Labor’s Lost Leverage

by Andrew McAfee on January 9, 2013

Here’s a graph I assembled over at the invaluable FRED showing how corporate profits (as a percentage of GDP) and labor’s share of income (essentially the percentage of GDP paid out in wages) have been doing over the post-war era in America. At this point, it’ll surprise few people to learn that labor share is the red line, which has never been lower.

 

US Corporate profits and labor share, 1947-2012

 

Labor share keeps dropping even though it includes two categories that have been on the rise in recent years: the realized compensation (e.g. salaries, exercised stock options, taxable fringe benefits like use of a jet) of CEOs, hedge fund managers, and other extremely highly paid employees, and benefits like health care coverage paid to retirees. If these were excluded, the red line above would be falling even more quickly.

Corporate profits, meanwhile, have never been higher (whether in absolute terms or expressed as a percentage of GDP, as is the case above). The graph makes clear that the two lines typically move in the opposite direction: when more of companies’ money gets paid out to workers, there’s less left over for profits.

When technologies come along that reduce the need for human workers the opposite occurs, especially if these techs keep getting cheaper over time and so don’t eat so heavily into corporate profits. As I’ve been saying for a while now, alone and in conjunction with Erik Brynjolfsson, we’ve seen a whole lot of such technologies in recent years, and we ain’t seen nothing yet. So I expect these two lines to keep diverging.

I am the farthest thing from a Marxist that you’ll ever meet, but I’m also not willing to pretend any more that things will be just fine for American workers once demand comes back and companies get healthy again. Judging by their profits, American companies have never been in better shape. The same cannot be said for workers.

Any great ideas on what to do about this?

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