Spinning Tales

At the end of 2013, the Economic Policy Institute presented the “13 Most Important Charts of the Year”. One of those is below (on the left), purporting to show the “roots of American inequality”. The chart on the right hand side tells the same tale using slightly different data.

EPI Charts_1

Let me make a change in the deflator of hourly compensation. Instead of using consumption prices I use producer prices. That´s not an arbitrary change. When deciding on pay, the producer takes into account the productivity of the worker relative to the price he (the producer) will receive.

The tale changes significantly.

EPI Charts_2

At the end there is still a gap, but that starts in the mid-00s, not in the mid-70s!

Following the 2001 recession there was a long period that came to be called “jobless recovery”. Real wages stagnated while productivity continued to rise. As the bottom chart shows, profits rebounded strongly. The same happens (more intensely) following the 2008/09 crisis. Real compensation even drops somewhat (a “job-loss recovery”) while productivity rises.

This chart also gives a hint into the reasons for the corporate shenanigans (by the Enrons of this world) which the SEC unraveled in late 2001. Interestingly the SEC went back to 1997, which was identified as the starting point for the false income reporting by the corporations involved.

Notice, looking at the shaded area, that 1997 was the year in which real compensation began to climb strongly after spending some time stagnant while productivity rose. Profits drop. The executives whose pay was tied to stock performance ‘despaired’. Solution: cook the books to keep our pay level! Obviously most corporations had better governance than Enron et al.

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4 thoughts on “Spinning Tales

  1. Excellent apolitical use of charts.

    The recent corporate profit explosion is mysterious if welcome. Funny, QE gets blamed for everything but not corporate profits…

  2. Pingback: Telling stories with charts « Economics Info

  3. On a lark I decided to look at the question in a similar fashion using BEA data. So here’s productivity calculated as RGDP per hour (blue) and compensation as real compensation of employees per hour (red) both scaled to 100 in 1948:

    http://research.stlouisfed.org/fred2/graph/?graph_id=160937&category_id=0

    Note that compensation has exceeded productivity throughout. To get a better idea of the relative trend I included compensation of employees as a percent of GDP (green). Note that it rose from 1948 to 1970 and has fallen since. I could go into much greater detail why I think we see this pattern (yes, monetary policy played a role) but the point is that EPI’s presentation is biased. .

  4. marksadowski,

    Interesting graph. But I have trouble with your claim that “compensation has exceeded productivity throughout” the 1948-2012 period. Your green line suggests it would be correct to say compensation increased faster than productivity until 1970, and more slowly than productivity since that time.

    I see your red and blue lines use index values with 1948=100. I changed your index dates from 1948 to 1970, and now your graph shows that productivity has exceeded compensation throughout (paraphrasing your claim).

    With the revised index date, your graph shows that compensation increased more slowly than productivity since 1970, and seems to support the EPI view.

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