Output, Compensation, and the Conservative Backlash

The link in the title is to a post by the economist Max Sawicky from June 5th, the occassion for which was a speech by Eddie Lazear, head of the President's Council of Economic Advisers, at the American Enterprise Institute. In refuting some data Lazear presented on worker productivity and compensation, Sawicky and his commentator, Sandwichman, generated some other data that relates to an on-going discussion we've been having at Lumpenlogocracy about the economic structures underlying the Conservative backlash.

First, though, let me explain more fully the context of Sawicky's post. Lazear argued that increases in total compensation closely track increases in worker output. Lazear's point was that to increase wages it was important to have robust economic growth, such as can best be provided by the tax-cutting, investment encouraging policies of the GOP. But, Sawicky noticed, that in order to get the nicely tracking lines of output and compensation, Lazear had to use an odd deflator. In Sawicky's words:

If you check the bottom, you see the deflator used is the "price index for nonfarm output," the result of which is the "real product wage." I had never heard of that before, but I'm no labor/price index savant. The trick here is that the deflator is for all output, including intermediate goods. The worker, by contrast, is more interested in the prices for the stuff he buys, not for machine tools and electric generators. If you use the Consumer Price Index you get a different picture, like this one.

I've duplicated Eddie's chart (the red and blue lines), and added real hourly compensation deflated by the CPI. Not quite the same, is it?

Indeed, no. But the really interesting chart came a bit later, in response to comments by Sandwichman, who thought Lazear's deflator might deserve more credit than Sawicky was giving it. Sandwichman constructed another data series, this one using 1947 as a reference point rather than 1992, as Lazear and Sawicky had done earlier. The reference point matters a lot, because the charts track relative changes in output and compensation. At the reference year, the lines for output and compensation are arbitrarily set to equal values (100). Here is the chart for the 1947 reference year:

Sandwichman comments:

Using 1947 as the base year, I find it rather remarkable that output, Eddie's compensation and real compensation tracked each other very closely until sometime in the early 1970s when they started to diverge. In the 4th quarter of 1970 the index numbers were Output = 184.8, Eddie's Compensation = 183.7, and Real Compensation = 183.0. Just for reference: Nixon closed the gold window and imposed wage/price controls on August 15, 1971.

The early 1970s were also the years when the Conservative backlash was making important inroads into the white working class. The data series on output and compensation matters in discussing the backlash because it shows that from that time forward, American workers kept on improving their output, but were not seeing matching increases in their compensation. This would lead, one imagines, to a fair amount of resentment. Backlash politicians and pundits were able to harness some of that resentment, but direct it away from economic issues and toward cultural issues instead.

I don't think this is news to readers of Lumpenlogocracy, of course, but I did think that the chart was a nice demonstration of the point. Add it to your own pile of substantiating data if you wish.