Junior economists Diane Foreman and Les Harlan are discussing the concepts of aggregate hours and real wage rates and how they relate to real GDP. They state the following:
Foreman: Aggregate hours are a more accurate measure of total labor input than the number of people employed. Aggregate hours tend to be positively correlated with real GDP growth.
Harlan: Real wage rates have not increased as much over time as the productivity of labor, but that is largely because a greater share of labor compensation now comes in the form of employer-paid benefits.
Are Foreman and Harlan CORRECT?
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Foreman is correct. Unlike the various measures of the number of people employed, aggregate hours measure the effects of part-time work and overtime. Aggregate hours tend to increase during expansions and decrease in recessions. Harlan is incorrect. Employer-paid benefits are a component of “total labor compensation,” which is the indicator used to measure real wage rates. When calculated this way, real wage rates have tended to fluctuate with the productivity of labor.
Which of the following employment measures is most closely related to the level of real GDP?
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Aggregate hours measure the total amount of labor performed in the economy. This measure captures changes in the number of people working and the effects of part-time work and overtime. Aggregate hours are related more closely to the level of real GDP than any of the other employment measures listed.
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