Although the share of U.S. national income paid to wage and salary workers fell to a new low in 2006 while the share going to corporate profits was the highest on record, analysts differ on the issue of whether the historic balance between labor and capital has changed over the last several decades.
In 2006, wages and salaries declined to 51.6 percent of national income, from the previous low of 52.4 percent set in both 2005 and 2004, according to a recent analysis of federal government data by the Center on Budget and Policy Priorities (CBPP). The government has tracked national income since 1929.
Although small in percentage terms, such declines can make a great difference to workers, because each one-tenth of 1 percent of national income amounts to approximately $117 billion in national income, according to CBPP, a Washington, D.C.-based nonprofit organization that provides research and education on fiscal policy and public programs that affect low- and moderate-income people.
In contrast to workers' pay, corporate profits' share of national income has increased sharply each year since the 2001 recession, when it bottomed out at 8.5 percent, and reached its likely peak in 2006 at 13.8 percent, matching the record high set in 1942, CBPP said. Most economists expect profit growth to weaken substantially in 2007.
By comparison, growth in wage and salary income was unusually weak during the early part of the recovery, then picked up in recent years and was strong in 2006. "The stronger recent growth, however, has not been enough to undo the effects of weak growth in previous years," CBPP researchers Aviva Aron-Dine and Isaac Shapiro said in the report, released March 29.
During the past five years, corporate profits as a share of national income "have grown at a faster pace in the current recovery than in any other equivalent period since World War II," they said.
As a result, "only 34 percent of the overall increase in national income since the end of 2001 has gone to increases in workers' pay," the least of any recovery in the past 50 years, they said.
"For the first time on record, corporate profits have captured a larger share of the income growth in a recovery--46 percent of it--than wages and salaries have," Aron-Dine and Shapiro said.
At the same stage of the expansion after the 1991 recession, corporate profits had captured 29.5 percent of income gains, compared with the 45.9 percent that went for wages and salaries, according to CBPP.
On average since World War II, 19.5 percent of national income growth in the five years following the end of a recession has gone to corporate profits, while wage and salary workers have received 47.4 percent.
Growth in Health, Other Benefits Cited
The latest figures on corporate profits and wages and salaries come from the final estimates of U.S. gross domestic product in the fourth quarter released March 29 by the Commerce Department's Bureau of Economic Analysis (61 DLR D-1, 3/30/07 ).
The share of national income going to wages and salaries has trended downward since 1970, when it peaked at 59.3 percent, according to CBPP.
The evidence that labor's share of national income has fallen over time is less clear, however, for total compensation, which includes employer-provided health insurance and other fringe benefits as well as pay.
In a similar analysis of Commerce Department data, David Wyss, chief economist at Standard & Poor's, also found that the wage-and-salary share of the gross national product has dropped steadily since 1970. However, this trend "is often misinterpreted," Wyss said, because most of the decline in pay has been offset by increases in the share of GNP going to fringe benefits, Wyss said.
"In fact, the shares [of labor and capital] have been relatively constant" in recent decades, Wyss said March 2 in a report to clients of the New York-based financial firm. In 2006, total employee compensation accounted for 53.0 percent of gross national product, below its historical average since 1960 of 54.2 percent, "but certainly within its narrow historical range" of 52.4 percent to 56.8 percent, Wyss said.
The rapidly rising cost of health benefits is "the primary culprit" for the decline in the share of GNP going to wages, although higher payroll taxes for Social Security, Medicare, and unemployment insurance, and increased pension contributions also are factors, he said.
"When you include fringe benefits, there's not a significant decline," Wyss said April 10 in an interview. "The main difference is that more of the working person's paycheck is going to health care" instead of wage increases, he told BNA.
Fringe benefits also reached a record high of 7.5 percent of gross national product last year, compared with an historical average of 5.6 percent, Wyss said.
In addition, the number of people who are self-employed or are the sole owners and operators of businesses has grown over time, further eroding the share of income going to wages and salaries, Wyss said. The proportion of GNP going to nonfarm proprietors has grown from about 6.3 percent in 1970 to 7.5 percent in 2006, he said.
CBPP's Aron-Dine argued that much like wages and salaries, total compensation's share of national income has declined to near-record lows in recent years, despite the rapid run-up in health care costs. "It's still on the low end historically," she said in an interview.
CBPP's analysis found employee compensation as a proportion of national income fell to 64.0 percent last year from 65.0 percent in 2005. That was the second lowest share in four decades, next to 63.9 percent in 1997.
Corporate Profits More Volatile
"The other side of the coin is that the gross return to capital," including corporate profits, increased to 28.6 percent of gross national product in 2006, above its historical average of 27.3 percent, Wyss said.
As a share of GNP, gross capital returns, which include corporate profits, depreciation, rent, and interest payments on debt, have been "basically flat" since 1980, Wyss said.
Corporate profits as a share of GNP hit a record high in 2006, at 13.5 percent, compared with an historic average since 1960 of 8.7 percent, he said. The main factor boosting profits has been lower interest rates, which have reduced interest payments to the smallest share of GNP since 1970, he said. In addition, companies have paid off more debt, lowering the ratio of corporate debt to net worth to its lowest level since 1985, Wyss said.
Bringing down the historic average of corporate profits is the fact that their share of GNP tends to fall during recessions, while the share going to wages and salaries tends to increase during downturns.
"So the capitalists are doing about as well as they always have," Wyss said.
Wyss said he was not disputing arguments that inequality in income distribution has grown as the shares going to low-, middle-, and upper-income households have changed in recent decades. "There's not much question that the rich are getting richer," Wyss said.
CBPP's Aron-Dine said the group's analysis of the share of national income going to corporate profits and wages and salaries also sheds light on the issue of growing inequality in income distribution and on "where the income gains from the current recovery have gone over the past five years."
"Middle- and lower-income households typically are much more heavily dependent on wage and salary income," whereas corporate profits in the form of dividends and capital gains flow to high-income households, which own a disproportionate share of stock, the CBPP report said.
The CBPP's report on 2006 national income shares is available on the Internet at http://www.cbpp.org/8-31-06inc.htm.
By Larry Swisher
