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?

  • http://twitter.com/cebess Charlie Bess

    Do you think the changing energy perspective for the US and the possible movement of the jobs that remain back will have any effect? Between the abundance of energy that is predicted and the automation of the mundane aspects of many jobs being automated a shift in the skills of the workforce will be required — will that increase leverage or just move the work to a new more responsive workforce?

  • Billb

    I suppect you are going to have to showa much greater granularity to show exactly which sectors are accuring profits and which aren’t. For normal consumer based industries ever increaseing profits on a falling comsumer base seems to be a recipe for a crash.

  • Billb

    I suppect you are going to have to showa much greater granularity to show exactly which sectors are accuring profits and which aren’t. For normal consumer based industries ever increaseing profits on a falling comsumer base seems to be a recipe for a crash.

  • http://twitter.com/thadwoodman Thaddeus Woodman

    Great graph; great post. One of the most interesting things about the graph is how tight the inverse correlation appears to be from ~1945 to ~1975; then from 1975 to ~1990 the two metrics appear to be relatively synched; then from ~1990 forward its back to an inverse correlation. Any ideas why?

    If the recent divergence between labor and corporate profits can be traced to automation and Moore’s law, then would it be too bold to suggest that corporate profits should be taxed to fund retraining and education for misplaced workers? If that sounds too Marxist you might say this instead: Americans favor minimal divergence between the growth of corporate profits and labor which the free market does not always deliver. Insofar as it doesn’t a tax should be levied against the excesses of one to fuel growth in the other.

  • John Csellak

    Good post. Should’ve titled it, “Labor’s Leverage Lost”, though. ;)

  • tploucks

    What do you feel the graph would look like for Global Wages and Global Profits? Are workers in developing countries losing while developing nations are winning?

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