[phil_20686]

As I alluded to above, there are difficulties in winstomms analysis. Most importantly, the wage gap now is caused almost entirely by different measures of inflation used in the two measurements, coupled with rising commodity prices. However you look at it, rising costs for raw materials caused by increased consumer power in the third world means a decreased standard of living now. People tend to forget that inflation can come from two sources, "textbook" inflation from increasing the money supply without a requisite increase in goods produced, or it can come from rising prices. This year, for example, many countiries have had a poor harvest, and the price of wheat is nearly double what it was last year. Have a look at say this link, all this feeds through into, say the price of bread, and comes out as inflation.

A lot of what we are seeing in this productivity gap is just that rising productivity is not translating into more profits because the extra gain in productivity is being eaten by increases in the cost of buying raw materials. Here are some increases in price for a bunch of basic commodities over the last decade (approximately)

Iron ore: 12 -> 170 cents per ton
Crude oil 40 -> 200 (index number)
Lead 400 -> 2400 dollars per ton
Tin 3500 -> 26000 dollars per ton

Now that is not to say that every commodity has increased. Some have bucked the trend, its easy to get data just google commodities prices. Overall the index for industrial commodities has risen by a factor of 4 in ten years. To put this in perspective, 30 years ago at was at pretty much exactly the same value as ten years ago. No matter how you look at it, if the economy is paying more for goods, then people are worse off. This is the story of the wage/productivity gap for the last decade.

(Prior to a decade ago it was entirely explained by the fact that consumer purchases (wages) used the consumer price index, and companies used the retail price index to adjust for inflation. If you adjusted them both by the same inflation index there was no productivity gap. )

[mike777]

There are two components that account for the gap between real hourly compensation growth and productivity growth. The first is the difference between the price indexes used to account for inflation in the BLS productivity and hourly compensation measures. The second is the change in “labor share,” which, as explained earlier, is the share of output that is accounted for by workers’ wages, salaries, and benefits.
••Before 2000, the difference between the growth rates of the CPI and the IPD—that is, the difference in inflation rates—explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap.

----------------


Labor share is the portion of output that employers spend on labor costs (wages, salaries, and benefits) valued in each year’s prices. Nonlabor share—the remaining portion of output—includes returns to capital, such as profits, net interest, depreciation, and indirect taxes.
••Labor share averaged 64.3 percent from 1947 to 2000. Labor share has declined over the past decade, falling to its lowest point in the third quarter of 2010, 57.8 percent. The change in labor share from one period to the next has become a major factor contributing to the compensation–productivity gap in the nonfarm business sector.

-------------


http://www.bls.gov/o...01/art3full.pdf

[kenberg]

Mike,

The BLS article that you link to appears to be, at least after a brief look, very well written. I think that I can actually understand it.

I need to think more about the whole concept. There is a sense in which greater productivity with lower labor costs can be a good thing. A company buys a better fork lift and the driver can move more stuff more quickly at lower cost. So far, so good. But then you need fewer drivers and the driver glut may well lead to lower wages which, at least from my view, is not a good result. Not good for fork lift operators, and quite possibly not good for the overall economy either. What to do about this is not so clear. I don't favor banning the use of efficient fork lifts.

[phil_20686]

kenberg, on 2011-August-22, 05:59, said:

Mike,

The BLS article that you link to appears to be, at least after a brief look, very well written. I think that I can actually understand it.

I need to think more about the whole concept. There is a sense in which greater productivity with lower labor costs can be a good thing. A company buys a better fork lift and the driver can move more stuff more quickly at lower cost. So far, so good. But then you need fewer drivers and the driver glut may well lead to lower wages which, at least from my view, is not a good result. Not good for fork lift operators, and quite possibly not good for the overall economy either. What to do about this is not so clear. I don't favor banning the use of efficient fork lifts.

Your intuition is correct here. Increased productivity almost always leads to lower wages in the industry. E.g. Farms, farms struggle to make ends meet because they are too productive, it is easy to over produce and supply normally exceeds demand leading to low prices.

However, one cannot apply an industry sized result to the economy as a whole. (The fallacy of composition), as lower priced goods increase the buying power of everybody outside that industry, so overall increased productivity leads to greater buying power - the fundamental definition of growth.

You could read, say, http://www.economica.ca/ew07_2p1.htm.

[Winstonm]

Quote

A lot of what we are seeing in this productivity gap is just that rising productivity is not translating into more profits because the extra gain in productivity is being eaten by increases in the cost of buying raw materials.

That would be true on a nominal basis, but the figures (both productivity and wages) are inflation adjusted so the only real argument is which deflator to utilize, but even then the differences are not great.

Even then, it really doesn't matter as in the U.S. 71% of GDP is consumption, of which 50% is consumption by families of four who earn less than $80K a year - the production class, primarily.

If wages do not rise with inflation, demand must fall and production then must be cut.

[mike777]

First of all thanks to Winston for shifting the conversation to this subject.\


At this point the discussion seems to remind me of my post by Roll. It just seems to be framed a bit different.


First, human capital values declined precipitously
from mid-2007 through 2008 because anticipated
growth rates in labor income declined. This
value reduction was not observed (and could not
have been). If the anticipated growth rate in labor
income is relatively close to the discount rate, even
a small decrease in anticipated growth can have a
large impact on the present value of human capital



http://www.cfapubs.o...69/faj.v67.n2.3

----




1. The valuation of human capital is irrational, as
the stock market is sometimes alleged to be;
there is no underlying real cause but simply a
psychosomatic malady.
2. Human capital values fell because the anticipated
growth rate in labor income declined
(and it should have declined).
There is little proof, but there are plenty of
reasons to suspect that the second possibility is
true. If it is correct, the markets actually got it right
from the very beginning!1
Markets are forward looking, and in 2007,
global market participants began to notice

[Winstonm]

I actually think this subset discussion is on point with the thread: to know what and how to cut and who or what to raise we have no clue as to how to accomplish anything worthwhile going forward.

Ken,

I think this may appeal to your mathematical tendencies if you care to look: it is the present discussion in charts and graphs.
http://www.bls.gov/o...01/art3full.pdf

[phil_20686]

Winstonm, on 2011-August-22, 17:41, said:

That would be true on a nominal basis, but the figures (both productivity and wages) are inflation adjusted so the only real argument is which deflator to utilize, but even then the differences are not great.

This is exactly the point, rising commoditites cause the deflators to diverge. The discussion is complicated by the fact that other things can cause the deflators to diverge. This is essentially what happened in the last decade. Rising commodity prices meant that making things got more expensive. Rising productivity offset this since the productivity gains went to paying more for commoditites, so wages stayed flat. However, the CPI stayed flat as the price of goods was not rising.

However you look at it, america as a whole is paying more for the raw materials it consumes. That is coming out of somebodys paycheck somehow. The wage gap just demonstrates that it came out of the wages of people who make stuff, rather than, say, teachers (it also came out of returns of people who provide capital for industry, which also declined). That is not particularly surprising.

[Winstonm]

phil_20686, on 2011-August-23, 05:39, said:

This is exactly the point, rising commoditites cause the deflators to diverge. The discussion is complicated by the fact that other things can cause the deflators to diverge. This is essentially what happened in the last decade. Rising commodity prices meant that making things got more expensive. Rising productivity offset this since the productivity gains went to paying more for commoditites, so wages stayed flat. However, the CPI stayed flat as the price of goods was not rising.

However you look at it, america as a whole is paying more for the raw materials it consumes. That is coming out of somebodys paycheck somehow. The wage gap just demonstrates that it came out of the wages of people who make stuff, rather than, say, teachers (it also came out of returns of people who provide capital for industry, which also declined). That is not particularly surprising.

Phil,

Let me reproduce a direct quotation from the BLS document to which I referred Ken. (my emphasis)

"Before 2009, the difference in growth rates of the CPI and the IPD - that is, the difference in inflation rates - explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap."

[kenberg]

I just want to note that both Mike and Winston referenced the same BLS document. Miracles still happen!

Anyway, yes, it does appeal to my mathematical instincts.

[phil_20686]

Winstonm, on 2011-August-23, 16:37, said:

Phil,

Let me reproduce a direct quotation from the BLS document to which I referred Ken. (my emphasis)

"Before 2009, the difference in growth rates of the CPI and the IPD - that is, the difference in inflation rates - explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap."

Yes, but look at figure 11, and ask "where did it go". It seems to be your unstated implication that the money is going into the hands of the share holders/providers of finance. However, a look at the same graph tells you that it went almost entirely into "materials" - look at figure 11. Materials being the raw materials needed, which is driven by commodity prices.

Again, I point you to the wide angle view: America is paying a lot more for the raw materials for its manufacturing sector. This is coming out of someone's pay or profits. What the decline in labour share tells you is that increased productivity are being used to offset higher prices, rather than to raise wages, while the price of capital and services are broadly stable.

[phil_20686]

kenberg, on 2011-August-23, 17:26, said:

I just want to note that both Mike and Winston referenced the same BLS document. Miracles still happen!

Actually, I was the first person to link to that report, bottom of page 34.

[kenberg]

phil_20686, on 2011-August-24, 05:43, said:

Actually, I was the first person to link to that report, bottom of page 34.

mea culpa

At any rate, I like the report.

[Winstonm]

Quote

Now that is not to say that every commodity has increased. Some have bucked the trend, its easy to get data just google commodities prices. Overall the index for industrial commodities has risen by a factor of 4 in ten years. To put this in perspective, 30 years ago at was at pretty much exactly the same value as ten years ago. No matter how you look at it, if the economy is paying more for goods, then people are worse off. This is the story of the wage/productivity gap for the last decade.

Phil,

I looked at the inflation data since 1980 and I cannot get those results to match your claims, especially when compared to the following from the BLS: (repeated for convenience - emphasis added)

"Before 2009, the difference in growth rates of the CPI and the IPD - that is, the difference in inflation rates - explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap."

I looked at the average annual inflation rates for the past 3 decades and here is what I found:

1980-1989: 4.55
1990-1999: 3.01
2000-2009: 2.56

It would seem that if your claim that inflation is the cause of the increase in the wage-productivity gap then inflation should be rising over time rather than falling. Your idea also does not include the change in the U.S. from a manufacturing economy (where commodity prices matter more) to a service-based economy (where commodity pricing isn't as important). GDP - the basis of productivity - includes the value of all goods and services. At the same time, manufacturing, where commodity price increases would be felt most, has dropped as a share of the USA economy from 21% in 1980 to 18% in 1990, 16% in 2000 and 13% in 2008.

It is difficult to see how your claim holds, especially for 2000-2009 period, when inflation was lower than the two previous decades, the U.S. economy had become primarily service-based, but wages stagnated while the wage-productivity gap increased.

Add to that the record-setting profits of U.S. corporations during the bulk of the 2000s, and it is hard to see how your explanation is viable.

[mike777]

again Winston If I understand your main point...it seems basically the same as the theory put forth in the Roll article.


The article points out it does not have proof of the theory.


First, human capital values declined precipitously
from mid-2007 through 2008 because anticipated
growth rates in labor income declined. This
value reduction was not observed (and could not
have been). If the anticipated growth rate in labor
income is relatively close to the discount rate, even
a small decrease in anticipated growth can have a
large impact on the present value of human capital.
Second, real estate values declined either concurrently
or with a short lag.
Third, as soon as these poorly observable
assets became clearly less valuable, equities fell
because anticipated consumption and future corporate
earnings declined.
Validity?
If the preceding chronology has any validity, we
may have misdiagnosed the debt markets as the
underlying cause of the crisis rather than simply
the sneeze caused by the virus. But if the chronology
is valid, why did human capital fall in value and
thereby precipitate the cascade of declines in other
real assets? There are two possibilities that are

[mike777]

sidenote


really are rep cand saying they dont belive in evolution or "general" global warming?


asfar as glbl warming lets debate what we should do about it....not that it exists


as far as evolution...ok.....in general yes......very extreme....very....God....


-------------------



I worry about most of the rep cand.

[phil_20686]

Winstonm, on 2011-August-24, 22:04, said:

Phil,

I looked at the inflation data since 1980 and I cannot get those results to match your claims, especially when compared to the following from the BLS: (repeated for convenience - emphasis added)

"Before 2009, the difference in growth rates of the CPI and the IPD - that is, the difference in inflation rates - explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap."

You seem to be missing the point. Which is, that a decline in labour share cannot happen in a vacuum. Either some other costs are higher, or profits are higher. That productivity increase went somewhere. You are arguing the second case, that corporations are screwing fewer works for more work. I am arguing the first cast, that productivity increases went into higher costs.

The IPD is not a very good indicator of the cost of doing buisness in the short to medium term, as it includes lots of items that a business might only need to buy once a decade, as well as lots of items that are needed daily. Further, it doesn't really account for the fact that as prices change the balance of inputs by value changes, so you need to change the weighting in the basket according to the current prices. But generally statisticians keep them the same, or change them only rarely, to make the indexes from different years more directly comparable. Let me once again point you to the wide angle view: America is paying more for the raw materials for its manufacturing industry, a lot more, my contention is that this is principally coming out of the wages of workers in the manufacturing sector. I would expect a bigger productivity gap in the manufacturing sector than over the whole economy if this is true: what do you know that is exactly what the report shows: Compare figures one and six.

Your contention seems to be that the productivity increases has gone into increases corporate profits. However, a brief analysis shows that the increase in corporate profits is driven almost entirely by overseas earnings. That is mostly a function of the exchange rate, but at any rate, overseas earnings cannot be driven by the productivity of american workers.

Corporate profits over the business cycle are pretty stable in any competitive industry, generally being a low single digit % of revenue. A nice comfortable energy company like eon is making profits at about 8% of revenue, despite benefiting from ever rising gas prices in the UK.

[hrothgar]

phil_20686, on 2011-August-25, 06:49, said:

Let me once again point you to the wide angle view: America is paying more for the raw materials for its manufacturing industry, a lot more, my contention is that this is principally coming out of the wages of workers in the manufacturing sector. I would expect a bigger productivity gap in the manufacturing sector than over the whole economy if this is true: what do you know that is exactly what the report shows: Compare figures one and six.

Quick thought about all this:

Economists would model the increase in the cost of raw materials as a supply shock.

There are well known procedures for measuring the impact of a supply shock on the economy.
Many of these analyzes deal with measuring the "incidence" of the supply shock.
(What portion of the supply shock gets absorbed by producers as opposed to consumers)
There is a good treatment of this available at http://en.wikipedia....i/Tax_incidence
(This assumes that the supply shock is a tax, however, an increase in to cost of raw materials is completely analogous)

Conceptually, once can extend the analysis to consider how the cost of the supply shock that is absorbed by the firm is divided between capital and labor. At this point in time, labor is very plentiful and capital is scarce; accordingly the effect of the supply shock will largely fall on the backs of laborers.

[phil_20686]

hrothgar, on 2011-August-25, 07:39, said:

Quick thought about all this:

Economists would model the increase in the cost of raw materials as a supply shock.

There are well known procedures for measuring the impact of a supply shock on the economy.
Many of these analyzes deal with measuring the "incidence" of the supply shock.
(What portion of the supply shock gets absorbed by producers as opposed to consumers)
There is a good treatment of this available at http://en.wikipedia....i/Tax_incidence
(This assumes that the supply shock is a tax, however, an increase in to cost of raw materials is completely analogous)

Conceptually, once can extend the analysis to consider how the cost of the supply shock that is absorbed by the firm is divided between capital and labor. At this point in time, labor is very plentiful and capital is scarce; accordingly the effect of the supply shock will largely fall on the backs of laborers.

One of the references I pointed Kenberg to on productivity pointed out that the wages/productivity link has a full employment assumption lurking in it. If unemployment is high one can basically always find someone willing to do the same job for less.

I once had an interesting discussion on this point, along the lines of the fact that the highly educated are virtually always at full employment. Even in a job market as tough as this one, a good degree in physics or maths from a top university will get you a good job. However, if you are lacking skills then there is a glut of labour among the poorly educated. I argued (though I don't know how much I believe it), that expanding this link to groups with similar education backgrounds could be useful in understanding the difference in growth of wages among different groups. My friend argued that since productivity growth and wages are only tied at a national level, rather than an industry level, comparing groups below national level is pointless.

It feels like there is something to the argument that far too small a proportion of our workforce has "good skills", and that this means that those who do are commanding a larger premium than might be expected.

[Winstonm]

Quote

Your contention seems to be that the productivity increases has gone into increases corporate profits.

The argument is that there is a real wage-productivity gap, caused by many variables, including reductions in corporate taxes that were subsidized by regressive taxes like FICA, and because 50% of GDP is consumption by production workers, any long term change in GDP needs to alter the flow of funds.

In other words, the best way to help everyone is to relieve the pressure on the lower classes. Cutting taxes on those making <$100,000 a year while compensating with higher corporate taxes and income taxes on the higher brackets would have a more positive effect on the economy than the current trend.

Without increasing demand through wages, we are bound to stagnate.