News for Emily Litella
Greg Mankiw’s Blog Tuesday August 29
All of us who work with macroeconomic data have learned, sometimes the hard way, that conclusions based on preliminary data are subject to change. Here is a good example.
The NY Times two days ago in a front-page, above-the-fold article:
wages and salaries now make up the lowest share of the nation’s gross domestic product since the
government began recording the data in 1947.
The NY Times online today, presumably to be reported in tomorrow's paper (on what page? [update: page C1]):
Perhaps the biggest surprise in today’s report was a surge in wage-and-salary income during the first
half of this year. Between the fourth quarter of last year and the second quarter of 2006, it grew at an annual rate of about 7 percent, after adjusting for inflation, up from an earlier estimate of 4 percent, according to MFR, a consulting firm in New York.
As a result, wages and salaries no longer make up their smallest share of the gross domestic product since World War II. They accounted for 46.1 percent of economic output in the second quarter, down from a high of 53.6 percent in 1970 but up from 45.4 percent last year.
Total compensation — including employee health benefits, which have risen in value in recent years — equaled 57.1 percent of the economy, down from 59.8 percent in 1970. Still, compensation makes up a larger share of the economy than it did throughout the 1950’s and early 60’s, as well as during parts of the mid-1990’s and the last couple of years.
As Emily Litella would say, "Never mind."
Update: My friend Jason Furman emails me his observations on the matter:
Measured properly wages and salaries in the first half of 2006 were the lowest as a share of economy since WW II.
The proper denominator for factor shares is gross domestic income (GDI) or national income. Using either denominator, wages and salaries are the lowest since World War II. CEA's Economic Report of the President always shows incomes as a fraction of GDI as does NIPA Table 1.11. You are correct that as a share of gross domestic product (GDP) wages and salaries are no longer the lowest since WW II. But this is an apples-to-oranges comparison -- which is why neither the very careful CEA nor the very careful BEA would do it. (It is, alas, a common practice to use GDP in the denominator -- one that many excellent economists and reporters, including the New York Times -- follow.)
Specifically, the statistical discrepancy between GDP and GDI shows up in the denominator but not in the numerator. In 2006-Q2, GDP was $76 billion lower than GDI. If you're using GDP in the denominator, then this $76billion should be subtracted from some combination of wages, profits, rents, etc. Conversely, in 2005 GDP was $71 billion higher than GDI. As a result, to use GDP in the denominator you should also add this $71 billion to incomes.
Since we don't know how the statistical discrepancy breaks out between different factor incomes (that's why it's a "statistical discrepancy") we use GDI in the denominator. Or to avoid screwy results from depreciation, I generally prefer to use national income. Either way, the Times headline holds up. Best, Jason
P.S. I should say I'm not that interested in wage shares, compensation shares are the relevant metric for most important questions. And the upward revision in wages certainly is a good sign and helps make sense of the revenue surprises we experienced this year -- and might suggest they'll be somewhat more durable than the potentially more ephemeral capital gains and corporate profits. But since you were being picky, I thought you might as well help your Ec 10 students to learn some national accounting arcana.