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The Dark Lining of the Silver Cloud

Posted By Russ Roberts On April 10, 2006 @ 9:43 am In Inequality | Comments Disabled

Lou Uchitelle, in yesterday’s New York Time [1]s, is desperate to find proof that workers are  losing ground.  He hangs his rhetorical hat on a subtle issue in trying to measure GDP, the treatment of research and development. Is it an expense or is it investment? Current calculations of GDP treat it as an expense, but a good case can be made that it’s actually an investment. That changes the calculation of business profit and makes measured profits higher. That seems reasonable. But Uchitelle tries to make the case that workers are doing evven worse than we thought. Here’s his summary of reclassifying R&D as investment:

This reclassification leaves no doubt that workers are being left
behind as the G.D.P. expands. When R & D is counted as profit, the
employee compensation share of national income drops by more than one
percentage point. In a $12.5 trillion economy, that’s big money.

What does the phrase "left behind" mean to you? Standing still? Falling back? Moving forward but not as fast as others? All of the above?  It’s a vague phrase to give Uchitelle some wiggle room. But even so, a 1% change in compensation’s share is not a big change unless you saw it persist year after year. There’s always going to be some fluctuation. And is labor’s share falling? Or is this 1% reduction a change in the level that has always been there but now we’re measuring it properly?

Uchitelle immediately lets us know that workers even though they’re being "left behind" are actually not really becoming worse off:

Measured in dollars, wages aren’t actually falling, but workers are
losing ground. "If capital income is going up and wages stay the same,
then the share of total national income that goes to labor goes down,"
said Sumiye Okubo, an associate director of the bureau, who is
directing the experimental project.

So we’re back to a favorite theme at the Times’s. People are still getting ahead but some are getting ahead faster than others.

In fact, labor’s share of the economic pie, measured in the traditional fashion without the correction for R&D as an investment, is remarkably constant, as this report [2] from the St. Louis Fed by Michael Pakko shows:

Laborshare [3]The top line is compensation going to workers. It is remarkably steady at 70% of national income going back to 1948. It doesn’t go any higher than 73% and it doesn’t fall below 67%. The lower line is wages and salaries, a series that some pessimists use because by ignoring the increasing role of benefits in compensation, it misleads about how labor is doing relative to profits. This picture makes it clear that labor’s share measured in the traditional manner without accounting for the intangibles, hasn’t fallen since the 70′s. Or the 1950′s even. This picture is makes it difficult for the pessimists to claim that the top 1% are getting everything or that corporations rule the world. So I can understand the desire to reclassify GDP calculations to find a gloomier conclusion.

Changing the way we account for R&D and moving this number around by something on the order of 1% isn’t going to be much of a story. But there are other changes that people are considering in how to measure labor and business’s share in GDP—how to treat advertising, for example, or the
adoption of technology:

Such intangibles now approach $250 billion a year, up from only $11
billion in the 1970′s, the three economists calculate. If these
intangibles, along with R & D, were incorporated into G.D.P. on the
profit side as capital investment, labor’s share of national income
would decline from a fairly steady 65 percent in the 1950′s, 60′s and
70′s to less than 60 percent today.

I don’t know where Uchitelle gets his numbers. The Fed study shows the share steady at 70% not 65%.

The long decline doesn’t show up in the standard G.D.P. accounts,
which ascribe nearly 65 percent of national income to labor. "The
hidden earnings from these knowledge investments have not been shared
equally with workers," Mr. Hulten said.

I can believe that if you reclassify some expenses as investments, you can boost business profits and business’s share of GDP. There may even be a decline over time in labor’s share as Uchitelle and the authors of the study he mentions are right. But is there any reason that all gains should be shared equally? Is there an economic reason? Here are Uchitelle’s reasons for the decline he perceives:

Two reasons seem
likely. Some of the profit is probably going to the wealthiest
Americans — the upper 1 percent whose incomes have risen sharply, in
part from dividends and other forms of corporate earnings.

The economic argument that Uchitelle and Hulten (one of the study’s
co-authors) seem to be making is that since 1970, there has beena  big
increase in technology and R&D and advertising. These changes have increased inequality by lowering labor’s share. But do they really believe that increases in R&D and technology are bad for workers? I’d
think that workers benefit from technology and R&D. Does Uchitelle really believe that the benefits of R&D and technology accrue mostly to the top 1%? But here’s the real kicker:

Then,
too, most of the nation’s workers are bereft of bargaining power.
Unless that returns, labor’s share of national income seems likely to
continue its decline.

Bereft of bargaining power? What does that mean? I assume Uchitelle means the decline of unions. But the steadiness of labor’s share goes back to the 1950′s. And unionization in the private sector has been falling steadily since the 1950′s. Tough thesis to prove.

Ironically perhaps, just above Uchitelle’s piece, in the print edition of the paper, was this piece [4] by Ben Stein arguing that envy is a destructive emotion:

Years ago, I went to a 12-step program on Point Dume, a lovely area
in Malibu, Calif. At the time, I was making a modest living and was
petrified about money many nights. I would walk my magnificent German
short-haired pointer, Trixie, near the homes of fabulously wealthy
stars and moguls and then return to my shabby rented cottage.

At
the meeting, I complained about the maddening truth that so many people
near me on Point Dume had so much more money than I did, and a smart
woman named Jennie said: "Instead of thinking about what you don’t
have, think about what you have. You have the handsomest son on the
planet. You have the perfect dog. Concentrate on those. When you are
tempted to feel envy, remember that envy is as bad as strychnine for
you. Make a list of what you do have that is good in your life, and
then the envy will lift."

Good advice.

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URL to article: http://cafehayek.com/2006/04/the_dark_lining.html

URLs in this post:

[1] yesterday’s New York Time: http://www.nytimes.com/2006/04/09/business/yourmoney/09view.html?_r=1&oref=slogin

[2] this report: http://cafehayek.comresearch.stlouisfed.org/publications/net/20040801/cover.pdf

[3] Image: http://cafehayek.com/images/various/laborshare.jpg

[4] this piece: http://www.nytimes.com/2006/04/09/business/yourmoney/09every.html

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