Another look at the FT post we considered yesterday.
Izzy Kaminska is poking around, trying to explain what the economy is doing. Her discussion starts with a review of several unsatisfying explanations for the excellent productivity of the late 1990s in the U.S. economy. But that excellent productivity long since expired, and Kaminska ends up trying to explain the very bad economic recovery of the present day.
She seems to think Alan Greenspan's original explanation -- technology -- is now working in reverse, undermining jobs instead of creating them.
She shows some graphs to make her case. One of those graphs is the Unit Labor Cost graph. It is the reason we come back to Kaminska for this post. She writes:
unit labour costs — the labour cost attached to the production of one unit — are staying positively muted
She shows a FRED graph:
|Graph 1: The Unit Labor Cost scam|
The "positively muted" remark refers to recent data at the right end of the plot, where at first glance the blue line seems to be running flat rather than rising. At second glance, however, the line isn't running flat. It went down a bit during the recession, but it has been going up since the recession. And if you look a third time, it appears that the "going up" part is going up at about the same rate as the "going up" that was going on for 20 years before that recession.
So I don't know what Kaminska's talking about. Whatever it is that the Unit Labor Cost graph shows, it is going up now just like it was going up before the Great Recession.
What does it show?
Kaminska seems to think the graph shows labor cost. How does she describe it? "The labour cost attached to the production of one unit". Oh right, right: "One unit".
As I showed the other day, the Unit Labor Cost plot is almost identical to the price level plot:
|Graph #2: Unit Labor Cost (blue) and the price level (red)|
The similarity between ULC and the price level is so remarkable as to inspire disbelief. And well it should, for the red line is used to calculate the blue line. To calculate Unit Labor Cost, labor costs are multiplied by prices.
And then the graph is used to claim that Labor cost makes prices go up.
To use the Unit Labor Cost graph is to say
The price number series is used to calculate Unit Labor Cost. But if you take the price number out of the labor number, you see that the labor number is just going down, relative to GDP:
|Graph #3: Total Labor Compensation (including benefits) relative to GDP|
Click graph for FRED source page
Again: The labor number is going down. The labor number multiplied by prices is going up. And the labor number, multiplied by prices, is used to support the claim that the labor number is what makes prices go up.
The graph is worse than worthless. It's fraudulent.
Unit Labor Cost
The Uses of Fake GDP (2): Unit Labor Cost
No Matter What the Red Line Does
The Fraudulent Use of Arithmetic