BCG81 said...

This is crude. I'm just throwing together a few pictures at FRED, in response to a comment from BCG81 on my old Kaminska and Unit Labor Cost post.

BCG81 said...

I agree it does not make sense to talk about a "correlation" between ULCs and inflation, because they're the same thing. But as I understand it, the reason *nominal* compensation is compared to *real* productivity is to measure the extent to which compensation can rise (as a result of compensation or inflation rising) without putting pressure on prices. You can't see that without holding output prices constant. Also, when using ULCs as a measure of international competitiveness, you want to see both cost (i.e., nominal i.e., labor share) competitiveness and price competitiveness (i.e., relative rates of inflation).

I don't know how to respond in words. The ideas are too big and too nebulous. It goes in interesting but turns to mush in my head. So I went to FRED.

This is crude because I'm just comparing labor cost to corporate profit.


Here's the "Unit Labor Cost" graph I showed in the old post:

Graph 1: Unit Labor Cost

Now if you wanted to compare that to something, you might compare it to Corporate Profit as a share of GDP:

Graph #2: Corporate Profit After Tax as a Percent of GDP

But that's not really a good comparison, for a couple reasons. First of all, the corporate profit measure is "after taxes". Why, I don't know. That's the popular measure though, at FRED. Type corporate profits in their search box and hit enter, and the first thing that comes up is Corporate profits after tax on a list that's sorted by popularity.

Whatever. The second reason...

Well, wait a minute. Let's look at the graphs.The first graph shows unit labor cost going up on a pretty straight path since 1980. That's labor cost, meaning wages and salaries (and benefits) before tax, as opposed to after tax. In addition, the taxes businesses pay on labor are added to that, if I remember right.

The second graph shows corporate profits after tax drifting possibly down until the mid-1980s, then rising from a low of 3% to a current high of over 11%.

From 1980 to the recent data, unit labor cost rose from about 60 index-units to less than 120. I don't know what the index-units are, but I can see that unit labor cost did not quite double since 1980. By contrast, corporate profits increased from 3% to over 11%. That's almost a fourfold increase, in less time than it took for the unit labor cost to double. Now... where was I?

The second reason these two graphs are not a good comparison is that Graph #2 shows profit as a percent of actual-price GDP. To make it comparable to Graph #1, we'd have to show it as a percent of inflation-adjusted GDP, like this:

Graph #3: Corporate Profits After Tax as a Percent of Real GDP

Now that sucker's going up.


I downloaded the data from Graph #3 and figured the average of the four (quarterly) values from 2005. That value is 9.72447382422837. (You should be laughing because I'm using all the digits.)

I used the average to create a version of Graph #3 that shows the data as an index with 2005 = 100, just like the Unit Labor Cost in Graph #1.

Here's the corporate profit data in blue, and the Unit Labor Cost data in red:

Graph #4: Unit Labor Cost (red) and Unit Corporate Cost (blue)

Here's the same data, just since 1980:

Graph #5: Unit Labor Cost (red) and Unit Corporate Cost (blue) since 1980

So, what's going up faster? What's driving prices up? Labor cost, they say. Not the blue one, they say. Well, maybe that was true in the Reagan years...


But, you know, maybe that's not so clear. Both lines are going up since the latter '80s. Let me do what I did in the old post, and show the data relative to "nominal" GDP -- GDP measured in the prices we actually paid to buy the stuff we bought:

Labor Cost (red) and Corporate Profit (blue) Indexes Relative to Actual GDP

Yeah, that red one? The one that's going down since 1960? That's the one they say makes prices go up.

It can't be true.


And now I can respond to BCG81:

I don't know about the things you said. But I know that any time you divide "nominal" something by "real" something, you are factoring inflation into the result.

And I know that after you factor inflation into something, the thing looks more like inflation than it did before.

And I know economists like to take these things with inflation factored in, and compare them to inflation, and say Wow, look at the similarity.

And I know that the similarity is created by the arithmetic. Not by the economy.