Saturday, December 9, 2017

"Wages and Productivity"

From Marc to Market, Dec 6:
The US monthly employment data has been the single most important high frequency economic report. It was a key in the recession of the Great Financial Crisis, and it was an important metric of the recovery.

Recent reports have been distorted by the storms in late Q3 and early Q4. September jobs growth fell to 18k and October bounced back to 261k. Before the distortions, this year's average, through August, was 176k, nearly identical with last year's average of 187k. Economists expect nearly 200k net new jobs were created in November.

Job growth, unemployment and underemployment have moved more than the Fed had expected. The focus since earlier this year has been on the easing of price pressures. In the traditional thinking, headline inflation converges to core inflation, and core inflation converges to wage growth. Average hourly earnings are reported with the non-farm payroll data and interest in it seems to be overshadowing the job creation or unemployment metrics.

Average hourly earnings may have been distorted by the storms, as well. They were unchanged in October and are expected to have risen 0.3% in November. Hourly earnings were flat last November, so due to the base effect, the year-over-year pace will match the November 2018 monthly increase. It is expected to accelerate to a 2.7% pace from 2.4% in October. This probably overstates the case and the December comparison will be more difficult (December 2016 average hourly earnings rose 0.3%). Over the past 24 and 36 months, the average year-over-year pace of hourly earnings is steady after having gradually risen to stand at 2.5%-2.6%.

In the broad discussion of economics and politics, the divergence between earnings growth and productivity has been grist for the mill. Since 1980, productivity growth has doubled while some measures of compensation have increased by only 50%. The divergence appears to have begun in the late 1960s. 

This Great Graphic, from data by the Federal Reserve of St. Louis was in a recent article by Noah Smith, an assistant professor of finance at Stony Brook University, and a columnist for Bloomberg. It shows the yawning divergence.

Professor Smith says in big bold letters on the top of the chart that "These two were supposed to be inseparable." Really? They did move tightly together after WWII, but what does "supposed to be" mean?

They are not linked by any natural or people-made law. It begs the question of what determines wages. Employers are under no compulsion to distribute the productivity gains to employees. They may do so under certain conditions, such as competition from other employers, or as a concession in negotiations with labor.

Some observers attribute the divergence of compensation and productivity to the integration of China into the world economy. However, the divergence takes place well before China began modernizing in the late 1970s. It did not join the WTO until 2001. The same temporal misalignment seems to rule out the fall of the Soviet Union and the integration of eastern and central Europe, and Russia in to the world economy.

Smith draws on recent work by Summers and Stansbury to argue that short-term changes in productivity are correlated with better pay. He concludes, "It's wrong to say that raising productivity won't raise wages-if history is any guide, it will." Indeed, productivity growth has been abysmal (negative) in some quarters and average hourly earnings have surpassed it....MORE
Read on. The sting, as Shakespeare said, is in the tail.
Of course, he was talking about something completely different.