Evan Soltas
Sep 17, 2015

More Thoughts on Productivity

Well, that could have gone better.

Josh Bivens and Larry Mishel have written a response to my blog post on labor productivity and compensation. Since we've had a short discussion over email today, I figured it would be worthwhile to outline a short reply.

Let's stipulate that the analysis could have been better. For example, it would have been useful for me to have better-defined, non-overlapping industry categories or data on the value of intermediate inputs. Above all, the ability of industry data at all to give insight into individual labor productivity is limited -- and they allude to the compositional issue in their blog post -- but, without some unit of analysis above the individual, measuring labor productivity is almost impossible. To the extent that we want to make any comparison at all between productivity and compensation, we need to accept certain trade-offs. This is one of them.

And the mistake I made in preparing the data, of course, is on me.

Yet I think Bivens and Mishel don't recognize that there is a good reason to look at nominal definitions of productivity and compensation. Notably, they misrepresent the analysis with an analogy to Zimbabwe's hyperinflation, saying that inflation invalidates my results. This is wrong.

My results are driven by relative changes in compensation and in productivity. This means that, had I deflated all my data by any measure of prices -- CPI, PCE, etc. -- it would not change my results.

What Bivens and Mishel do in their blog post, I would say, examines an different relationship than than I do, because they adjust productivity for industry-specific price indexes. So we reach two distinct conclusions that are both correct, which is easily missed in their write-up:

The key difference, of course, is that I examined the value of output, and they examined the volume. Both results are meaningful. Together, they imply that, to a considerable extent, the economy adjusts to industries' different rates of productivity growth by changing the relative prices of output. You might think of how consumer technology is both much cheaper and produced more efficiently, than say, haircuts.

There is an underlying normative issue here as to whether workers should be compensated for the gains in the economic value of their output or in increases in the volume of it. To say that one analysis is "right" or "wrong" implicitly takes a position on the normative issue. I don't have any special insight on it.

Addendum: Brad DeLong and Mike Konczal have asked me to say how my interpretation has changed, and rightly so. Originally, I found a relationship between growth in labor productivity and in labor compensation strong enough to explain most (80%) of the variance across industries from 1987 to 2013. In my revised results, this drops to a third. If before I would have said that compensation growth is very well explained by productivity growth, now I think a reasonable view of my results is to say that it is a substantial contributor, but not by any means the full story.