Slow Wage-Growth Just One More Sign of How Big a Problem the Profit-Biased Recovery Is
On Wednesday, Larry Mishel and Heidi Shierholz released a paper tracking wage-growth over the past decade. It’s familiar but still sad news—the vast majority of American workers have seen essentially stagnant or worse wage-growth over that time.
One angle on poor wage-growth over the past couple of years deserves some attention: the vastly disproportionate share of income-growth that has flowed to corporate profits (and other forms of capital income) rather to wages and (and other forms of labor income).
The figure below shows the share of total corporate sector income claimed by capital income – data that allows for the clearest measure of how much this capital income growth (profits, essentially) has crowded-out labor income growth (wages, essentially). This is the cleanest cut at this issue because in the corporate sector, all income is classified as either labor or capital income. (In the rest of the economy, categories like proprietors’ incomes that are a mix of capital and labor incomes muddy the waters a bit.)
The figure shows that since the official beginning of the recovery from the Great Recession (after June 2009), the corporate sector capital-share (short-handed here as “profit-share,” though it also includes items like net interest) has risen enormously, and for calendar year 2012 it was the highest since 1966.
It’s been noted (by us, particularly) that for most of the U.S. economy, the official recovery hasn’t actually felt like much of a recovery (see, for example, the incredibly slow progress in boosting the employment-to-population ratio since the recovery began). And, this feeling can be confirmed by looking at the performance of GDP over the full business cycle and comparing to previous ones, as in the figure here.
But profits in this recovery are looking pretty healthy—firmly in line or even exceeding the average growth following recessions.
How much does this profit-biased recovery matter for wages? In the first quarter of 2013 (last quarter for which data is available), suppose that the corporate sector capital income share was at its pre-Great Recession long-term (1979-2007) average of 19.7 percent instead of the 24.7 percent that actually prevailed. This would represent roughly $350 billion that would have accrued to labor income rather than capital income during the recovery, or, a $6,900 raise for every employee in the corporate sector. And to be clear, the corporate sector of the economy is big—accounting for a majority of all economic activity and more than 45 percent of employment in the economy (so, spread this money over the entire private-sector workforce and the raise would still be more than $3,000.
There are lots of problems caused by how profit-biased the recovery has been. For one, income accruing to capital-owners is less likely to recycle quickly back through the economy and generate demand (as evidence, see the huge amount of idle cash balances on corporate balance sheets in recent years). If a larger share of income growth had translated into wage-growth, this would have sparked more self-generating demand and improved the recovery. From a political economy perspective, the rapid recovery of corporate profits has also likely led to less urgency from a potential ally in asking for more macroeconomic stimulus (corporate business, which, remember, strongly supported the Recovery Act).
And, most directly, these higher profits just mean that all else equal, there’s less to go to paychecks. And as yesterday’s paper shows, that’s a sadly familiar outcome.
A last, possibly peevish sidenote—while we’re often accused (correctly!) of being pretty gloomy on the economic picture for most American families, we’re also often accused (incorrectly!) of feeding a sense of fatalism by not providing potential solutions or highlighting what could be changed. We’ve got some solutions here, and, we should note that there is a glimmer of good news in Larry and Heidi’s analysis: we are a rich country that gets richer just about every year. Look at the productivity trends (check out Table 1) in their piece—in 2012 productivity was nearly 8 percent higher than it was at the start of the Great Recession! The problem is insuring that these potential income gains actually are broadly shared—and this is mostly a political problem. Political problems are bad (trust us, we know), but they’re better than genuine economic problems. To put it another way, it’s better to be arguing over how to fairly split up a big pile of money than to have no big pile of money to split up.