Fun with Index Numbers: the Lazear Diet

Max Sawicky has some fun with a speech by Edward Lazear where the CEA chairman said:

To get a sense of why economic growth is so important, look at Figure 1. In Figure 1 the relationship between compensation and productivity is plotted over about a 55-year period. The compensation series used here is called the real product wage, which is a comprehensive measure of total compensation. Although these curves do not line up on a yearly basis, it is quite clear that wages and productivity are highly linked. A related measure of compensation, real after-tax income has also increased substantially, rising by a total of 12.9 percent since January 2001, and $2,140 per person.

Of course, Lazear factored in the current tax cuts without including those deferred tax liabilities (tax shift – not tax cut).

Max reads the footnotes and writes:

If you check the bottom, you see the deflator used is the “price index for nonfarm output,” the result of which is the “real product wage.” I had never heard of that before, but I’m no labor/price index savant. The trick here is that the deflator is for all output, including intermediate goods. The worker, by contrast, is more interested in the prices for the stuff he buys, not for machine tools and electric generators. If you use the Consumer Price Index you get a different picture

Max gets into the details, which makes me realize I’m certainly no savant. But I did some checking over at the source for NIPA tables and found table 1.9.4 – Price Indexes for Net Value Added by Sector, which shows annual data through 2004. From 2000 to 2004, the general rise in prices was about 10%, which tracked the increase in consumer prices. For the business sector, prices rose by 7.8% – but here is where it gets fun. While the nonfarm price index rose by only 7.4%, the price index for the farm sector rose by over 68%. So if one does not have to eat – one might have seen an increase in one’s standard of living!