Sunday, December 03, 2006

Wages and prosperity, the saga continues...

I have posted before about the problem of stagnant wage growth for most Americans, and have even opined that it is partly caused by the intense focus on wage pressure by the inflation-watching Fed. In short, we may be solving one problem [inflation] by deepening another [wage stagnation].

It could be it has to be this way - I don't know. But one reason econo-yahoos like Lou Dobbs are getting ratings is because this trade-off sure hits home with a lot of people who feel like they aren't sharing in the prosperity that has been hailed in the form of corporate profits.

New numbers are not reversing this trend.
Paul Kaihla at Buisiness 2.0 Blog, reaches a similar conclusion:
In a normal economy, GDP goes up -- and the share claimed by workers follows along. In 2000, the last year of the Clinton boom, workers' incomes totalled 49 percent of GDP.

But that hasn't happened in the cycle since then.

As of today, worker compensation is only 45.4 % of GDP, and that calculation isn't off the back of my lunch napkin but by Nigel Gault, Global Insight's widely-followed managing director of North American macroeconomics.

Doesn't sound like much of a drop? Each percentage point equals $133 billion out of the collective pockets of workers. Also consider that wages and salaries as a share of GDP are now equal to their lowest level since 1929, the incept date for the data we're using.

Meanwhile, corporate profits as a share of GDP rose to 12.4 percent today.

How high is that? It's the highest since 1950. In 2000, at the height of the bubble economy, profits were only 11 percent.

This reversal of fortunes between business income and the income of the workers businesses employ is one of the most disturbing distoritions of the Bush II economy.

I have not been a supporter of the Economic Policy Institute -- and they don't use this yardstick for wages -- but how can you avoid concluding that, in aggrregate, these numbers justify the EPI's attacks on the national jobs recovery as a "wageless" one?

More surprising to me is staunch defenders of inflation fighting are less opposed to a minimum wage hike than previously. While it may cost some jobs, many former opponents are looking for some answer to spreading the apparent wealth growth in America around. I may not be the only apprehensive observer.

My point is less that the rich don't deserve their investment returns than a nervousness when economic inequities are going the wrong direction and academics simply justify the status quo. The equations may be right, but if a majority of ordinary people in the US feel like they are being treated unfairly, strange things begin to happen in politics. And I think Lou Dobbs qualifies as a strange thing. Also the grim outlook for trade liberalization, budget discipline, and immigration.

Theoretically, at least, the ol' invisible hand should rebalance labor and capital. If things have not undergone a fundamental change -
However, there is another factor that might have raised the return on capital relative to labour in a lasting way, namely the integration of China and India into the world economy, along with their vast supply of cheap labour. To the extent that this increases the global ratio of labour to capital, it will lift the relative return to capital. Outsourcing may not have destroyed many jobs in developed economies, but the threat that firms could produce offshore helps to keep a lid on wages. As a result, the share of profits in national income could stay relatively high for a period. Labour's share would remain low, though workers may still be better off if the cake itself is growing faster. But this is not a reason to expect profits to continue to grow faster than GDP; indeed, in a competitive market profit margins will eventually narrow. Even if outsourcing reduces costs, competition will eventually force firms to reduce prices, distributing the benefits back to consumers and workers. [More]

Regardless, I wonder if modern populations have the patience to wait for the adjustment to be made.


Anonymous said...

Corporate profits create jobs. It's better to have 10 jobs @ X1 level pay than 5 jobs @ X2 level pay. More people making a living. A little frugality will make the X1 level pay work rather then want, want, want requiring X2. Meeting needs vs wants. I would rather me and my coworker have jobs each @ $40,000/yr then just my coworker having a job @ $60,000 and me having none!!!

John Phipps said...

Posing a false choice between two jobs at 40K and one at 60K means little unless it is the real choice. What if the choice is two jobs at 30K?

These are exercises in hypothesis. My point is try selling that theory to somebody whose wages have seen no real growth despite increased production is not playing well right now.

The threats of outsourcing and cutbacks have propelled some astonishing leaps in worker productivity, and with little or no compensation.

This is short-sighted management IMHO.

1029barn said...


There is a way to re-balance the returns from the increased productivity of the working class. By raising taxes on incomes over $100,000 per year and on corporate profits, we could pay for our many wars and social programs. In addition to leveling the playing field within the country, basic research could be funded by these taxes to improve productivity and produce new products for sale through the global economy.