Précis, Monthly Labor Review Online, Mar. 1998

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March 1998, Vol. 121, No. 3

Précis

Capital and labor
Democracy pays
Wealth and savings
Industrial diversity
Different surveys, different measures

Précis from past issues

Capital and labor

The quantity, types, and organization of capital and labor services determine a Nation’s output, according to the Federal Reserve Bank of Cleveland’s Economic Trends. The amount invested in these accounts is affected, in turn, by the economic environment. "For instance," the report says, "growth of the capital stock decelerated significantly during the 1970s, a period of rampant inflation that magnified tax rates on capital income and dented private investment incentives."
The last 6 years, however, have witnessed a more favorable economic environment and a general boom in investment. The ensuing rise in the value of the capital stock probably also reflects the better technology in newer equipment and gains from the better deployment of existing capital.

In labor services, total hours worked have nearly doubled over the past 40 years, with only brief setbacks during recessions. Moreover, an hour of labor in 1995 cannot be directly compared with an hour of work in the mid-1950s. More education, training, and skills have made labor services more efficient. Adjusting for these, according to Economic Trends, "yields a steeper time profile of hours worked than does the series on observed total hours." Even allowing for such an adjustment, the ratio of capital to labor has, with the exception of the 1970s, increased consistently.

Democracy pays
In Democracies Pay Higher Wages, a National Bureau of Economic Research Working Paper, Dani Rodrik finds "there is a robust and statistically significant association between the extent of democratic rights and wages received by workers." Rodrick based this conclusion on models that controlled for labor productivity, per capita income levels, consumer prices, and other variables. The association of wages with democracy—a statistic based on indicators of civil liberties and political rights—remained positive in all these models.

Wealth and savings
The national savings rate is critical to the capital accumulation that drives economic growth, labor productivity, and living standards. According to Peter Yoo, writing in the Federal Reserve Bank of St. Louis’ National Economic Trends, economists thus worry because personal savings as a percent of disposable income have dropped steadily since the early 1980s. In 1997, the savings rate by this measure stood at less than 4 percent.

Yoo goes on to investigate the effect of adding changes in the value of households’ existing assets—in particular the rise in stock prices—to our understanding of national savings. Increases in the value of existing wealth might imply that "markets believe existing assets will be more productive in the future, so the increased wealth may substitute for capital accumulation."

This broader concept of savings, however, has little impact on the way recent trends in savings would be viewed. The broader measure of savings, total change in wealth as a percent of disposable income, is both higher and more volatile than the personal savings rate. This is not surprising, given the fluctuations of stock and other asset prices. What Yoo finds more important is that the alternative measure also turns out to show a declining savings rate, despite rising stock prices.

Industrial diversity

The fedgazette newspaper published by the Federal Reserve Bank of Minneapolis, reprinted a State Industrial Diversity Index developed by Regional Financial Associates for 1995–96. On a scale where 1.00 indicates that a State has an industrial structure identical to that of the Nation, the average State scored 0.61. The States with industrial structures most like the Nation’s were Pennsylvania, Illinois, and Missouri with index scores of 0.83. The District of Columbia and Nevada least resembled the Nation, with index scores of 0.16 and 0.17, respectively.

Different surveys, different measures
One of the frustrations of economics is the significant differences in outcome that is often the result of seemingly minor change in method. Quite often, painstaking work is needed to find the sources of these differences. A good example of this appeared in the Social Security Bulletin under the title "Why SIPP [Survey of Income and Program Participation] and CPS [Current Population Survey] Produce Different Poverty Measure Among the Elderly." According to the Bulletin, "In terms of poverty rates, the SIPP consistently produces lower estimates for all subgroups and all 4 years considered (1987, 1988, 1990, and 1991). . . .SIPP not only finds fewer poor people, it also finds that those counted as poor are on average somewhat better off than their (more numerous) CPS counterparts."
The two surveys found broadly similar patterns of income for the elderly: Social Security benefits are about 40 percent of income; property income, 25 percent; other pensions, 20 percent; and wages, 10 percent. But SIPP counted more recipients for all sources of income, albeit often in lower amounts. The most important exception is Social Security benefits and they are the most important reason SIPP recorded poverty rates for older Americans that were lower by 2-l/2 to 4 percentage points than those in the CPS. "To summarize," concluded the Bulletin, "differences in the reporting of Social Security benefits seem to be able to account for at least half of the poverty rate differential among the elderly in SIPP and CPS."

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