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efore i indexed graph 3 at 1947 it looked like this the only difference between graph 3 and graph 5 is that in graph 3 the two lines are pinned together in 1947 by indexing in graph 5 the two lines are pinned together in 2009 by default if we get rid of all the data before 2009 where the lines are pinned together and then wait 70 years or so while more data is gathered and added to graph 5 the graph will give you an idea of how the two price indexes have changed since 2009 i get a similar effect on graph 3 by pinning the lines together at 1947 we don t have to wait 70 years because the time has already gone by we can just look at graph 3 and get an idea how the two price indexes have changed since 1947 the purpose of a price index is to show how much prices have gone up over a period of time on graph 5 both lines show that prices have gone up but because the two lines are pinned together near the end rather than at the beginning the graph creates the false impression that there is little difference between the two lines pinning the lines together where they start as on graph 3 is a way to correct this false impression the gap on graph 3 opens in 1961 and expands relentlessly thereafter exactly like the gap on the first two graphs is this a coincidence it is not coincidence graph 1 shows a gap between nominal labor share and real labor share the only difference in the calculations is that real labor share uses the price indexes and nominal does not so it has to be the price indexes that create the gap on graph 1 since there are no other differences in the calculation it has to be the price indexes that create the gap the fact that the labor share gap and the price index gap both start in 1961 is evidence that the price indexes create the gap in the labor share graph the fact that both graphs show similar gap growth is additional evidence that s evidence not coincidence if i take the higher line on the labor share graph as a percent of the lower line and do the same for the price index graph i can put the two gaps together and compare them graph 6 gap size comparison for labor share blue and the price indexes red click the graph for a larger view identical the gaps are identical the story of the gap in the productivity vs compensation graph is not so neat and tidy even with nominal values there is a gap compensation per hour and output per hour run more or less parallel but are not identical graph 7 the nominal version of productivity blue and compensation red note productivity real output per hour is a measure of economic growth and economic growth is correctly measured in real rather than nominal values this graph shows nominal output per hour values that will become productivity when the inflation is removed compensation falls behind output per hour even in the nominal data when we bring price indexes into the calculation the price index gap is combined with the gap in the nominals the gap we so often see on graphs of productivity vs compensation is partly due to differences in the price indexes and partly due to the differences between the nominals how much of the productivity vs compensation gap is due to price index differences how much is due to differences between output per hour and compensation per hour price indexes aside we can answer that question by using one price index instead of two on the graph below blue is productivity and red is compensation figured as always with the two different price indexes the green line is compensation again figured using the same price index that is used for the productivity numbers the gap between green and red is due to the price index the gap between green and blue is due to compensation falling behind productivity graph 8 productivity blue compensation red and compensation deflated by the same price index as productivity green if i take the red line as a percent of the blue line we get a look at compensation relative to productivity based on the way the two are always figured with different price indexes i will show that in red on the next graph on the same graph i will show in green the green line as a percent of the blue to see compensation relative to productivity when the two are figured with both using the same price index this may give us a better measure of the gap between them i don t know yet if it s a better measure i do know it s an issue so i look graph 9 two measures of compensation falling behind productivity the gap between the green and red lines on graph 9 should remind you of the gaps on the first three graphs of this post graph 1 in particular is strikingly similar to 9 the blue line on graph 9 is the goal the level of productivity which is the level we expect compensation to reach productivity is 100 of productivity both measures of compensation are generally less than 100 of productivity and show decline the red line is the compensation measure you would generally see on a productivity and compensation graph the gap between blue and red shows how much compensation has fallen behind in the late 1950s compensation had not fallen behind at all since 2010 compensation has been down to about 60 of productivity so about 40 behind but the red compensation uses a different measure of inflation than productivity the different measure may exaggerate the extent to which compensation has fallen i m not sure whether it is exaggeration is a separate question the green compensation line uses the same measure of inflation that is used for productivity using the same price index for compensation and productivity eliminates this potential exaggeration the gap between blue and green shows how much compensation has fallen behind without exaggeration in the late 1950s compensation had not fallen behind at all since 2010 compensation has been down to about 86 of productivity so about 14 behind about one third of the gap but that s only if we figure it using the output price index if we figure it using the compensation price index compensation is about 29 behind productivity twice as much twice as far behind two thirds of the gap but either way compensation per hour is an average that does not count factors like rising inequality i m gonna go take some aspirin now please feel free to check my work i should add that at fred if i change the units for a data series to index scale value to 100 for chosen date the chosen date defaults to the data start date 01 01 1947 which is exactly what i want this series of posts begins on 14 december posted by the arthurian at 4 00 am 2 comments thursday december 21 2017 productivity and compensation the early years i put output per hour and compensation per hour on a graph for both the business sector and the nonfarm business sector indexed all the lines to the start date so they all start at the 100 level then i subtracted 50 from the nonfarm business numbers to shift them down on the graph now we can compare productivity and compensation for the business sector blue and red to productivity and compensation for nonfarm business green and purple through 1970 only graph 1 productivity and compensation 1947 1970 for business nonfarm business the separation between productivity and compensation is greater for the business sector than for nonfarm business in these early years since i want to see differences i m going to use the business sector data and set the nonfarm data aside as i said before the numbers are indexed both business sector lines start at 100 but we know compensation was actually less than the value of output because somebody made a profit we know compensation was less than the value of output but we don t know how much less from the indexed data we cannot tell i messed with that all day how much less and made no progress so i m moving on i m looking at the early years real compensation and real output run together for a while then separate for a while then run together then separate there s no inflation in these numbers but they do show compensation falling slightly behind output or catching up or sometimes maybe gaining on it and i remember james forder saying samuelson and solow published a widely read paper in the may issue of the american economic review of 1960 it discussed the causes of inflation the phillips curve and related matters discussion of their paper frequently says that it presented the phillips curve as a stable exploitable relation and hence played an important role in the development of inflationary policy this is hardly so the question samuelson and solow were addressing was that of the explanation of the inflation of the 1950s particularly the period 1955 57 and the implications it had for macroeconomics mild though that was later to seem this creeping inflation as it was called was at the time a source of much anxiety i think samuelson and solow had caught a case of cost push inflation ah the great ignored cost push inflation it fascinates me that s where science advances in the ignored areas once they stop being ignored it s where the interesting questions are i m wondering about the cost push inflation of 1955 57 and what i might find in the early years of the business sector output and compensation data my table of fred data lists both compensation per hour and real compensation per hour i can divide the nominal by the real to get a price index i wonder how that index compares to the cpi and the deflator and the new one pce graph 2 the business sector compensation price index blue and other price measures well that s interesting no match the business sector compensation measure falls about midway between the cpi red and the gdp deflator purple pce the new one runs lowest of all yeah that makes sense because we solve our economic problems by changing the way we measure them so you d expect the new measure of inflation to be the lowest one focus art the measure of inflation in business sector pay is different from the others i wonder what the rate of inflation looks like graph 3 the rate of inflation in business sector compensation there it is the inflation samuelson and solow were looking at 1955 57 inflation jumps to one percent per quarter four percent per year about out of nowhere after inflation had died down nicely following the korean war the great inflation shows up right on schedule compensation inflation increases beginning in the mid 60s and it peaks with the 1970 recession the 1974 recession and the 1980 recession plus you can see the near recession of 1967 in a brief sudden fall from the trend of increase it s all there all of it but like samuelson and solow i am fascinated by the inflation of 1955 57 i notice fred has data for both current dollar output and real output for the business sector so i can get another price index a business sector output price index i ll put that inflation rate on the graph along with business sector compensation inflation and again i ll cut off everything after 1970 to get a close up view of the early years graph 3 the rate of inflation in business sector compensation the first thing i notice is that after the 1954 recession output inflation went up earlier and faster than compensation inflation oh that s interesting if it s true i would expect to see on graph 1 that the output line rises relative to the compensation line coming out of the 1954 recession it does the output line was already above the compensation line during the 54 recession but the gap opened more in 55 the gap closed in 56 as compensation inflation scooted up to the 1 level so i can imagine that prices i e output prices were rising after the 54 recession and it took until 56 for wages to react i want to subtract compensation inflation from output inflation of the business sector this will show me the portion of rising business sector prices that is not due to labor i told ya the ignored areas that s where the most interesting questions are for both the business sector compensation price index and the business sector output price index i take the nominal data at fred and divide it by the inflation adjusted data i use the default units index 2009 100 and the default frequency quarterly after the division in the finally you can change the units of your new series part of the fred window i set the units to percent change in order to do more arithmetic after that i have to export the data to excel in excel i receive the quarterly inflation rates for business sector compensation and business sector output i subtract the compensation number from the output number this gives me the inflation in the price of business output which is not due to the cost of labor i put that on a graph then i go back to fred for the quarterly inflation rate as measured by the gdp deflator i add this to my graph in excel so i have a context something to compare against business non labor inflation here is the result graph 5 non labor inflation in the business sector the red line is the deflator it is a measure of inflation relevant to gdp as a whole by contrast the consumer price index cpi is more relevant to consumer purchases i don t want that narrow focus here the blue line is the inflation in business output with the inflation in employee compensation subtracted out of it what remains in the blue line is the inflation in business output which is not due to labor the blue line runs mostly below the red this stands to reason if only because labor cost inflation does not show up in the blue line in the early 60s for example the trends of red and blue run parallel with red a little higher then in the latter 1960s as the great inflation took hold business non labor inflation falls behind overall gdp inflation the first years on the graph show inflation immediately following the second world war the red runs much higher than the blue this could be attributed to government rather than business or labor similarly in 1951 52 the red runs extremely high related this time to the korean war now look at 1953 1956 in 53 the blue is flat at zero the red is flat and a little higher comparable to what we saw for the early 1960s then in 1954 and 1955 the lines move upward from the zero level reaching the 1 0 level the 1 0 level is 1 inflation quarterly or about 4 per year that s what samuelson and solow were looking at notice that during this transition the red and blue run together sometimes touching and sometimes even with the blue above the red there is essentially no gap between the lines during this time from before 1954 to after 1955 1953 q4 to 1956 q1 in other words during all of 1954 and all of 1955 business sector non labor inflation was responsible for inflation as measured by the gdp deflator labor costs are excluded from the calculation labor cannot be held responsible for the inflation of those years i think that s pretty interesting posted by the arthurian at 4 00 am 3 comments wednesday december 20 2017 productivity and compensation the early years the first take i put output per hour and compensation per hour tw...