaging in the BLS' calculations of OER -- both of which will be working in the direction of maintaining higher levels of CPI growth -- might combine with yet more energy-price increases -- which can temporarily depress the OER part of the CPI -- in driving the near-term evolution of core inflation measures (ex food and energy versions, especially).   It surely is not getting any easier.   

July 14, 2006 in Inflation | Permalink

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Thanks for the clear explanation.

Best Wishes.

Posted by: CalculatedRisk | July 14, 2006 at 09:11 PM

This OER issue has sure been getting alot of attention recently. The probem I have is that everyone sems t be dsounting ts effects as just a "volatile" issue that somehow should not really count towards "inflation." However, if one is to take that stance then clearly one would have t agree that inflation has been understated for the past 5 years (if not more depending on when you think housing really took off). wouldn't that mea that the fed was really behind the curve in tightening as inflation has long been higher than just recently?

Posted by: GeorgeNYC | July 15, 2006 at 08:30 AM

Actually over the past decade the rise in the OER has average 3% while the repeat sale index has
averged 7% gains. this suggest the CPI has understated inflation by about one percentage point annually for a decade.

Posted by: spencer | July 15, 2006 at 08:59 AM

OER will finally be "fixed" when it decisively takes the CPI in a direction the government doesn't want to see.

Posted by: Max | July 15, 2006 at 09:37 AM

residential leases often include utilities provided by the landlord

Surely this isn't true anymore, is it?

Posted by: Lord | July 15, 2006 at 03:12 PM

All -- I think the bottom line is that the peculiarities of the OER combined with the stock market boom means that we really do have to think very carefully about the statistic. It certainly looks like we were for awhile getting a more benign reasing on the CPI stats than we thought -- but Lord asks a good question that I'll try to get an answer for.

Posted by: Dave Altig | July 16, 2006 at 09:37 AM

GREAT START: "OER—the costs that homeowners would assume if they rented their homes instead of owning them— accounts for nearly one-quarter of the CPI market basket." Can you PLEASE, in a similarly clear & straightforward explanation, explain how the BLS gathers the data and how subjective the measurement is? I've had no luck finding this info. on the BLS site & it seems a fit starting point to the discussion. Thanks.

Posted by: bailey | July 16, 2006 at 12:19 PM

Hi David, I hope you're enjoying your summer. I've been very interested in the OER issue for some time, and I may have discussed it with you in class - though I don't think we had a shouting match on this topic...

Putting aside the issue of the magnitude of the understatement of CPI and Core CPI numbers over the past few years, I'm concerned about the FED's reaction to the reversal of this trend.

I think we can agree that OER was understated due to at least two factors: rising utilities and improvements in housing affordability which decreased demand for rental units. Now that at least one and perhaps both of these factors are reversing, we should see higher reported inflation numbers. In fact, the impact on Core CPI should be larger than on headline CPI due to the larger weight of OER.

The FED seems to have been somewhat comfortable (mildly uncomfortable?) allowing the headline CPI to rise above 4% pointing to the Core inflation numbers which were more "in check" around the 2% mark.

How should the FED react if going forward the Core numbers accelerate faster than the headline numbers due to the OER effect? It seems the new Chairman is between a rock and a hard place. If he points to the statistical noise from the OER and allows the Core numbers to rise uncomfortably above the 2% mark his credibility may falter. If he ignores the statistical noise from OER and "targets" the Core CPI at around 2% he may overshoot. Any thoughts on this dilemma?

Posted by: Marcos Nogues, XP-75 | July 16, 2006 at 01:46 PM

I think you all have captured most of the important points of the OER, giving everyone the understanding that this thing almost certainly has to continue to rise and "inflate the inflation" numbers, just as it has deflated them during the China driven asset bubble. The other factor I would point out along these lines is that on energy costs, I cannot speak for the rest of the country, but in the Northeast a large number of utilities "capped" their costs for many years and those caps are just now coming off. In Maryland (Pepco, Delmarva) it has already hit with considerable impact this summer and in Virginia (Dominion Electric) the cap disappears early next year and electric utility rates, kept at artifically low numbers for about five years, are set to soar. I just wonder how many utilities across the country are about to "catch up" (especially given the rate setting structure most have) and when this is reflected in the CPI numbers.

I think between this OER statistical abberation and China flooding the Treasury with our trade deficit money, a serious inflation problem has been masked for quite some time. Barring a recession, I believe "inflation as we calculate it" is going to rise considerably given just about everything going against it.

On a longer term perspective, I just wonder how long we can trade Treasuries for Chinese/other foreign goods before we reach a point where we have to print up so many dollars just to service the debt that REAL INFLATION kicks in, not just this little stuff we are talking about now.

Posted by: lewisthebadbear | July 17, 2006 at 10:25 AM

bailey -- When I get asked these sorts of questions I always turn to Mike Bryan. Without implicating him for any errors in my interpretation, here's the basic story: The BLS collects the underlying rental information by sampling 36,000 rental units in 85 urban areas. The BLS acknowledges that they have some difficulty getting a large enough sample in areas that are primarily residential. Some people argue that this biases the statistic downward, but the fact is we really don't know. Mike tells me that improving this aspect of the data collection is on the BLS'plans for the next major revision (I think in 2009).

Hi Marcos -- Great to hear from you. Rock and a hard place sounds about right. I will say that we were expecting that the core inflation numbers might keep creeping up even when headline numbers were residing, primarily due to the lagged effects of energy-price pass-through. Our problem now, of course, is we are not getting improvement on any front.

lewis -- Interesting point, that frankly I hadn't thought about, and which I now plan to look into. Thanks.

Posted by: Dave Altig | July 20, 2006 at 11:38 AM

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