The Economic Policy Institute's Misleading Use Of Statistics

After my post on income inequality, monetary policy and leftists, a Italian fan of my blog that calls himself Libertyfirst asked me about a chart in a text from the leftist ( union funded ) Economic Policy Institute that I had linked to. I hadn't thought much about the chart and linked to the text simply to provide a source for my claim that the left is pro-inflationist.


But when I looked at it after LibertyFirst:s question, I was really amazed by it. It showed that productivity supposedly increased 75% while real compensation to non-managers allegedly was nearly flat since 1980. While corporate profits have indeed increased, I knew for sure it hadn't increased anywhere near as dramatically as it would have done had real compensation really been flat in the face of a 75% increase in productivity. And there simply aren't enough CEO:s around to account for more than a fraction of this discrepancy.

My answer at the time was that it was misleading because 1) The numbers for productivity included all private sector workers, while the number for real compensation included a more limited group of workers that excluded not just CEO:s 2) The compensation number probably (I wasn't sure exactly what number they used so this was just a hypothesis) excluded non-wage benefits which has increased faster than wages 3) The productivity number was deflated by product price indexes while the compensation number was probably deflated by consumer price indexes which increases a lot more (and if a price index increases more, any real number derived from nominal numbers deflated by it will be lower).

I see now that another leftist group, Center for Economic and Policy Research, has quantified the exact extent to which the third factor is responsible for the distortion in the EPI chart (not that the paper was in anyway intended to refute EPI, it simply did so unintentionally):

"When a consumption deflator is applied to economy-wide net output [instead of smaller output deflator due to higher depreciation rates of investment goods such as computers], cumulative productivity growth since 1973 has totaled just 47.8 percent, instead of the 81.6 percent figure reported for gross output in the non-farm business sector."

This means that more than a third of the divergence between productivity and real compensation in the EPI chart is explained by using different price indexes when calculating productivity and real compensation. The rest reflects mostly the two other distorting factors, with a small portion reflecting the real relative increase in corporate profits compared to compensation of labor.