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August 29, 2006
More Confusion About The Return To Labor
Regular readers of macroblog know that one of my pet peeves is the insistence of some to measure labor compensation using narrow measures of hourly wages. Yesterday, The New York Times continued to insist in an article titled "Real Wages Fail to Match a Rise in Productivity."
Not to fret, though. Russell Roberts administers the smackdown:
Let me repeat the key sentence:
The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation.
That's a very strange sentence for many reasons:
1. Why would you use a measure of compensation that ignores benefits, an increasingly important form of compensation?
2. Why would you use 2003 as your starting point when the recession ended in November of 2001?
... for every year since the recession of 2001, real hourly compensation has actually increased. It's up since 2003 as well. And this year it's up quite dramatically...
As I have mentioned here before--the standard claims you hear about labor's share declining come from using wages without other forms of compensation. When you include benefits, labor's share is virtually a constant at 70% of national income and has been steady since the end of World War II,
I might just stop there, but on this topic I really can't stop complaining. In reading the Times piece, The Capital Spectator instead focuses on what would appear to be the flip side of the claim that labor share is falling: A rising share of income accruing to capital. Again from the Times article:
In another recent report on the boom in profits, economists at Goldman Sachs wrote, “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.”
I'm not sure how that conclusion is reached, but my colleagues Paul Gomme and Peter Rupert make this observation:
.. for labor’s share as computed by the Bureau of Labor Statistics, a fall in labor’s share does not necessarily imply a rise in capital’s share; indirect taxes and subsidies constitute a wedge between these two series. Consequently, a fall in labor’s share could be associated with a rise in capital’s share, but it could also be due to a rise in the share of indirect taxes less subsidies... Further, the terms “capital’s share” and “profit share” are often used interchangeably, ignoring the fact that capital income derives from more sources than just (corporate) profits.
What I think is more important in the Gomme-Rupert analysis is this, from one of my previous discussions on this topic:
... 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.)
In what I suppose is a related topic, there has been plenty of blogging in the last several days on the injunction against a strike by Northwest Airlines flight attendants, union-busting, and wage inequality -- from Dean Baker, from Brad DeLong, and from Mark Thoma (among others, no doubt).
Just about a month ago the raging debate was about why it might be that changes in income inequality have been concentrated among the top 1% of income earners -- excellent examples of that debate being found here and here. Once you have identified the real issue as being about the top 1% of the income distribution, I'd think you have pretty much ruled out unionization (or the lack of it) as a dominant driver of the major trends in who gets what. In any event, on the question of unionization and wage inequality, I'm with Greg Mankiw.
UPDATE: Max Sawicky takes me to task for omitting this from the Gomme-Rupert quotation above:
... we find that the share of indirect taxes less subsidies does not vary much.."
Well, it certainly wasn't my intention to deceive, but Max has a good point. I'll consider my knuckles duly rapped.
In a related vein, Dean Baker notes that depreciation can also cloud the picture on capital sharel. knzn thanks Dr. Baker for us all, but comes to the "indirect taxes" conclusion: There's not enough action there to eliminate the decline in standard labor share calculations.
Greg Mankiw covers the theory of productivity and wages, and provides several reasons the data might not cooperate with theory (including Dean Baker's observations that different price indexes are in play). If you would like to see the math behind Professor Mankiw's discussion of labor shares and the Cobb Douglas production function, Economic Investigations has just what you're looking for.
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