Profits vs. Paychecks: Workers Lose Big
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The Fiscal Times
December 11, 2011
  • Workers’ share of national income stands at 57 percent, an all-time low
  • Despite striking productivity growth, workers’ pay has gone nowhere
  • Third-quarter profits were 19.4 percent above their pre-recession peak

Any economist will tell you that productivity—output per hour worked—is the key to higher living standards. Given more capital equipment, improved technology, and sharper skills, the same number of workers can produce more, generating more national income and a bigger economic pie for all to share. Much was the case during the technology-fueled surge in productivity during the 1990s. Right now, however, you’ll have a hard time selling the virtues of productivity growth to American workers. Although productivity over past decade has grown even faster than it did in the 1990s, workers are losing ground—and at a record pace.

It’s a stunning reversal of fortune that may
well be the key trend underlying
much of the anger expressed by
the Occupy Wall Street crowd.

In short, Americans are working harder with less to show for it, based on the breakdown of national income, which is the total of all income generated by labor and capital in the production of goods and services, including salaries, employee benefits, profits, rents, interest, and dividends. Over the past decade, the share of national income going to workers—salaries and benefits—has fallen sharply to an all-time low of 57 percent in the third quarter. On the flipside, the share going to capital has surged to an all-time high, with the chief beneficiary being profits. It’s a stunning reversal of fortune that may well be the key trend underlying much of the anger expressed by the Occupy Wall Street crowd

Throughout the postwar period, labor’s share of national income had been so stable that is was generally taken as a constant in economic analysis, says J. P. Morgan economist Michael Feroli. Labor’s share has tended to vary with the economy’s ups and downs, but the recent break from the long-term trend is unprecedented, and the share shows no sign of turning up. From 1947 to 2000 labor’s share of national income had averaged a relatively steady 64 percent. If the current share were at the pre-2000 average, worker income would be $780 billion higher right now, equal to nearly 10 percent of current pay and benefits. “That income would have provided a much-needed lift for a sector of the economy reeling from too much debt and too little employment.” says Feroli.

James C. Cooper
was BusinessWeek's senior editor, senior economist and author of its influential Business Outlook column. Prior to that, he was an economist at the American Paper Institute, performing economic analysis and forecasting. He holds bachelors and masters degrees in economics.