Relevant and even prescient commentary on news, politics and the economy.

Inflation in China is not necessarily a bad thing

Yesterday, the release of key economic indicators in China produced headlines like this: China Targets Inflation as Economy Runs Hot. The table below lists the full release, including the consensus expectations (Bloomberg’s survey) for each statistic. (Here is the link for the actual data release.)

As you can see, the survey undershot the actual results across many of the releases, including that for GDP and inflation (CPI). The surge in the CPI, 1.9% y/y in December versus 1.4% y/y expected, attracted a lot of attention. According to the Economist, Helen Qiao and Yu Song at Goldman Sachs points out that prices may be on an (increasingly) upward trajectory:

The recent rise in inflation was caused mainly by higher food prices as a result of severe winter weather in northern China. In many cities, fresh-vegetable prices have more than doubled in the past two months. But Helen Qiao and Yu Song at Goldman Sachs argue that it is not just food prices that risk pushing up inflation: the economy is starting to exceed its speed limit. If, as China bears contend, the economy had massive overcapacity, there would be little to worry about: excess supply would hold down prices. But bottlenecks are already appearing. Some provinces report electricity shortages, and stocks of coal are low. The labour market is also tightening, forcing firms to pay higher wages.

The final sentence is very important – a tight labor market will lead to higher wages (the data on wages is 4 months old, so I will not plot it out). This suggests, completely by inference on my part, that prices pressures will be the wage-price spiral type – this can quickly get out of hand.

To be sure, the inflation surge was driven primarily by food prices, up 5.3% over the year; but with retail sales growing at a rate of 17.5% over the year and broad money growing at a 27.7% pace in 2009, prices hikes are bound to spread. We already saw inflation pressures building in the trade balance. Now I get to my chosen post-point: why is inflation in China necessarily a bad thing?

The inflation pop sparked a lot of market angst yesterday. Of course, this is just a single data point; but if inflation does build, and the government insists on maintaining its tight peg against the $US, then inflation will do what US consumers and Asian savers have not: reverse trade flows.

Specifically, and holding all else equal, sizable inflation in China would drive up the value of its real-exchange rate (REER), where the REER is the nominal exchange rate adjusted for relative prices in China versus its trading partners – faced by the Chinese.

As illustrated in the chart above, the REER has been on a downward trajectory throughout 2008, but remains elevated compared to its 2006 levels. The real exchange rate is the single-most important factor in determining trade flows. An inflation-driven growth in the real value of the Chinese yuan (REER) would effectively, and eventually, drop China’s export share with key trading partners.

Rebecca Wilder

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AB notes on the December Employment Situation

This article is roughly 24 hours late, but I do have additional points to the headline numbers. From the BLS:

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

The monthly shift in the December nonfarm payroll is practically a mirror image of the month that initiated the cyclical downturn, January 2008 when the payroll fell 72k (after revisions). Not because of the similar level values, but because of the mix: it is the goods-sector employment that is dragging the aggregate number, whereas the service-sector is just barely below zero. Actually, the private sector services payroll, 80% of the total service payroll, hired 17,000 more workers in net in December.

The volatility over the last two months has been driven primarily by the service sector. As illustrated in the chart below, the first-difference of the goods-sector payroll is approaching the coveted “0” threshold level, but at a much slower pace that is its service counterpart.

The durable-goods jobs should turn up soon, at least the 64% of its payroll that is manufacturing. The ISM employment diffusion index has been above 50 for three consecutive months. And with a 78% correlation between the 3-month lead of the index and annual manufacturing jobs growth, there is hope for January 2010. However, look for ISM diffusion index values around 53 (the average ISM value that correlates with >=0% manufacturing jobs growth) to forecast positive annual jobs growth. We are just barely there.

It does seem that, as expected, the service sector (86% of December’s payroll) will pull the labor market back in positive territory in coming months.

From the Household Survey, the unemployment rate went unchanged in December at 10%. However, this is hardly good news; simple math says this rate will hover in the 9%-10% range throughout 2010 without a substantial pickup in the pace of employment growth. The reason is that the category “not in labor force” has grown by 3.4 million since May 2009.

If the number of unemployed persons falls each month over the next year by its 2005-2006 average, -48k, and just a quarter of the additional “not in labor force” persons since May (842k) re-enter at an average pace of 70k per month to find immediate employment, the unemployment rate will be 9.5% by December 2010. My point is: a serious growth momentum is needed to generate jobs, one that is not expected until initial unemployment claims drop significantly below their current 434k-level (week ending Jan. 2).

Of note, average hourly earnings rose 3 cents per hour in December to $18.80/hour. Ostensibly, this is good news for the price stability picture. However, the y/y numbers are strikingly low, just 2.2% growth in earnings since December 2008. By this measure, wage pressures are extremely muted, which is another reason that the Fed may not be too quick to exit.

The chart illustrates annual earnings growth and the unemployment rate. It wouldn’t be a stretch to expect wage growth to fall further, given the sharp upward trajectory of the unemployment rate.

There will likely be some volatility in coming months, specifically in April and May, when the Census hires temporary workers (6 weeks at $25/hour for 20 hours each week). Here is something I wrote about the Census hires some time ago.

Of note, the BLS is beefing up its report. Effective February 5, 2010 (the January 2010 employment release), the establishment survey will include more detail on hours and earnings, including those broken down by gender.

Rebecca Wilder

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Is the government actually forecasting a narrowing of the U.S. current account deficit?

This is a follow up to an article I wrote earlier this week, Older workers working longer; labor-force participation falling. In response to the article, which highlights the BLS employment and labor-force participation projections for 2008-2018, 2slugbaits (a loyal AB commenter) presented the following point:

The 2 industry sectors expected to have the largest employment growth are professional and business services (4.2 million) and health care and social assistance (4.0 million).

Put another way, employment growth will be in nontradeable goods sectors, which suggests we might have to sell a lot of assets in order to pay for imports.

Is the government actually forecasting that Japan an China will finance the U.S. trade deficit for the next ten years? I assumed (silly of me) that any government (BLS) projection would be based on such international pledges as the U.S.-China Strategic and Economic Dialogue:

To this end, both countries [U.S. and China] will enhance communication and the exchange of information regarding macro-economic policy, and will work together to pursue policies of adjusting domestic demand and relative prices to lead to more sustainable and balanced trade and growth.

…and more specifically…

The United States will take measures to increase national saving as a share of GDP. The U.S. household saving rate has already risen sharply as a result of the crisis, contributing to a significant decline in the U.S. current account deficit, and the United States will adopt policies that will continue to encourage household saving.

The U.S. commitment: grow national saving as a share of GDP and significantly reduce the current account deficit. According to the BLS long-term forecast, the U.S. will make good on just one the these two pledges.

The table below extracts national saving and the current account from the BLS 2018 economic assumptions for the employment projections (Table 4.3).

Note: two identities are needed: (1) National Saving is Income minus Consumption minus Government Spending, and (2) the Current Account is National Saving minus Investment. The BLS projects GDP rather than GNP = GDP + net receipts from the rest of the world. In using GDP as the definition of “income”, net receipts from the rest of the world is zero, and the current account reduces to net-exports.

To be sure, the BLS does forecast that U.S. national saving rate will rise 67.5%, from 9.3% of GDP in 2008 to 10.2% in 2018. But domestic investment rises by more, +72.1%. Therefore, the current account deficit grows by 81.3%.

I’m not seeing any healthy reduction of the current account deficit by 2018. 2slugs is right: the BLS is essentially forecasting that China and Japan (among other perpetual savers) will finance a growing U.S. trade deficit. Oh man.

Rebecca Wilder

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Older workers working longer; labor-force participation falling

The BLS released its employment and labor force projections for the period 2008-2018. The report highlights a more diverse and slower growing labor force stemming from a falling labor-force participation rate. Some headline findings of the report are (bold font by yours truly):

Total employment is projected to increase by 15.3 million, or 10.1 percent, during the 2008-18 period, the U.S. Bureau of Labor Statistics reported today. The projections show an aging and more racially and ethnically diverse labor force, and employment growth in service-providing industries.

…and…

Projected employment growth is concentrated in the service-providing sector, continuing a long-term shift from the goods-producing sector of the economy. From 2008 to 2018, service-providing industries are projected to add 14.6 million jobs, or 96 percent of the increase in total employment. The 2 industry sectors expected to have the largest employment growth are professional and business services (4.2 million) and health care and social assistance (4.0 million).

…and…

The largest decline among the detailed industries is expected to be in department stores, with a loss of 159,000 jobs, followed by manufacturers of semiconductors (-146,000) and motor vehicle parts (-101,000).

…and more…

Occupations that usually require a postsecondary degree or award are expected to account for nearly half of all new jobs from 2008 to 2018 and one-third of total job openings. Among the education and training categories, the fastest growth will occur in occupations requiring an associate degree.

The last part is very interesting. According to Table 9 of the employment projections, the growth rates of jobs requiring an associate degree or higher are generally in the double digits. In order to work in a top 10 wage and salary growth industries, one must attain a higher degree.

That little fact explains the projected trend in labor-force participation among those aged 16-24 years: down.

The chart illustrates the BLS’ projection of the labor-force participation rate (LFPR) by age group (Table 3.3). The LFPR is the percentage of the population that is either working or seeking employment. There are two important points here.

First, the 16-24 LFPR is expected to fall another 4-points to 54.5% by 2018. This furthers a downward trend that has been underway for some time.

Second, the population is growing older, but that is not the full LFPR story: older workers are working longer. The LFPR for those aged 65 and older is expected to jump 33% to 22.4% by 2018. This trend has emerged more recently, where just one decade ago the LFPR went essentially unchanged from the ten years prior to that.

In spite of their working longer, and with the downward trend in the 16-24 LFPR, the growing baby-boomer population (individuals born 1946-1964) is expected to drag the aggregate LFPR a point-and-a-half to 64.5% by 2018 (the aggregate LFPR is an average of all age groups).

It should be noted that this is a long-term projection. Therefore, the 2007-2009 recession affects primarily the rates of growth toward the long-run values rather than the levels of employment and the labor force per se. According to the forecast, the unemployment rate is 5.1% by 2018, and the average annual rate of GDP growth is 2.4% (slower productivity growth is expected to drag GDP growth).

Note: I will not be available to reply to comments until Friday, January 1. My apologies.

Rebecca Wilder

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This week’s Greek tragedy

This week, the single most important event in global bond markets was the S&P downgrade of Greece’s long-term debt obligations, A- to BBB+. Moody’s is the last of the major rating agencies to hold Greek debt in the A-category of investment grade (currently at A1); but a major decision from Moody’s could come within weeks. This would make Greece the lowest-rated country in the Eurozone, and the only one with 6-B status.

Since the beginning of the month, the Greek 5-Yr government bond jumped over 1% to 5% by Friday.

The chart illustrates comparable 5-yr government bonds across the Eurozone. Interestingly, the region (ex Greece) remained rather resilient to the news. However, Greece is not alone; and its growing government financing problems are in good Eurozone company.

According to the European Commission’s autumn 2009 Economic Forecast, only 5 of the 16 Eurozone countries are expected to remain below the 60% debt limits of the Treaty on European Union in 2010, while just 3 will satisfy the 3% deficit limits.The most imminent issue for Greece, with its new BBB+ status, is eligibility for ECB’s collateralized loans. In October 2008, the ECB dropped the minimum credit rating for eligible collateral on its credit facilities from A- to BBB-. However, Greece’s downgrade to the next tier of investment grade status (BBB+ by S&P) now makes it ineligible for the ECB’s credit programs if the temporary measure is repealed. Obviously, this is a problem for Greece; but it is a growing problem for the ECB as well.

I see two problems forming. First, the pressure to drop deficits and leverage will be overbearing in Europe, especially in the UK. Dropping debt levels will be important after the recovery is well underway; but before that, and a fledgling economic recovery may be cut short. Second, if investors do start to question the ability of governments to service debt (recently in Greece), financing costs in other struggling countries, like Spain, Portugal, or Italy (and some of the others circled above), could rise swiftly and pressure budgets further.

The Wall Street Journal wrote a nifty little article about the time spent trying to regain a higher rating after a downgrade occurred:

Sovereign upgrades, meanwhile, can take a long time: Greece’s rating took nine years to move one notch upward to triple-B in the 1990s; Australia lost its triple-A rating in 1986 and saw 17 years pass before it was restored.

Years, that’s how long it will likely take Greece to “implement a credible medium-term fiscal consolidation programme”. And it is very possible that Greece will see further downgrades before upgrades.

This is a problem for the ECB – it will be interesting to see the ECB push a credible exit with Greece’s credit rating squelching the expiration of the temporary collateral requirements. Fun times ahead!

Rebecca Wilder

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Household leverage: US vs. UK

Households in the US and the UK are members of the “most levered club”. But put their balance sheets side-by-side, and the outlook for the US economy looks a little brighter than that for the UK. Why? Both are dropping debt burden, but a qualitative analysis suggests that the UK household leverage (probably) should be falling at a more accelerated pace.

The chart illustrates leverage in the US and UK, or household debt (loans) as a percentage of disposable income (DPI) through Q3 2009 and Q2 2009, respectively (the UK releases Q3 Economic Accounts at the end of December). By Q2 2009, UK and US households dropped leverage rather coincidentally, -4.8% and -4.4%, respectively. However, the debt bubble was bigger in the UK than in the US, peaking at 160% of DPI compared to 131% in the US. Why isn’t leverage falling more quickly? Spending.

To be fair, UK Q3 statistics may paint a very different picture. However, that is unlikely, given that real retail sales continue to grow, 3.2% at an annualized rate in the three months ending in October.

Oh, it all makes sense now: UK retail sales remained firm in 2009, and real home values hit a (probably local rather than global) cyclical low much earlier than in the US.

This is an ominous sign for the UK economy. Households are kicking the can down the road: de-leveraging – paying down debt by dropping consumption and saving a relatively higher share of income – is inevitable.

Rebecca

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Sit back and relax: the US and China, this is gonna take awhile

China exported its way to a $2 trillion dollar fortress of F/X reserves ($USD mostly), while the US borrowed its way into a hole deep enough to spark a vast global recession. Who’s to blame?

Given the symbiotic relationship in the chart above, it’s hard to blame any one individual, group, or even country. But blame we do. Martin Wolf, at the Financial Times, wrote an interesting article about the need for a “co-operative adjustment” of global current account deficits and surpluses. He argues the following:

China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises.

It sounds so imminent: re-balance now, or else. Sure the tides of portfolio flows must change; structural current account imbalances are now proven to cause economic catastrophe, as illustrated by the 2-yr case study of late. But it’s not going to happen over night. It takes a long time for re-balancing of any kind to fully pass through. Just look at Japan in the 1990’s.

Data note: you can download Japan Flow of Funds data here, and US Flow of Funds data here.

The chart above illustrates the debt bubbles in the US financial crisis and in 1990’s Japan. In Japan, the households didn’t accumulate as much debt relative to the non-financial business sector; however, both sectors dropped leverage. And notice, that it took about a decade for households and firms to do so.

What’s overly obvious is that the Chinese will not be bullied into revaluing the yuan just because the US says so. And also evident is that there is a (very lengthy) de-leveraging process underway in key economies. By default, the debt-reducing developed world will force the Chinese to focus policy more inward (domestic demand) and less outward (export demand), as US consumers drop debt levels. But sit back and relax, it’s gonna be a while.

Rebecca Wilder

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Too efficient NOT to consolidate

Cross-posted at News N Economics blog, by Rebecca

Here’s yet another historical record broken in 2009:

“Only three insured institutions were chartered in the [third] quarter, the smallest quarterly total since World War II.”

This fact is from the FDIC’s latest Quarterly Banking Profile. There are probably non-economic reasons for this, i.e., the application process to qualify as a new charter institution (see the types of charters here) is likely much more stringent than in previous years; but nevertheless, this fact reiterates the trend in the number of banking institutions, most definitely down.

The FDIC is awash in problem institutions. The well reported number of bank failures jumped to 132 in 2009 (as of November 20, and you can find the data here). However, that’s just share of the much larger “problem”. According to the same quarterly profile, there are now 552 “Problem” institutions in the FDIC charter system holding $346 billion of assets on balance – that’s 2.4% of nominal GDP.

As such, it seems that consolidation is all but a foregone conclusion. But watch out, because the new 4-letter-style phrase, “too big to fail”, is heavy on the tongues of US policymakers. Senator Bernard Sanders (Vermont) introduced the “Too Big To Fail Is Too Big to Exist” bill last month, which defines such an institution as (see the bill here):

“any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial Government assistance.”

Ahem, so how big is that? Peter Boone and Simon Johnson at the Baseline Scenario define “too big to fail” as bank liabilities amounting to 2% of GDP (roughly):

“So to us, 2 percent of G.D.P. seems about right. This would mean every bank in our country would have no more than about $300 billion of liabilities.

A large American corporation would still be able to do all its transactions using several banks. They would even be better off — competition would ensure that margins are low and the banks give the corporates a good deal. This would help end the situation where banks take an ever-increasing share of profits from our successful nonfinancial corporations (as seen in the rising share of bank value added in G.D.P. in recent decades).”

But there are economic efficiencies, like scale economies, that need to be considered. David C. Wheelock and Paul W. Wilson at the St. Louis Fed find statistically significant increasing returns to scale (i.e., bigger banks, lower costs) in the US banking system. They use a non-parametric estimator to estimate a model of bank costs and find the following (link to paper, and bolded font by yours truly):

“The present paper adds to a growing body of evidence that banks face increasing returns over a large range of sizes. We use nonparametric local linear estimation to evaluate both ray-scale and expansion-path scale economies for a panel data set comprised of quarterly observations on all U.S. commercial banks during 1984-2006. Using either measure, we find that most U.S. banks operated under increasing returns to scale. The fact that most banks faced increasing returns as recently as 2006 suggests that the U.S. banking industry will continue to consolidate and the average size of U.S. banks is likely to continue to grow unless impeded by regulatory intervention. Our results thus indicate that while regulatory limits on the size of banks may be justified to ensure competitive markets or to limit the number of institutions deemed too-big-to-fail, preventing banks from attaining economies of scale is a potential cost of such intervention.”

Better put: the cost of consumer and firm loans will be higher in the long run if too much intervention prevents the banking system from capturing scale economies. Furthermore, they suggest that even the largest institutions experience increasing returns (i.e., these).

I should say that I have absolutely no experience in non-parametric estimation and cannot vouch for the econometrics. However, the results are timely; and furthermore, the Federal Reserve Bank of St. Louis’ economics research is well-regarded. Point: I trust it.

As a note, David Wheelock wrote a very interesting piece a while back about the inefficiencies of mortgage foreclosure moratoria during the Great Depression …interesting stuff (paper link here).

Rebecca Wilder

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Are exporters in Asia real-ly losing their competitive edges?

by Rebecca

Central banks across Asia are concerned and actively engaged in some kind of currency manipulation – direct intervention, quasi-capital controls, and/or public speech (I will refer to this later, but RGE published a great article to the fact) – as investors flock to global capital markets seeking the “risk-on” trade. Central banks are attempting to stem the sometimes sharp currency appreciation, however, real exchange rates remain competitive.

Over the last three months, the $USD has dropped 3.6% against the Singapore dollar, 4% against the Malaysian ringgit, 6.1% against Indonesian rupiah, 1.9% against the Thai baht, 3.6% against Indian Rupee, 6.8% against the Korean won, and 1.8% against the Taiwan dollar.

The chart illustrates the trend in key Asian (not including China, whose exchange rate is explicitly pegged at 6.83 since July 2008) nominal exchange rates (measured in local currency units per $USD) – appreciating , which has Asian export industries worried. Central banks are intervening (in some cases through direct $USD purchase), where further intervention is a near certainty as many of these countries see export growth as the impetus to recovery. As such, and according to RGE last week, Asian central bankers are faced with a dilemma:

Despite a flood of portfolio investments into many of the region’s asset markets since early 2009, Asia still needs foreign capital to stimulate investment and finance its current accounts. Therefore, facing a sluggish export recovery and a pegged Chinese renminbi, most countries have opted to contain currency appreciation via verbal and actual interventions to avoid losing competitiveness. Intervention in the foreign exchange market has led to record reserve growth of over US$70 billion in Q3 alone in emerging Asia ex-China. Although most Asian countries are expected to keep intervening amid some currency appreciation, several countries may impose restrictions on foreign currency transactions. Given buoyant equity markets, attractive carry trades and the U.S. dollar weakness, policy measures will not contain the impact of capital inflows on Asian currencies, meaning that some appreciation from the least trade-dependent countries is to be expected. Taiwan is the country where capital controls or new restrictions are most likely to be implemented.

True, Asian nominal exchange rates are appreciating (sharply in some cases); but what one needs to consider is the real effective exchange rate. Actually, real effective exchange rates (taking also into account relative prices) remain rather competitive. In fact, only Indonesia and South Korea are experiencing any substantial real appreciation, and South Korea’s coming off of a very low base.

The chart above illustrates the real exchange rate: the nominal exchange rate defined in units of home currency per unit of foreign currency * (foreign price level)/(home price level). A movement up indicates a real appreciation of the local currency against the country’s trading partners.

Real exchange rates in Malaysia, Thailand, Taiwan, and India fell in the latest monthly data point; and furthermore, some are seeing the downward trend intact. Indonesian policymakers are worried – the sharp appreciation of its currency is growing the real exchange rate quickly.

It’s a complicated policy world out there – a hodgepodge of monetary stimulus, capital controls, and fiscal deficits. Something’s gotta give; and my bet’s that it will not be the currency. Direct intervention and further capital controls are on the way in Asia in spite of the need for foreign-sponsored domestic investment.

Rebecca Wilder

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LABOR’S SHARE

By Spencer (2009)

 

The issue of a jobless recovery is getting a lot of attention recently.

I’ve found the best way to look at the issue is to compare the change in real growth and productivity over the long run. There have been three periods of different productivity trends in modern US economic history.

Prior to about 1973 productivity growth averaged 2.8%. In the second or low productivity era, running from 1974 to 1995, productivity growth slowed to 1.5% before rebounding to 2.4% since 1995.

But real GDP growth also slowed over this period. As a consequence, the ratio of real GDP growth to productivity growth fell from 68% in the early strong productivity to 50% in the weak productivity era before rebounding to over 80% in the most recent era. Basically, real GDP growth equals productivity growth plus hours worked or employment growth. A consequence of stronger productivity in an era of weaker GDP growth this suggests that each percentage point increase in real GDP growth generates a much weaker increase in hours worked or employment. Currently, a percentage point increase in real GDP growth now generates under a 0.2 percentage point increase in hours worked versus 0.3 in the pre-1974 era and 0.5 percentage points in the low productivity era.

But to a certain extent comparing productivity and real GDP is comparing apples to oranges. To be accurate one should look at productivity versus output in the nonfarm sector. GDP includes the farm sector of course, but also the nonprofit and government sectors where productivity is assumed to be zero.

If you look at what happened in the 1990s and early 2000s recoveries in the nonfarm business sector, you see that productivity growth significantly outpaced output growth in the early recovery phase of the cycle. As a consequence hours worked or employment fell, generating the jobless recoveries. It looks like the problem in these two cycles was much weaker growth rather than strong productivity.


This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.

This development was a secular decline in labor’s share of the pie. Prior to the 1982 recession there was a strong cyclical pattern of labor’s but it was around a long term or secular flat trend. But since the early 1980s labor’s share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor’s share.


If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.

additional chart in response to comments.

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