BenderlySlides Dec0506

The U.S. Labor Market: Stable and Normal Long-Run Behavior

Jason Benderly The Global Interdependence Center Paris Conference December 5-8, 2006

225 WALL STREET, SUITE 245, VAIL, COLORADO 81657

TEL: 970-476-7110 FAX: 970-476-7104 benderly@colorado.net

Main points 

Long-run cycle of labor cost growth: The unemployment rate for married males, spouse present (MMSP) has been a stable indicator of rising and falling labor cost growth for 50 years.

The MMSP unemployment rate suggests there have been four long-term labor market cycles (loose 1955-1962, tight 1966-79, loose 1980-94, tight 1995-present).

Hourly compensation growth is consistent with these long-term cycles, and tracks a simple model using the MMSP unemployment rate.

Labor market has been tight and growth rate of labor costs have been rising since 1995.



Long-term cycles of core inflation, productivity trends, and long-term interest rates: The growth rate of the core consumer spending deflator (the Fed’s favorite measure) has been on a gradual upward trend since 1999.

The trend of productivity growth has fluctuated three times – high (2.8%) from 1950 to 1972, low (1.4%) from 1973 to 1995, and high (2.9%) from 2006 to the present 10-year treasury yield should increase to 5.5%-6.0% by mid-2007.

This measure of core inflation is related to the growth rate of hourly compensation adjusted for the long-run trends of productivity growth.

Long-term interest rates are related to the trend of core inflation.

02/03/13

Page: 2

Main points (continued) 

Payroll employment survey has a long-run downward bias: The payroll employment survey has always understated the growth rate of hourly wages, as well as the growth rate of wage & salary income, by almost 1.0% per year.

This downward bias is not just from the exclusion of white collar workers; the Employment Cost Index (ECI) has had the same downward bias since 1990.



Employment growth: U.S. companies have always been cautious in hiring and firing workers, and as a result, payroll employment growth is not closely related to quarterly real GDP growth.

But also as a result, payroll employment growth is closely related to a long moving average of real GDP growth.

Payroll employment growth should average 125,000-150,000 per month, and a low unemployment rate will not cause shortages.



Labor and profit shares of the economy: Total labor share of GDP is not at a low level because decline in wage & salary share has been offset by increase in supplement share.

Profit shares are more normal than not because they have been affected by tax payments, corporate share of GDP, and financial sector share of corporate sector.

02/03/13

Page: 3

Figure 1: This unemployment rate has been a stable indicator of labor market tightness – rising versus falling wage growth percent 8

8

tight

loose

loose

7

tight 7

unemployment rate for married males, spouse present [MMSP]

6

6

5

5

4

4

neutral = 3.5%

3

3

2

2

1 1955

02/03/13

1 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 4

Figure 2: The cumulative sum of the difference between the MMSP and 3.5% (inverted) should paint a picture of wage inflation cumulative percent 60

cumulative percent

loose

tight

loose

60

tight

50

50

40

40

30

30

20

20

10

10

0

0

-10

-10

cumlative labor market tightness (sum of area above and below 3.5% )

-20

-20

-30 1955

02/03/13

-30 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 5

Figure 3: And it does – this cumulative measure is a stable indicator of the long-run cycle of hourly compensation growth cumulative percent 60

4-quarter percent change 12

tight

loose

loose

tight

11

50

10

40

9

30

8 7

20

6

10

5 0

4

-10

3

-20

2

cumulative labor market tightness (left) hourly compensation (right)

-30

1 0

1955

02/03/13

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 6

Figure 3: And it does – this cumulative measure is a stable indicator of the long-run cycle of hourly compensation growth cumulative percent 60

4-quarter percent change 12

tight

loose

loose

tight

11

50

10

40

9

30

8 7

20

6

10

5 0

4

-10

3

-20

2

cumulative labor market tightness (left) hourly compensation (right)

-30

1 0

1955

02/03/13

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 7

Figure 4: Long-run trends of productivity growth – fast (1948-72), slow (1973-95), and fast (1996-06) index (1982=100)

percent 160

160

productivity for the nonfarm business sector

140

140

120

120

1948-1972 trend = 2.8% 1973-1995 trend = 1.4% 1996-2006 trend = 2.9%

100

100

80

80

60

60

40

40 1950

02/03/13

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 8

Figure 5: Adjusting hourly compensation growth for productivity trends dampens the upward trend since 1995 4-quarter growth rate

4-quarter growth rate

12

12

hourly compensation

11 10

11

reported adjusted for productivity trends

9

10 9

8

8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

-1 1955

02/03/13

-1 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 9

Figure 6: Core consumer spending deflator – the Fed’s favorite measure has been on a gradual upward trend since 1999 percent change (annual rate)

percent change (annual rate)

12

12

11

11

core consumer spending deflator: excluding food and energy

10

10

9

9

3-month growth rate 3-year growth rate

8

8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0 1960

0

02/03/13

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 10

Figure 7: And this gradual upward trend is related to the growth rate of hourly compensation adjusted for productivity trends percent change (annual rate)

percent change (annual rate)

12

core consumer spending deflator (1-qtr) productivity adjusted hourly compensation (4-qtr)

10

12

10

8

8

6

6

4

4

2

2

0

0

1955

02/03/13

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 11

Figure 8: 10-year treasury note yield is related to core spending deflator, fed funds rate , and fed funds less nominal GDP growth percent

percent

15

15

14

14

10-year treasury notes

13

13

12

12

11

11

10

10

9

9

8

8

7

7

6

6

5

5

4

4

actual fitted through 1981, out of sample from 1982 to 2007

3 2 1955

02/03/13

3 2

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 12

Figure 9: The payroll survey has always understated the growth rate of hourly wages (and wage & salary income growth) index 1964:Q1=100

index 1964:Q1=100 190

190

comparison of hourly wages: payroll survey versus personal income

180

180

170

170

real private wages & salaries per hour (1.6% average growth rate)

160

160

150

150

140

140

130

130

real average hourly earnings (0.6% average growth rate)

120

120

110

110

100

100 1965

02/03/13

1970

1975

1980

1985

1990

1995

2000

2005

Page: 13

Figure 10: This downward bias is not just from white collar workers; the ECI has had the same downward bias since 1990 index 1964:Q1 = 100

index 1964:Q1 = 100

140

140

real measures of hourly wages

135

135

private wages & salaries [ECI] blue-collar wages & salaries [ECI] white-collar wages & salaries [ECI] average hourly earnings [CES] private wages & salaries per hour [UI]

130 125

130 125

120

120

115

115

110

110

105

105

100

100 90

02/03/13

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

Page: 14

Figure 11: Payroll employment – quarterly growth rate is not closely related to quarterly growth rate of real GDP percent change (annual rate)

percent change (annual rate)

8

6 forecast

payroll employment, 1-qtr growth rate (right) real GDP, 1-quarter growth rate (left)

7

5

6

4

5

3

4

2

3

1

2

0

trend growth rate of real GDP per employee = 2.0%

1

-1

0

-2

-1

-3

-2

-4 1997

02/03/13

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Page: 15

Figure 12: Payroll employment – but quarterly growth rate is very closely related to moving average of real GDP growth percent change (annual rate)

percent change (annual rate) forecast payroll employment, 1-qtr growth rate (right) real GDP, 6-quarter weighted average growth rate (left)

5

3

4

2

3

1

trend growth rate of real GDP per employee = 2.0%

2

0

1

-1

0

-2 1997

02/03/13

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Page: 16

Figure 13: The wage & salary share of GDP has declined to a new low, but the total compensation share is still high percent of GDP

percent of GDP

64

labor shares of GDP

total compensation (right)

60

56 20 52

wages & salaries (right)

16

48 12 44 8

supplements & benefits (left)

4 1950

02/03/13

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 17

Figure 14: Nonfinancial corporate profit shares – pre-tax at a cyclical high but on a downward trend; after-tax behaving normally percent

percent

22

22

20

20

nonfinancial corporate profit shares (percent of nonfinancial corporate value added)

18

18

16

16

14

14

pre-tax

12

12

10

10

8

8

6

6

after-tax

4

4

2

2 1950

02/03/13

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Page: 18