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07/05/2013

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Very interesting - thanks! So the significant stagnation is really a more recent phenomena. I wonder what caused the jump in real compensation about 1998-2004.

From 1998 to 2002, money was flowing more readily. Natural interest rate jumped up during that time. Liquidity increased throughout the economy. The liquidity made its way into wages while inflation stayed low. If inflation had accompanied the rise in wages, "real" wages would not have risen as much.
The answer is that inflation stayed low as wages rose with excess liquidity.

When I read this again today, I wondered about the indexes used to compensate for inflation.

I found this article:
http://www.bls.gov/opub/mlr/2011/01/art3full.pdf

The date was January 2011.

Page 57
"There are two main components that account for the magnitude and direction of the compensation–productivity gap. The first is the difference between the price indexes used to adjust for inflation in the BLS hourly compensation and productivity measures. The Consumer Price Index and the implicit price deflator comprise different baskets of goods and services; if consumer prices rise more quickly than output prices, purchasing power falls and the compensation–productivity gap grows."

"The second component, “labor share,” is the share of output accounted for by employees’ compensa- tion. Labor share is a measure of how much of the economic pie goes to all workers. When labor share is constant or rising, workers benefit from economic growth. When labor share falls, the compensation– productivity gap widens. Concurrently, nonlabor costs—which include intermediate inputs into pro- duction and returns to investments, or profits—rep- resent a greater share of output. Because real hourly compensation and labor productivity, which is output per hour, both include hours worked in their calcula- tions, changes in hours worked have no impact on the gap."

Page 58
"The real hourly compensation measures used in this essay differ from other compensation measures published by BLS. The productivity program develops the measures on the basis of BLS and BEA data, making adjustments for coverage. The IPD for non-farm business output is published by the BEA. The consumer price index prepared by the BLS productiv- ity program is the quarterly average of the monthly BLS Consumer Price Index for all Urban Consumers Research Series (CPI-U-RS) for 1978 through the most recent full year, currently 2009. Changes in the BLS CPI for all Urban Consumers (CPI-U) are used to estimate an index for years prior to 1978 and for recent quarters. The productivity program’s consumer price index based on these measures is displayed in this essay."

I don't know if this would affect your analysis, but I thought you might be interested.

Jim,
I am reading your comments with great interest. I cannot find that source that says labor share rose during WWII, but I found another paper that shows it was low. But...
But...
That paper turns out to be really interesting because they did a study on capacity utilization and labor similar to what I am doing.
Here is the link for you to look at...
http://www.newschool.edu/scepa/papers/archive/cepa200303.pdf

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Data as of 3rdQ-2017
Effective Demand = $17.424 trillion
Real GDP = $17.157 trillion
Productive Capacity is rising to next business cycle = $23.558 trillion
UT index is falling= +1.1%
Effective demand limit = 73.9%
TFUR = 72.8%
ED Fed rate rule (down from a peak of 3.8% in 2014) = 2.2%
Estimated Natural Real Interest rate = 2.2%
Short-term real interest rate (fallen from 2.8% peak in 2014) = -1.7%

There is no recession for 3rdQ-2017. Chance of recession is growing as economy heads toward 2nd effective demand limit in this business cycle. I am forecasting economic contraction in 2018.




Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):

The UT Index

z-vertical:

z-vertical

z derivatives in terms of labor & capital:

z derivatives in terms of labor & capital

Effective Demand, real GDP & Potential GDP:

ED, real GDP & pot rGDP

ED Output Gap:

ED Output gap

Corporate profit rate over real cost of money:

Corp profit rate over real cost of money

Exponential decay of Inflation:

Corporate profits impact Inflation

Measures of Inflation:

Measures of Inflation

YoY Employment change:

YoY employment change

Speed of consuming slack: yoy monthly:

Speed of consuming slack

Speed of consuming slack: quarterly:

Speed of consuming slack quarterly

Real consumption per Employee:

real consumption per employee 2

Will real wages ever rise faster than productivity?:

Productivity & Real Wages

Real Wage Index:

real wage index

Productivity:

Productivity

Productivity against Effective Demand limit:

Prod & ED limit

Bottom of Initial Claims?:

Initial claims

Tracking inflation expectations:

Fisher effect?

M2 velocity still falling:

Measures of Inflation

All in one:

All in one

Double checking labor share with unit labor costs & inflation:

ULC LS CPI
My Photo
Edward Lambert: Independent Researcher on Effective Demand.
Some links for economic analysis
Fed Views - San Francisco Fed, around 10th of each month.
Well's Fargo monthly - around 10th of each month
Well's Fargo weekly
Well's Fargo Interest rate report
Well's Fargo Economic indicators
T. Rowe Price weekly market wrap-up
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