Both the NYT and Post had articles this morning that warned about the 4.9 percent annual rate of growth in unit labor costs in the second quarter reported yesterday, and indicated that this could cause the Fed to raise interest rates further to combat inflation. Whatever the Fed does on interest rates, let�s hope that the quarterly data on unit labor costs is not the reason. Unit labor cost data are highly erratic and are also subject to large revisions. This is due to the fact that both the numerator (compensation in the national income accounts) and the denominator (productivity) are highly erratic. Compensation can jump because of the timing of health care payments to insurers or the decision of workers to take stock options. (Compensation for the first quarter was revised up in yesterday�s release to show a 13.7 percent annual rate of growth, after originally showing a 6.9 percent rate of growth.) Productivity for the second quarter was reported as growing at 1.6 percent annual rate after growing at a 4.3 percent rate in the first quarter. It�s far more plausible that the rate of productivity growth was overstated in the first quarter and is now understated for the second quarter, than the actual rate of growth in the economy just crashed. The Fed would be right to pay attention to trends in hourly compensation, but they better be aware of the limitations in the data or we are going to be in serious trouble.
--Dean Baker
