Labor Costs vs Consumer Prices 1950-2010
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The Bloomberg chart above compares year-to-year percentage changes in labor costs and consumer prices – from 1950 to present, for the past six decades (data source: Labor Department).
These indicators had a high correlation — 0.82 during the period — according to Brian Belski, chief investment strategist for Oppenheimer & Co. Labor costs have fallen for the past eight quarters, and are essentially flat over the past decade. Declining wages means consumers have less cash to fuel spending. Companies will have a limited ability to raise prices, and will likely see their margins pressured, Belski has argued.
Hence, even rising bond yields are unlikely to reflect a worsening inflation outlook. Since October 7th 2010, the yield on the Treasury’s 10-year note climbed 1.25 percentage points from its low.
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Source:
‘Several Years’ of Tame U.S. Inflation Lie Ahead: Chart of Day
David Wilson
Bloomberg, February 14, 2011
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February 15th, 2011 at 2:24 pm
‘Labor’ is such a vague term. Is a CEO and President considered labor? Viacom’s president and CEO Philippe Dauman managed to squeeze Viacom for $84 million in total compensation last year. He wasn’t at all embarrassed to have his package tossed around in public. He should be, given what Viacom actually pays the employees in its many subsidiaries.
February 15th, 2011 at 2:58 pm
Dow,
If we were to remove these extremely large packages as outliers, the labor numbers would be even more negative. So, the inference that CPI is in a deflationary phase would not change.
February 15th, 2011 at 3:00 pm
these ‘old metric’ are, generally, descriptive of an ‘Economy’ that no longer exists..
or, are peans to http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Phillips+Curve that has been http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Phillips+Curve+discredited
the idea that ‘We’ can’t have ‘cost-push’ ‘Inflation’, b/c wages are stagnant, is a bad joke..
tell it to these people http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Food+Riots
February 15th, 2011 at 3:10 pm
Helicopter Ben! Massive printing! Weimar, Zimbabwe, Greece! QE2! Hyperinflation is just around the corner!
February 15th, 2011 at 3:28 pm
“Hence, even rising bond yields are unlikely to reflect a worsening inflation outlook”
so- when a company’s costs equals its revenue- it will close shop because it knows it will be difficult to pass price increases onto consumers?
HAHAHAHAAHAHAHAHA!!!! That’s a good one . . .
February 15th, 2011 at 3:41 pm
Labor costs should be a global variable because commodity prices are global. Furthermore, each country’s labor costs should be weighted according to that country’s internal consumption of commodities. How fast are Asian labor costs rising? What percentage of commodities do Asian countries consume internally (i.e. not import strictly as an input for export out of Asia)?
February 15th, 2011 at 3:44 pm
look closely,
wage lags price inflation .
not a new discovery:
http://www.clevelandfed.org/research/POLICYDIS/pd1.PDF
February 15th, 2011 at 3:59 pm
Interesting. While sipping afternoon coffee, I ran over to the St. Louis Fed and downloaded essentially the same series. (Attempted link at the bottom). I find a simple correlation of 0.83, so I think I’m close enough. As can be seen visually, this correlation is heavily driven by the period of the late 1960′s (Vietnam, Arthur Burns, and oil price shocks) and the mid 1980′s (when Volcker broke the wage-price spiral). The simple correlation, 2000 onward, is only 0.60, which reinforces the observation that the rise in yields isn’t due to inflationary pressures. Long-term rates are just the average of expected short-term rates, and it’s clear for the moment that the world isn’t spinning off of its axis.
Attempted link.
February 15th, 2011 at 4:21 pm
@carrottop
You might want to read the paper’s abstract and conclusion. I see that the authors conclude, “There is little systematic evidence that wages… are helpful for predicting inflation. In fact, there is more evidence that inflation help predict wages.”
Moreover, the study is over 10 years old, doesn’t include the bursting of two financial bubbles, two recessions and jobless recoveries, a decade of little or no wage growth, and nearly two years in an liquidity trap. Oh, and it draws its inferences from so-called Granger causality tests, which have little power.
February 15th, 2011 at 4:55 pm
I can’t find this link but a FED paper I read several years ago fits right in here.
The thrust of the paper was that as long as the cost of labor wasn’t going up there is no inflation. It is part of the argument that was made the last time food and energy were going nuts, but the FED kept saying there was no inflation because wages weren’t going up. Since the FED is responsible for controlling inflation, there is a inclination on their part to define it away. And define inflation away they have.
There seems to me to be several things wrong with the FED stance, as long as wages aren’t going up there is no inflation:
1) The FEDS cred suffers big time among the masses. In the end all they have is cred, when it is gone so will the FED be gone.
2)It is a BS argument that has no meaning in the real world. Try to tell the average guy whose wages have been stagnant or downward for years, food and energy are going nuts, there is no inflation. The FED argument doesn’t pass the smell test.
3) American workers are competing against the Chinese, Mexicans etc. Wages aren’t going up nor will they under our current rules. The manufacturing just moves to the cheaper cost, no environmental rules areas where profits are maximized. The American unskilled worker doesn’t know what hit them. They are completely in a no win situation.
4) Henry Ford realized he had to pay his workers a good wage so they could buy his stuff. The FED seems to be saying let them eat cake.
5) In the end American companies will suffer when only the 1%ers can buy they stuff American companies produce. We are headed there.
February 15th, 2011 at 5:11 pm
yes, looking closer, you see that the wage increases are almost always BELOW the CPI increases. Only for a few brief (~1yr) episodes was it significantly above (~1957, 1970, ~1997) but for most of the period 1985-present it is much below.
be curious to see what the cumulative result is over that period. but it seems clear that wages have not nearly kept up with CPI over he past 50 years or so.
damn unions, driving up inflation. oh, wait ….
February 15th, 2011 at 5:33 pm
To say that unit labor costs always track inflation is to argue for an economic law that states that a country’s standard of living cannot decline. Tell that to the Argentinians. In Argentina during the economic crisis of 1999, prices doubled and tripled. Wages held relatively steady. The standard of living collapsed.
February 15th, 2011 at 8:19 pm
It could certainly be possible to have high wage inflation coupled with high unemployment provided two conditions apply: first, that the economy is heavily loaded toward high-tech jobs, and second, that educational requirements for those jobs are strict and difficult to afford.
In that case you end up with a binary type economy of haves and have nots.
A more interesting question is where is the U.S. debt ceiling? Q.E. is nothing more than monetizing a debt instrument that has only one value – that it will at a future time be monetized by the U.S. government. As the Fed is acting as a de facto governmental agency when it creates money to buy treasuries, once those treasuries are purchased and monetized they should be considered worthless. After all, you cannot redeem the same bond twice, can you? With mostly pre-monetized, i.e., in-essence counterfeit treasuries comprising their balance sheet, the Fed is bankrupt except for the ability to create money by buying more stuff. If the backing of U.S. debt is a bankrupt institution that prints counterfeit dollars, at what point will foreign governments start holding dollar bills up to the light before they accept them for payment?
February 15th, 2011 at 11:27 pm
Folks focusing on labor costs are at least 10 years behind the curve.
As a decision maker at a global electronics manufacturer, I can tell you that labor costs are fifth or sixth on the list of concerns when we consider where to locate a factory or even a design center.
Taxes, fees, and tariffs have a much greater impact on the bottom line. After shipping, $15 an hour for an American factory worker is in the ball park of $3 an hour for a Chinese worker, which is just about where we’re at today.
But factor in the cost of the building, equipment, and ongoing taxes, and the difference in overhead is ridiculous.
“Wage arbitrage” is a myth. Tax arbitrage is the reality.
February 16th, 2011 at 12:00 am
I seem to recall that every time labor costs started creeping up Greenspanic would start raising rates. This probably explains why