Saturday, September 3, 2016

Nominal Unit Labor Cost Growth in the 1970’s Versus Recently

Jeffrey Frankel reads some nonsense from Wilbur Ross so we don’t have to. Let me pick on one of Jeff’s points:
Okay, what he means is the rate of productivity growth, which has indeed fallen since the turn of the century, and is indeed a problem. But what numbers does he choose to cite to measure the productivity slowdown? “During the 1970s growth in US unit labour costs was 6.8 per cent a year but it dropped…to 1.2 per cent so far this century.” What a bizarre thing to say! Growth in unit labor costs (ULC) equals the rate of wage increase minus the rate of productivity growth. Other things equal, the productivity slowdown would show up as a higher rate of increase in ULC, not lower.
FRED provides nominal unit labor costs from 1947QI to 2015QIV. Over the thirteen year period from 1970 to 1982 this series did rise by 129.71% whereas it rose by only 18.09% over the thirteen year period from 2003 to 2015. This comparison is meaningless as the 1970’s was a high inflation period whereas inflation has been very modest during recent years. I trust Wilbur Ross knows this. So why not examine the changes in unit labor costs relative to the GDP deflator? Of course if he did that, he might have noticed that this real series fell by 3.4% during the 1970 to 1982 period whereas it fell by 8.47% during the more recent period. To continue with what Jeff noted – the change in the real value of unit labor cost equals the change in real wages minus the change in productivity. Yes productivity increases have been very modest of late and real wage growth has been worse, which contributes to the income inequality problem. But a chief advisor to Donald Trump seems to be clueless on what he is even measuring. Happy Labor Day!

1 comment:

Spencer England said...

The spread between unit labor cost and the non-farm deflator is a major determinate of profits. Currently the spread is negative and widening. This implies that the profits recession is not over and that the rebound in profits growth the market is discounting is unlikely to develop