David Altig looks into whether recent upward revisions in unit labor costs represent another good wage signal or, as he prefers, another bad inflation signal. Okay -- ignore that one, but David does say sensible things, for the most part anyway:
Another Bad Inflation Signal?, by David Altig, Macroblog: ...But not everyone was so convinced that the rise in measured labor compensation -- specifically hourly compensation in the nonfarm business sector -- was all that meaningful. Mark Thoma highlights comments by Paul Krugman, who attempts to repudiate any claims that labor compensation is rising by perpetuating a wrong-headed focus on narrow wage and salary data.
The best explanation I’ve heard comes from Dean Baker who suggests, based on the NIPA statistical discrepancy, that some capital gains (obtained, for example, via exercise of employee stock options) might be misclassified as compensation. (Conceptually, in the case of stock options, the compensation took place when the options were granted, not when they were exercised. Anything that happened to the value in the intervening time was a capital change rather than income, but the value of the options doesn’t show up on the income side of the national accounts until they are exercised.)
I'm not sure about the misclassified part. In terms of the national income side of things, any capital gains on the options may be a wash: We essentially have a transfer from firms (that would otherwise be able to sell their stock at market prices) to workers (who get the assets at a discount). In terms of labor costs, those transfers certainly count.
But the general point is well taken -- a jump in capital gains might well have a relatively transitory impact on labor costs, and not be indicative of a trend. Compare (as Dr. Baker suggests in his original post) the behavior of growth in the Employment Cost Index (ECI) with that in the hourly compensation series:
There are some differences in coverage between the ECI and nonfarm business sector compensation measures -- in the treatment of government and not-for-profit workers, for example -- but they are both broad measures that cover benefit payments as well as explicit wages and salaries. But the hourly compensation statistic - and hence unit labor cost calculations -- includes stock options. The ECI does not.
There was certainly nothing in the narrow measure of wages in the monthly employment report to suggest a 13.3 percent annualized jump in wages and salaries in the first quarter from the fourth quarter of 2005. When Commerce's Bureau of Economic Analysis reported the revised figures last week, the lumping of the income gains in the first quarter suggested to many economists that the source was bonuses and options.
The most noteworthy part of the report was the significant upward revision of hourly compensation to a 13.7% gain in the first quarter from the previous estimates of a 6.9% increase. This is a reflection of compensation increases coming from stock options and bonuses which are reflected in the income side estimates of GDP. This is a one-off event and not a reflection of a big change in the underlying trend of labor costs.
That, and the stable-to-declining pattern of compensation in the ECI, should give us pause about concluding we are at the beginning of any lasting acceleration in the return to labor.