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The wage decoupling mess

Summary:
The media continues to obsess over the so-called “wage decoupling” issue, the gap between the growth rate of median wages and the growth rate of GDP. Let’s start by asking why people are even interested in comparing these two growth rates. What are they supposed to show? Why not compare wages to average global temperature or the average score in an NBA game? I suppose people must have in mind some sort of concept that GDP is like a pie, and workers are not getting their fair share. But if that’s your concern then why not compare wages to total per capita income? After all, GDP includes things like depreciation, which nobody is “getting”.  Income is the “pie”, not GDP. Because depreciation grows faster than GDP it turns out that there is a “decoupling” between total

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The media continues to obsess over the so-called “wage decoupling” issue, the gap between the growth rate of median wages and the growth rate of GDP. Let’s start by asking why people are even interested in comparing these two growth rates. What are they supposed to show? Why not compare wages to average global temperature or the average score in an NBA game?

I suppose people must have in mind some sort of concept that GDP is like a pie, and workers are not getting their fair share. But if that’s your concern then why not compare wages to total per capita income? After all, GDP includes things like depreciation, which nobody is “getting”.  Income is the “pie”, not GDP.

Because depreciation grows faster than GDP it turns out that there is a “decoupling” between total income and total GDP. Total combined income earned by workers and capital rises more slowly than GDP.  That’s not a scandal.

Scott Alexander valiantly tries to make sense out of this mess, but ends up being sort of overwhelmed by too much information, too many claims. Tyler Cowen makes this observation:

On Scott’s broader points (not discussed in my excerpt), I think he is underemphasizing the possibility that productivity may be measuring better than it really performed, and thus there is not so much decoupling at all.

In a perfect world, the mis-measurement of productivity would have absolutely no impact on estimates of “decoupling”.  Indeed, let’s take a step back and consider the absurdity of the various measures of decoupling that people use, which all seem to rely on comparisons of real GDP and real wages.  Obviously the variables that ought to be used are nominal wages and nominal national income per capita.  And any gap between nominal wages and nominal national income per capita would be completely unaffected by the mis-measurement of productivity.

Of course that’s how things would be done in a non-idiotic world, where people don’t use different price indices to deflate national income and wage income.  We don’t live in that world, and thus Tyler’s point may have some validity.  These comparisons typically deflate wages by the CPI, which rises faster than the GDP deflator.  But why?

It would be better if Tyler simply referred to the idiocy of using two different price indices rather than the mis-measurement of productivity, which isn’t really the issue at all.

Scott Winship has the best explanation of this mess, and he shows that there is almost no long run decoupling between average wages and national income, at least in the way people think of the term. (I.e. more of the pie going to greedy corporations.  He excludes owner-occupied rent, which most people don’t even think of as income.)  On the other hand, there is a big decoupling between median wages and average wages, reflecting greater inequality of wage income.

If growing wage inequality is what people are concerned about, then that’s what they should talk about.  Any time you see an article in the NYT discussing the gap between GDP and wages, just stop reading.  You will only make yourself dumber by reading to the end.

PS.  I’d like to direct your attention to a new book that just came out, called “The ABCs of Austrian Business Cycle Theory“.  A better title might have been “The ABCs of Business Cycle Theory”, as you can tell from the product description:

The theories of the so-called “Austrian school” are brought into dialogue with those of John Maynard Keynes, Milton Friedman, as well as modern-day thinkers who are synthesizing the best ideas into a more nuanced but still partial understanding of the business cycle.Part 1: Robert Wenzel, AustrianPart 2: Brad DeLong, NeW KeynesianPart 3: Scott Sumner, Market MonetaristKey terms are also explained in simplified “A-B-C” form, to dispel the jargon that often obscures the relatively simple underlying problem of monetary disequilibrium that is implicated in each analysis.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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