Revised Smoothed Unit Labor Costs

Perhaps the most striking piece of data adduced by Allan Meltzer in arguing against an easing of monetary policy was “unit labor costs rising at a 5% rate.” It appears that he is comparing second quarter 2007 unit labor costs to second quarter 2006 unit labor costs to get that 5% growth rate. As I argued last year (ironically, arguing against Marty Feldstein, who went on to become Allan Meltzer’s major adversary in the recent debate),

...the right way to analyze these data is neither by comparing years to years nor by comparing fourth quarters to fourth quarters, but by smoothing the quarterly data over time to extract an estimate of the general trend.

I have updated the chart I made last year of the smoothed rate of unit labor cost growth, and the picture has not changed dramatically, though things do look a little bit more inflationary than they did a year ago. Certainly, my smoothed series does not suggest that that the 5% growth rate cited by Allan Meltzer is a very good indication of the general trend. The most recent smoothed growth rate is 2.5%, which, while it is higher than what today’s Fed would probably consider ideal, does not suggest that we are moving into a new regime of rapid labor cost growth.



It might also be worth thinking about what we should expect unit labor costs to do in the immediate future (or in the immediate past that hasn’t yet been reported in the data). Are there reasons to expect productivity growth to accelerate or decelerate? Are there reasons to expect compensation growth to accelerate or decelerate? To the extent that there are reasons for either, they go generally in the direction of accelerating productivity growth and decelerating compensation growth, so they point to a less inflationary trend in labor costs. Simply, the labor market is weak. With employment at a near standstill for the past 3 months, employers have little reason to raise compensation, and any significant output growth will have had to come in the form of rising productivity (since there is no indication that hours worked per employee is rising). Various indicators do suggest that output is still rising at a reasonable rate. (Also, I imagine compensation may take a substantial seasonally-adjusted hit when bonus time comes around for Wall Street and the mortgage and construction industries.) All in all, I don’t see much reason to be worried about rising labor costs.