Alan Reynolds

In those desperate last days before the election, liberal advocacy groups even managed to sneak political propaganda into routine business news, of all places. In an article ostensibly reporting facts about economic growth, Washington Post writer Jonathan Weisman managed to insert the following tidbit:

The liberal Center for Budget and Policy Priorities noted that the share of the economy going to wages and salaries has slipped from 49.5 percent when Bush came to office to 45.4 percent in the third quarter of 2004, even as corporate profits have risen as a share of the gross domestic product over that time, from 7.8 percent to 10.1 percent.

 The unsubtle suggestion was that the downtrodden working class has been systematically exploited by greedy capitalists since "Bush came to office." But these statistics, like many others in the partisan press, were incredibly amateurish.

 If you add together the income shares supposedly going to wages (45.4 percent) and profits (10.1 percent), nearly half the economy seems to be missing. A big reason is that GDP includes more than $1.5 trillion of estimated depreciation -- wear and tear on everything from factories to cars. Depreciation is larger than corporate profits, but it is not income in any sense. That is why serious calculations compare shares of profits and pay to national income, not GDP.

 The fact is that compensation of employees was 64.1 percent of national income in the third quarter and corporate profits were 11.5 percent. One reason labor's share looks so much larger than Weisman's reported figure is that depreciation is removed from the denominator. Another is that employee benefits are added to wage to arrive at total compensation.

 Hourly non-farm compensation was up 3.7 percent over the year ending in the third quarter, as was the similar employment cost index. But that 3.7 percent blends together a 6.9 percent rise in benefits with a 2.5 percent rise in wages. It is obvious why that liberal group spoke only of wages, ignoring benefits. But it is less obvious how or why a financial journalist was so easily conned.

 The Federal Reserve Bank of St. Louis took a longer perspective in the August issue of its "National Economic Trends." Michael Pakko used a graph to show that, "labor's share of income has averaged 70.5 percent (of national income) over the past 50 years and has remained within a narrow range of that average." His 70.5 percent norm is slightly higher than my third quarter figure because Pakko properly attributes part of proprietors' income to labor (shopkeepers do not work for nothing).


Alan Reynolds

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