Today's graphic is motivated by recent posts by Paul Krugman on implications of capital-biased technological change. In both posts Krugman uses the share of employee compensation (COE) to nominal GDP as his measure of labor's share of income. Although the data for both series go back to 1947, Krugman chooses to drop the data prior to 1973 arguing that 1973 marked the end of the post-WWII economic boom. Put another way, Krugman is saying that there is a structural break in the data generating process for labor's share which makes data prior to 1973 useless (or perhaps actively misleading) if one is interested in thinking about future trends in labor share.

If you are wondering what a plot of the entire time series looks like here is the ratio of COE / GDP from 1947 forward.

It looks like the employee compensation ratio is roughly the same today as it was in 1950 (although obviously heading in different directions!).

In his first post Krugman argues that this measure "fluctuates over the business cycle." Note that the vertical scale ranges only from 0.52 to 0.60. Such a small range will exacerbate fluctuations in the series. Plotting the same data on its natural scale (i.e., 0 to 1), yields the following.

Based on this plot, the measure appears to have been remarkably constant over the past 60 odd years.

Which of these plots gives the more "correct" view of the data? Or does it depend on the point you are trying to make?

As always, code is available.

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## Monday, December 31, 2012

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