Red Herrings Can Be Interesting
by Alan Reynolds
February 22nd, 2007
In the context of a discussion about the distribution of income and consumption, Mark Thoma brought up a new issue of questionable relevance – namely, the reported share of national income going to employee compensation under a hypothetical change in accounting conventions. I criticized his reference to a newspaper article because all other participants in this discussion have provided primary rather than secondary sources. I was not “implicitly dismissing” the work of academic economists, but suggesting they must have been misquoted. Academic economists would never have said that employee compensation was 65% of national income in the sixties, for example, since it was only 62.5% from 1960 to 1969.
The paper by Carol A. Corrado Charles R. Hulten and Daniel E. Sichel is about “Intangible Capital and Economic Growth.” It is a working paper, not something published in a peer-reviewed “top academic journal,” as Thoma says. But that doesn’t matter. If we could prudently dismiss all information that is not peer-reviewed, then we could dismiss all CBO, Census, BLS, Federal Reserve and SOI publications, not to mention Mr. Thoma’s blog.
The Corrado-Hulten-Sichel paper does not refer to employee compensation as a share of national income. It refers (in a graph on the last page) to total labor income of nonemployees and employees as a share of nonfarm business output (from BLS multifactor productivity). The study claims “our estimates, rough as they may be, imply that” growth of business output has been greatly understated by not counting intangible capital as an investment. Labor income, however, remains unchanged. Labor’s share of business output is mechanically reduced from 70% to 60% from 2000-2003 only because business output is estimated to be 17.3% larger than currently reported. The authors add $1.2 trillion of intangible capital to their definition of annual business output and assign that sum to income from intangible capital. They argue that most of the recent growth in “labor productivity” is due to capital investment rather than labor skills or schooling, which is not exactly a populist theme. The paper also seems to undermine or contradict the key theme of Piketty and Saez, and Dew-Becker and Gordon, which is to suggest that big gains in top incomes in recent decades have come from labor income (they stress CEO pay) rather than capital.
The Corrado-Hulten-Sichel exercise in growth accounting may be of considerable academic interest, but its implication for the distribution of income, consumption or wealth remains ambiguous at best. The authors want to move intangible investment from one accounting category to another, and to increase reported business output in the process, but doing so does not subtract one dollar from labor income.
