Gene Epstein‘s latest “Economic Beat” column for Barron’s scrutinizes President Obama’s rhetoric about the share of economic growth that heads to laborers.
In a meeting early this month with the Business Roundtable, President Barack Obama observed that “although corporate profits are at the highest levels in 60 years [and] the stock market is up 150%, wages and incomes still haven’t gone up significantly, and certainly have not picked up the way they did in earlier generations. That’s what’s causing disquiet in the general public even though the aggregate numbers look good.”
The president went on to emphasize that “even as productivity and profits go up, wages and incomes as a share of overall gross domestic product have shrunk. And that’s part of what is creating an undertow of pessimism despite generally good economic news.” Variations on this theme have been repeated by the media. The share of the economy claimed by profits is hitting new highs, while labor’s share is hitting new lows. The market rules that used to apply in the years after World War II have somehow been repealed.
Very little of this conventional wisdom holds up under scrutiny.
There may be nothing to celebrate about the share of income currently going to labor, but the trend doesn’t show that a kind of sea change has affected that share. Ditto the share going to profits. Once you sort out the shifts in the industry mix—the long-term increase in the highly profitable financial-services sector, and the rising profits earned abroad by overseas subsidiaries of U.S. companies—then little remains to justify the “disquiet” and “pessimism” to which the president referred.
Start with the returns to labor. The chart … tracks the quarterly ups and downs since 1947 of private-sector labor compensation as a percentage of private-sector income. As the chart indicates, the share ran 62% in the third quarter of this year and has been fluctuating around that percentage since 2011, with no signs of having shrunk over this period. In fact, although it’s well below the peak of 70% reached in second-quarter 1980, it’s now running slightly above the levels of the late 1940s and early 1950s.
As the chart also indicates, recessions and their aftermaths have generally hurt the labor-compensation share. This should not be surprising, because high levels of unemployment generally persist after recessions end, causing slack labor markets. It should also not be a surprise that the labor share was especially hurt by the Great Recession of 2007-09, the most severe downturn since the Great Depression of the 1930s.
