Monday, April 01, 2013

The Relationship Between Wages and GDP

This graph shows the ratio of Wages & Salaries from the Federal Reserve data (link) to GDP (link) since 1947.

To me, this graph shows the power of labor in the economy.  For example, you can see the rise in the late 60s when low unemployment was held in place despite rising inflation, leading to a natural power shift towards labor.  There has been a steady drop since then, with an interesting exception in the dot-com bubble times, when labor (presumably programmers!) were in short supply and companies were paying increasing sums for warm bodies.

Since then, the overall trend of lower labor costs has continued downward.  Since this is a US data series, it may hide labor costs outside the US (outsourcing for example).  At the same time, I believe GDP ignores the growth in foreign sales for US companies, so I would assume the two cancel out at least somewhat.

If I'm right, this trend explains some of why corporate profits are so strong right now compared to any time in the past.  Separately, I've scatter-graphed this ratio against profit margins and there isn't a trend - perhaps this implies that the extreme dip in the past decade is behind it and this will unwind as and when unemployment improves?

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