Tuesday, September 11, 2012

Unit Labor Cost

yourdictionary.com offers a definition for Unit Labor Cost:

unit labor cost business definition

An important measure of productivity calculated by dividing total labor compensation (including benefits) by real output. An increase in unit labor costs will result in a reduction in profitability unless a firm can pass along higher labor costs to its customers. Economists view increases in unit labor costs as an important indicator of potential inflation.

As Milton Friedman did with his MRTO graphs, the Unit Labor Cost calculation divides inflation out of GDP, then divides labor compensation by this inflation-adjusted GDP, effectively factoring inflation *INTO* the resulting numbers.

Total Labor Compensation is most people's income. That income makes up a good part of GDP. If we take GDP and reduce it for inflation, we make Total Labor Compensation look bigger than it really is. Not only that, but we make Total Labor Compensation appear to increase, in a pattern similar to the path of inflation.

And we they call this an important indicator of inflation.

Working backward, we can take Unit Labor Cost of the NonFarm Business Sector and multiply it by real output, to get Total Labor Compensation. Then we can divide it by GDP to see how Total Labor Compensation compares to the size of our economy:

Graph #1: Total Labor Compensation (including benefits) relative to GDP
(Index 2005=100)
Click graph for FRED source page
Labor costs (including benefits) have been declining since 1961. Labor costs cannot be the driver of inflation.


Clonal said...

Very important observation!

This leads me to the inveitable conclusion - as this includes the great inflation of the 1970's - that the inflation of the last 50 years has been driven by rent seeking, and increasing portions of the GDP going into the financial sector - in other words, enrichment of the 1% on the backs of the 99%

Greg said...

If you think about costs of an item coming from a competition of buyers, obviously the buyer with the most money will drive the cost of an item. Blaming working stiffs wages for inflation is jut another example of "pay no attention to the man behind the curtain" type behavior of our elites.

Jazzbumpa said...

A different algorithm, but totally consistent with what I posted a year ago.