Labor Day Gaps Posted on September 5, 2011 by Michael Morrison On this Labor Day weekend it’s appropriate to examine economic trends that influence all Americans and our collective quality of life. A number of interwoven trends follow. Everything is connected! Employment issues are at the forefront of this Labor Day weekend so let’s begin with that topic. Unemployment claims, per the following figure, remain high and GDP growth is not sufficiently robust to accommodate population growth for those desiring to enter the workforce. In addition, the percent of job losses relative to peak employment in the most recent recession have never been as large or persisted for so long, when compared with other post WWII recessions. Intermixed with reluctant job recovery are record corporate profits . Corporations are making profits (good) but they are not hiring (bad). Here’s a graph I created using the FRED online application at the St. Louis Federal Reserve, demonstrating the gap between after tax corporate profits and civilian employment. Note that prior to and during the recession civilian employment and corporate profits tracked fairly well. After the official recession (gray bar) there’s a huge disjunction between the two. Corporations are not hiring, despite record profits. Corporations have become leaner and American worker productivity has steadily increased over several years. Robert Reich’s opinion piece summarizes the concerns. Here’s a graph he produced from many sources: From 1947 to approximately 1980 increases in productivity, average hourly compensation and average hourly wage tracked steadily upward. Contrast those 33 years with the trend lines from 1980 to 2009. Productivity steadily accelerates with an 80% change from 1980 to 2009. On the other hand, average hourly wages and average hourly compensation remained relatively flat with 7 and 8 percent increases, respectively over the same time period. Despite rising worker productivity the following graph depicts a widening gap between real GDP and real disposable income, occurring over five decades. The above graphs depict averages so they don’t demonstrate how income is distributed in the economy. When the distribution of income is taken into account the gaps are even more staggering. Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez found the bottom 99 percent of incomes grew only 1.3 percent per year from 2002 to 2007 while the top 1 percent captured over two-thirds (65 percent) of income growth. Looking at the issue over a longer period of time economist Robert Reich produced the following graph using data from Piketty and Saez classic study: Income has become more concentrated in the hands of the top 1%, matching similar levels of inequality just before the beginning of the Great Depression. (Reich’s “wealth” labeling of the above graph is actually an error as the graph depicts income, not wealth. Wealth is even more highly concentrated .) A recent study by Northeastern University economists demonstrates that corporations have been one of the primary beneficiaries of sluggish economic growth: “Between the second quarter of 2009 and the fourth quarter of 2010, real national income in the U.S. increased by $528 billion. Pre-tax corporate profits by themselves had increased by $464 billion while aggregate real wages and salaries rose by only $7 billion or only .1%. Over this six quarter period, corporate profits captured 88% of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1% of the growth in real national income . …The absence of any positive share of national income growth due to wages and salaries received by American workers during the current economic recovery is historically unprecedented.” Don’t misunderstand — profits are good! But the current system is out of balance with a great segment of our society in financial, and probably, emotional trouble. Labor’s share of the economy has dwindled, to stay afloat the middle class workforce was given massive quantities of credit, and women joined the workforce in record numbers to help the family achieve the American Dream. The following graph clearly depicts a troubling decline in labor’s share of the economy. Equally troubling is the gap between real GDP per capita and median household income as revealed by a graph produced by Princeton economist Uwe Reinhardt from data from the Economic Report of the President to the Congress . From 1975 to 2009, the gap between real GDP per capita and real median household income is staggering. Real GDP per capita rose by an annual compound rate of 1.9 percent while real median household income rose by an annual compound rate of 1.18 percent. Conclusion This Labor Day is characterized by many economic challenges. Yet, don’t bet against the United States! We have faced more difficult challenges and come out on top. We are an adaptive, innovative society, changing when change is required. In that regard I pass along Nouriel Roubin’s recommendation for a balanced approach to the challenges we face: “To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken. The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts. Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalized economy. The alternative is – like in the 1930s – unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.” The American Dream holds promise for all, not just the few. Let’s not forget the marginal propensity to consume by the top 5% cannot be the engine to drive a consumption-based economy. (Recall consumption spending accounts for 70 percent of GDP.) Our capitalist system requires a strong, viable middle class and an enlightened self-interest that recognizes the need to find a more balanced economic outcome for people who are working hard, following the rules and trying to raise good families. This entry was posted in Economy , Inequality and tagged corporate profits , disposable personal income , distribution of income , economy , inequality , median household income , productivity , real GDP per capita , unemployment . 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