The Dispute Over the Trend Compensation Share of Labor: Is the Decline Secular or Cyclical, Workplace Power or Technology-Driven?

I score this for Larry Mishel…

Larry Mishel: Inequality is Central to the Productivity-Pay Gap: “The point is to show that the pay of a typical worker…

…has not grown along with productivity in recent decades, even though it did just that in the early post-war period… a substantial disconnect between workers’ pay and overall productivity… that has not always existed…. [Matthew] Yglesias argues that the major reason for the divergence is the different methods that must be used to adjust each line for inflation. This is flat wrong…. I quantified the factors behind the divergence of median hourly compensation and productivity for the period between 1973 and 2011…. The three wedges that are responsible for the productivity-pay gap are:

1. Changes in labor’s share: an overall shift in how much income in the economy is received as compensation by workers and how much is received by owners of capital;
2. Compensation inequality: growing gaps in wages, benefits, and compensations between the top 1 percent, and high–, middle-, and low–wage workers;
3. “Terms of trade”: the faster growth of the prices of what workers buy relative to the prices of what they produce.

The first two items are dimensions of rising inequality, while the third item is the one highlighted by Yglesias as the “big problem”:

Matthew Yglesias: Hillary Clinton’s Favorite Chart Is Pretty Misleading: “Workers’ pay hasn’t kept up with the growing productivity of the American economy…

…Hillary Clinton has offered up her own version… as part of her campaign’s larger theme that a Clinton administration will bring much-needed higher pay. But while the image is striking and depicts something real and important about the economy, it’s also fairly misleading…. One problem… is that economic productivity simply has nothing to do with ‘working hard.’ A guy who moves furniture for a living works very hard, but he does not generate much economic value per hour…. Highly productive workers are generally productive due to some combination of rare and valuable skills and access to useful technology….

But the bigger problem is that both lines are indexed to inflation–using different inflation indexes. The result is a chart that seems to suggest that further increases in productivity would be useless or unnecessary as a path to higher wages and incomes, when the real truth is the reverse….

The Consumer Price Index… tries to measure the price of what a typical [urban] consumer… buys…. The Implicit Price Deflator… tries to measure the price of everything that is produced…. These are different ideas. American consumers buy airplane tickets, but they generally don’t buy airplanes. Consequently, the price of a Boeing 777 isn’t part of the CPI basket…. When you draw a chart that uses both of these inflation indexes… the divergence between the two ways of looking at inflation is naturally going to drive divergence….

There’s no right way to do it. You can’t feed your kids a commercial jetliner or exports of business software, so saying something like, ‘Real wages have actually gone up a lot as long as you count a bunch of stuff that nobody buys in the price index’ doesn’t make much sense. On the other hand, making business equipment and software is a very legitimate line of work. Saying, ‘The economy really hasn’t grown much if you don’t count America’s most vibrant and innovative industries’ is pretty blinkered. Probably the best way to get an apples-to-apples comparison is to not adjust for inflation at all… nominal GDP versus nominal compensation… look at the ratio:

It shows that… the gap is pretty clearly a direct consequence of… the Great Recession…. The best cure is not a huge structural overhaul… [but] for Janet Yellen and her colleagues at the Federal Reserve to be extremely cautious about raising interest rates. High unemployment makes it easy for employers to skimp on paying their workers, while stretches of full employment push the ratio up. To get back to pre-2000s level, we’ll need more years of recovery…. The popularity of the inflation-mixing chart among liberals is unfortunate, and has prompted public confusion. But the idea of some conservative wonks like James Sherk of the Heritage Foundation to note the issue, debunk the chart, and then move on is also misguided….

Real wages really have risen much too slowly over the past 40 years. But while Clinton’s version of the chart makes it look like rising productivity isn’t part of the solution, looking at the divergent price indexes clarifies that it is crucial. For real wages to rise, we need the things middle-class families spend the bulk of their income on to get cheaper. That means more productivity in the big housing, health, and education sectors–not more pessimism about the potential of productivity.

The open questions Matt raises are: which of these two graphs below would we get if we got a low-unemployment high-pressure economy over the next five years? What is the real trend here?

Matt thinks it is:

Larry thinks it is:

I am, once again, with Larry here. We have deep problems that are the result of the failure to spur a strong recovery. But behind those we have even deeper problems.