Dollars and Jens
Tuesday, December 05, 2006
factors of production
The productivity report is out, with BIG revisions downward to second quarter compensation — I'm not quite clear on what's up with that. Mind, it's the long-term manufacturing data which capture my thoughts. Output per hour has climbed seventy-some percent since 1992, as has (nominal) compensation per hour; unit labor costs are essentially unchanged in the last fourteen years, and perhaps down slightly. For durable goods manufacturing, output per hour has more than doubled, while compensation is up the same 70%.

There's a sense that, in the long run, real wages (by which I mean labor compensation) should track productivity; in manufacturing, real wages are up only about 30% in the past fourteen years, about half of what productivity is, and less than that for durable goods alone. The general relationship can be reduced to an assumption that labor receives a constant proportion of GDP — productivity times number of hours worked is real GDP, while real wages (including benefits etc.) times number of hours worked is the portion received by employees, so if the ratio is constant, the percent change in one will equal the percent change in the other. In the case of the manufacturing sector, I believe there are two major contributors to the discrepancy:
  1. Manufacturing is increasingly capital-intensive, particularly in the United States. A lot of the increase in productivity is due to investments in plants and machines, which, essentially, have to be paid off.
  2. Prices in the manufacturing sector have risen more slowly than prices in general. This is in part because manufacturing is increasingly capital-intensive, and productivity improvements there have been faster than in the service sector; unit labor costs in the service sector keep up more closely with wages, and unit labor costs dominate the production costs of services. If we adjust wages in the manufacturing sector for inflation in manufactured goods' prices, they appear to have gained a bit more than if we use overall inflation.
I'm pretty sure the former effect is larger; most of the difference is that a new worker is only that much more productive if equipped with increasingly expensive equipment, so that the gain to employees is just enough to attract enough employees into those sectors of the economy, and is not substantially higher than in other sectors, as might be supposed by simply looking at output and number of workers.

There are a lot of directions I could take this now; there are papers suggesting that the Asian Economic Miracle of Taiwan and Korea, for example, can be explained entirely by capital investment; alternatively I think I could head off on a tangent about marginal versus average values: the partial derivative of output with respect to hours worked is very different from output divided by hour worked. I should probably just leave it alone, though.

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