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.
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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.
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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
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1 1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
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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
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-30 1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
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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
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1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
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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
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1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
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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
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1955
1960
1965
1970
1975
1980
1985
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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
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1
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0
0
-1 1955
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-1 1960
1965
1970
1975
1980
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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
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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
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1960
1965
1970
1975
1980
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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
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3 2
1960
1965
1970
1975
1980
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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
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1970
1975
1980
1985
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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
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100
100 90
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00
01
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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
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1998
1999
2000
2001
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2004
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2007
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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
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1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
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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
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1955
1960
1965
1970
1975
1980
1985
1990
1995
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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
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1955
1960
1965
1970
1975
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