Productivity Tracking ... New Progress

I have been pretty preoccupied lately with thinking about global macroeconomic balances (here and here). Thinking often mean less linking in a blogging context so I thought I would do quick pointer here. Consequently, a lot of interesting things caught my eyes lately but nothing more so than a recent paper from the New York Fed about how to track productivity 'real time.' The paper was also duly noted by Mark Thoma and New Economist (hat tips). So what is the point here? Well how do we track the trend in productivity growth ... yes I know, this is not straightforward as also initially noted by the authors.

The difficulty in assessing the trend in productivity growth stems primarily from the extreme volatility of quarterly growth rates. In any one quarter, annualized growth rates in excess of 5 percent or below zero are common. Moreover, the volatility is not confined to short-term movements in this series; productivity growth also fluctuates with the business cycle, typically declining during a recession and rising sharply at the onset of a recovery.

Apparently, the unravelling of the trend in productivity requires that we look at real consumption and labour compensation as derivative variables of productivity itself.

'(...) specifically, we construct a statistical model that includes, in addition to productivity, two variables that economic theory predicts will move together with productivity over the long term: real (inflation-adjusted) consumption expenditure and real labor compensation. By looking at all three of these economic series at once, the model can more easily uncover the trend that underlies them all.'

The model used (regime-shifting model) is also described in detail ...

The regime-switching model, introduced in Hamilton’s (1988) study of nominal interest rates, has been applied to a number of economic and financial time series. The model is motivated by the observation that many variables go through periods in which their behavior changes dramatically. 

(...)

The regime-switching model is especially useful for our purposes because it will allow the common trend in productivity, real labor compensation, and real consumption expenditure to shift periodically between high-growth and low-growth states.

And the conclusion ...

Volatile short-term growth rates make the tracking of the trend in productivity difficult. But by looking at productivity in conjunction with labor compensation and consumption expenditure, one can discern the trend that is common to all three series. Our regime-switching model proves effective in tracking trend shifts in the postwar period—particularly the jump to trend productivity growth of nearly 3 percent that occurred sometime around 1997. 

Now, this is really interesting from a sort of field study point of view since it seems that this tool will allow us to pin-point the nature of productivity growth more closely. Furthermore, it should also crucially enable us to cut into the bone and track the shifts in productivity which are cyclical (i.e. unsustainable) and those which are structural; this I guess is the whole point of the study. I have, however, one caveat and it has to do with one of the author's variables - real labour compensation. I mean, have we not talked a lot about how the link between labour compensation (wage growth) and productivity has been somewhat broken, at least in a US context? This is also noted in the commentaries on Mark Thoma's post. I had something on it some time ago here on AS. Especially,  the two following studies have been widely noted ... I guess I am just a bit surprised over chart 2 in the New York Fed study, but I am perhaps missing something?

"Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income" Ian Dew-Becker and Robert Gordon; December 2005 

"The Evolution of top incomes: A historical and International perspective" Thomas Piketty and Emmanuel Saez; december 2005