Thursday, January 3, 2013

Wage share in the US (1959-2011)

Figure above shows the compensation of employees as a share of personal income.
As you can see the negative trend starts in the late 1970s early 1980s, with the Volcker hike in interest rates and the Reagan revolution, meaning reductions in marginal taxes for the wealthy.


  1. Hey Naked,
    I'm seeing a peak above 74.0, looks like 1970 to me. Not "the late 1970s early 1980s". What were you thinking? :)

    I couldn't duplicate your graph at FRED in 30 seconds or less. Data Source?

    1. I'd imagine that wage-bargaining in the 1970s became more difficult due to the inflation.

      If you divide it up, however, you see that the sharpest fall was between 1979 and 1987. There was also a brief increase between 1995 and 2001.

    2. Absolutely. The 1995-2001 increase is related to the improved economic performance that Robert J. Gordon called a "macroeconomic miracle".

      The steepness of the steep decline (I'd call it 1979-1983, by eye) *may* have something to do with the Volcker squeeze and the recessions that "ended" the Great Inflation. Would be my bet.

      BTW in the 1970s there was a lot of COLA -- Cost Of Living Allowance -- stuff built into wage contracts. Wage bargaining was probably easier then, than any time since. (I never looked at data on that, but I did live thru it.)


    3. There is no trend in the 1970s. 1979 is higher than the average of pre-1980s period and higher than all the first half of the 1960s. The negative trend is clear after 1980. Data is from FRED. Compensation of employees, received (W209RC1), Billions of Dollars, Quarterly, Seasonally Adjusted Annual Rate over Personal Income (PI), Billions of Dollars, Quarterly, Seasonally Adjusted Annual Rate.

      I would say wage bargaining became more difficult because trade unions were weakened. Actually higher inflation is a reflection that in the 1970s wage resistance was still actually high. The difference between the 1970s and the 2000, both periods of higher commodity (including oil) prices is that in the latter period wage resistance was inexistent.

    4. Oh, yeah. W209RC1 at FRED, I got it now. Thank you, sir.

    5. When I said it was more difficult I meant that it was more difficult to get the right real wages due to the inflation. That's why the 1970s is probably all over the place. Think of a typical wage-bargaining model here where wages are set first and prices are set by firms after and you'll get what I mean. Something like:

      WE = w0 + PE - w1.u
      PE = p0 + WE
      WE = W

      If something like that was going on, which I assume that it was, the whole process would have been very messy. It's not at all surprising that we saw significant volatility and that this gives the illusion of a downward trend.

  2. I think you are showing me that the new [real] wage is equal to the old [real] wage because the new price went up enough to compensate for the wage hike. (But I don't do well with symbolic statements like yours.)

    A question (and who better to ask than TheIllusionist): What is the difference between a downward trend and "the illusion of a downward trend"? I mean, if the numbers go down they go down.

    I didn't ask when Matias said, "There is no trend in the 1970s," but I didn't understand that either. I only know how to eyeball these things, obviously. What standard do you use when defining a trend?

    1. Mind you I was just eyeballing too. It seems to me that from 1959 to 1980 there is no clear negative (or positive) trend. But the negative trend is clear since 1980 or so. But I can live with early 1970s too. Either way, it is clear that the conservative movement has had an impact. No doubt there are other forces in action too.

  3. Thanks Matias. I feel better about my eye now. And though I want to say the trend was uphill to 1970, I do not say it with much confidence because I don't know what happened before 1959.

    There is a great story from Lionel Ruby about interpreting the evidence:

    Darwin and a fellow scientist were searching for fossils in the north of England. They were not aware of the glacial theory at the time. Years later Darwin revisited the area, and he was now astonished to discover how clearly marked were the glacial ridges on the rocks. He had not noticed them on his earlier visit because he was not looking for them.... Darwin was able to appreciate the glacial markings only after he became aware of the glacial theory.


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