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December 28, 2005

Are Workers Losing Ground? Part II

Menzie Chinn, taking his turn over at Econbrowser, asks the question "How well are workers doing?"  His answer, to quote pgl at Angry Bear, is "not as great as advertised."  I'm no expert on advertising, but I have waded into these waters before, and have become sufficiently immersed to know that the numbers have become pretty slippery. 

One of Menzie's points is that labor's share of income -- measured by the ratio of paid compensation to gross domestic product -- has fallen way off its 1967-2005 average:


That picture is fairly compelling, but it loses some of its bite with slightly longer perspective.  Here's the same picture, this time for the entire period since 1967:


The last couple of years look strange only when compared with the immediately preceding years -- which themselves look like an aberration in the period after the great disinflation of the early 1980s.  The labor share calculated by the Bureau of Labor Statistics is a wee bit more favorable to the proposition that workers took it on the chin the last couple of years...


... but it is still not clear that this expansion is progressing much differently than the last one.  And, really, this is just where the trouble begins.  My colleagues Paul Gomme and Peter Rupert explain:

... the “historic lows” in labor’s share are observed only in the nonfarm business sector series produced by the Bureau of Labor Statistics. Other measures of labor’s share—for example, for the nonfinancial corporate business sector or the macroeconomy more broadly—are currently near their averages over the last several decades.

Those alternative measures are ones that avoid, for example, the problems associated with allocating rental income and proprietor's income between labor and capital.  (In other words, they avoid imputing things that we don't observe.)

To me, the labor market remains something of a mystery.  The crux of Menzie's post -- and pgl's endorsement -- is that employment growth, the returns to labor, and so on have been less than they should have been. But I still wonder -- what should they have been?