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Capital’s gain is lately labour’s loss

The global decline in the labour share of income

The GDP of a country reflects, among other things, the total payments to all factors of production. For a long time, the share of payments to labour* relative to total payments to all factors of production was relatively stable. In recent decades, the share of payments to labour has been trending down in many countries, which FRED can help us illustrate.

The first graph shows that the share of labour compensation in GDP has been declining for several countries around the world. In the U.S., this share has declined by 5% between 1975 and 2017. The decline in other countries is even greater, with the largest occurring in Canada, at almost 11%.

Researchers Karabarbounis and Neiman recently argued that there’s an association between the declining labour share and the declining price of capital goods, such as equipment. They show that, if the elasticity of substitution between capital and labour is larger than one (that is, if it’s easy to switch from labour to capital), then a decline in the price of capital will increase the use of capital in production—thus, increasing capital’s income share. This move away from labour has led to the decline of its global share of income. The authors estimate that the declining price of investment goods can explain nearly half of the decline in global labour share.

And, right on cue, the graph below shows this decline in the price of investment goods relative to the price of consumption in the U.S. Between 1947 and 2016, the relative price of investment goods fell by almost 78%. This decline in relative prices could be the result of several factors, such as a reduction of trade barriers that facilitated the exchange of capital goods across borders and technological improvements that led to greater efficiency in the production of those capital goods.

How these graphs were created: For the first graph, search for and select the series “Share of Labour Compensation in GDP at Current National Prices for United States” and click “Add to Graph.” Then, in the “Edit Graph” menu, under the “Add Line” tab, search for and select the series “Share of Labour Compensation in GDP at Current National Prices for Germany” (and then do the same for Canada, Japan, and France) and click “Add data series.” For the second graph, just search for and select “Relative Price of Investment Goods” and click “Add to Graph.”

* In deference to the University of Groningen, one of the sources of the data, we use their preferred, British spelling of labour.

Suggested by Asha Bharadwaj and Maximiliano Dvorkin.

View on FRED, series used in this post: LABSHPCAA156NRUG, LABSHPDEA156NRUG, LABSHPFRA156NRUG, LABSHPJPA156NRUG, LABSHPUSA156NRUG, PIRIC

Live by the barrel, die by the barrel

Connections between oil production, oil dependency, and economic growth

In every introductory macroeconomics course, oil is used as the classic example of a negative price shock. Professors tend to discuss the 1973 oil price shock triggered by the Arab-Israeli conflict and the 1979 oil price shock caused by the Iranian Revolution as reasons for rising inflation and falling global output—connecting these shocks to models about investment and aggregate supply and demand. More recent literature, including this presentation by St. Louis Fed President James Bullard, indicates that oil prices can sometimes be interpreted as a proxy for demand. But what’s the impact of oil supply for the consumers in oil-producing countries? We can use FRED to plot crude oil production versus GDP growth in oil-producing countries to get at least a first idea of just how oil-dependent a country might be.

For the United States, the relative importance of oil to industrial production (which is now less than 20% of the economy) is typically between 7% and 15%. Thus, in the graph above, the correlation between oil production and GDP growth per capita is practically negligible. In fact, the correlation is slightly negative. It’s unlikely that changes in oil production have much of an effect on aggregate economic activity.

But the relationship between oil production and GDP growth per capita is much stronger for countries that have more oil-dependent economies. For example, the correlation coefficient for this measure is 0.51 for the United Arab Emirates, 0.76 for Iran, and 0.93 for Iraq. (The closer this coefficient is to 1.0, the stronger the positive correlation.) The scatter plot below indicates the strength of this positive relationship. For these countries, aggregate well-being could be largely influenced by how much oil the country produces—which is why economic diversification is key to building a national economy less susceptible to oil or other shocks.

How these graphs were created: For the first graph, search for and select “constant GDP per capital United States” and click “Add to Graph.” From the “Edit Graph” panel, use the “Add a Line” feature to search for and select “industrial production crude oil”; change the units to “percent change from year ago” in the “Units” dropdown menu and click “Copy to All.” In the “Format” tab, change the line type to “Scatter Plot.” For the second graph, search for and select “constant GDP per capita United Arab Emirates” and click “Add to Graph.” From the “Edit Graph” panel, use the “Add a Line” feature to search for and select “crude oil production United Arab Emirates.” Repeat this process for each individual country. Change the units to “percent change from year ago” in the “Units” dropdown menu and click “Copy to All.” Change the line graph to a scatter plot by using the “Format” tab and changing “Graph type” entry to “Scatter” and pick different colors as needed.

Suggested by Darren Chang and Christian Zimmermann.

View on FRED, series used in this post: IPG211111CN, NYGDPPCAPKDUSA

Switzerland’s mountainous monetary base

More Swiss uniqueness on their national holiday

Today is the Swiss national holiday. In the past, we’ve taken this opportunity to discuss some unique (i.e., weird) feature of the Swiss economy. This time we use FRED to compare the Swiss monetary base with the U.S. monetary base. To make them comparable, we divide each by its country’s nominal GDP. We see that the general patterns are similar, with a sudden increase in 2008. While the U.S. monetary base has started to go back down (it’s lost a quarter since its high point), there’s nothing that shows any tendency to return to the long-run trend. Indeed, Switzerland is still working with extremely low (even negative) interest rates.

But let’s talk about the stark difference shown in the graph. This statistic for Switzerland is dramatically higher than it is for the U.S.: The Swiss monetary base is now worth over three years of its GDP, while the U.S. monetary base is worth only about two months of its GDP. There has always been a large difference, but it’s larger than ever now. This situation is likely fueled by the oversized banking sector in Switzerland as well as the refuge currency role of the Swiss franc. The latter is particularly true in times of uncertainty, including the uncertainty of its neighbors’ currency, the euro.

How this graph was created: Search for and select “Swiss monetary base” and click “Add to Graph.” From the “Edit Graph” panel, add a series by searching for “Switzerland GDP,” taking the quarterly series with nominal data, and applying formula a/b. Then, from the “Add Line” tab, search for and select “monetary base,” add a series by searching for “GDP” again taking the nominal series and applying formula a/b/1000. Finally, adjust the sample period to start in 1980.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: BOGMBASE, CPMNACSAB1GQCH, GDP, SNBMONTBASE


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