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:
- I show that there is a robust relationship between changes in the economic value of output produced per hour and changes in the hourly compensation of employees.
- They show that there is no relationship between changes in the volume of output produced per hour and changes in the hourly compensation of employees.