The Dismal Science Gets Even More Dismal: Wages Fall as a % of GDP

Mark Shea points to an article that shows some graphs showing that, as a percentage of  GDP, corporate profits are at an all time high, and that wages are at an all time low. This is generating discussion around issues of JVSTICE and Economics. Let’s look at what we got, here.

Wages as % of GDP

Corporate Profits as % of GDP

Quick breakdown:

1. The denominator in both cases is GDP – Gross Domestic Product, a broad measure of national economic activity.  So, if GDP goes DOWN, then anything measured as a percentage of GDP goes UP, unless it, too, goes down the same or a greater percentage. Right? So, if corporate profits had merely fallen less precipitously than GDP, their percentage of GDP would go up. Not saying this is what happened – just pointing out that the graph, in itself, does not provide enough information for anything more than a few very narrow conclusions.

2. For a given level of GDP, if the number of people employed falls, then, unless wages rise proportionally for those still employed, the percentage of GDP devoted to wages will also fall.  So, unemployment could be the problem here, not underpayment of people with jobs.  I suspect it is the result of a number of factors, including these 2 – but the graph doesn’t have nearly enough information to say.

3. Check out the range on the y-axis of the Wages graph – it runs from 42% to 54%, so that the percentage of GDP that is wages has varied only from a high of about 53.5% to a low of about 44% over the last 75 years. Looking at the graph without noting the scale might give you the impression that wages fell from some huge percent to some small percent of GDP, when in fact it’s a pretty narrow range – about  10 percentage points.

4. Wages have been falling as a percentage of GDP since 1970.  Increases have tended to precede recessions – which is what business cycle theory predicts.

5. While we would want to give the graph makers the benefit of the doubt, one has to wonder about some of the methodology here. For example:

– What does ‘wages’ include? Exclude? If it’s not total compensation, then has the proportions of wages versus total compensation stayed pretty much the same over time? Or are we singling out wages as most representative of working people’s income? Just would want to know what we’re measuring here. Trend data on how compensation has changed over time, like what percentage of compensation do wages make up, would be helpful as well.

– What are the raw numbers for GDP, Profits and Wages over time? We’d like to see how much the change in percentages are due to a change in the denominator versus changes in profits and wages, which we can’t figure out from the data given.

BUT – KEY POINT: the graphs provided, while evocative, do not provide quite enough information as needed for the conclusion everyone is jumping to: that wage earners are being cheated, or at least could be paid a lot more. That *may* be true, but the graphs do not show it.  I don’t find these graphs to be quite the egregious examples of disinformation as the ones I’ve critiqued earlier, largely because they seem more directed at the economically literate, who may be presumed to be savvy to the issues. It’s rather the article to which they are attached that seems a little less circumspect than the lack of data warrants. And then people – especially people with no understanding of business – are invited to pile on.

Now, to the more interesting (to me, anyway) issues. A couple of commentators on Mr. Shea’s site linked above pointed to this essay on John C Wright’s blog, which is helpful.  We’re going to take it a bit farther.

NOTE: the following analysis is NOT SAYING wage earners are not being treated unjustly, and is NOT SAYING corporations are just wonderful. What I’m trying to do is point out how 1) corporate profit-making and investment work, and 2) why corporations are not hiring new employees nor giving raises to current employees.  At the level of this analysis, questions of justice don’t really enter into it – it’s rather an attempt to explain how individual actors can be expected to behave within a set of rules and natural laws and reach the state depicted in the graphs.

I’m going to largely ignore for now the distortions on the market caused by arbitrary regulatory and political decisions.

First rule: Corporations will not invest – spend money – unless they have a reasonable expectation that they will make money on that investment. Ultimately, you make money by selling stuff. You can either sell stuff to people who don’t already buy what you sell from you or somebody else – like Mac IIs to geeks in the 80’s – or to people who already buy what you sell from somebody else – like your new improved cola to Coke and Pepsi drinkers. Bottom line: even if what you’re selling is ‘financing’, you’ve still got to sell something to somebody to make money.

Now, corporations have been piling up cash – retained earnings – for the last few years, so that many companies are sitting on vast heaps of money. This drives some people nuts: why not hire more people? why not raise wages? Why not pay dividends? Short answer: in the expert opinion of the people who run these companies, neither hiring people nor raising wages nor paying dividend is going to make them any more money. So they don’t do it, not because corporations have, in principle, anything against hiring people, raising wages or paying dividends, but because they have a very strong disinclination against spending money when it won’t make them any more money.

Let’s take it case-by-case: a corporation eagerly hires people whenever it’s clear that, by hiring those people, the corporation will make more money. If my widgets are flying off the shelf at a profitable price, and my sales channels are begging for more, then I sure as heck would be willing to hire people to make more widgets. BUT: if I’m working hard to make sure that all the widgets I’m making get sold, and have, in fact, existing unused capacity for making more widgets – I’m not hiring. American corporations as a whole are in that latter situation – they can make more stuff than they can sell with the people (and plants, etc.) that they already have. So, as we see every month in the Department of Labor reports, not too many new hires are being made – the total number of workers is not growing very fast.

If other companies aren’t hiring, the chances of a corporation losing many of the employees it needs is greatly reduced, while if your employees can easily get another job somewhere else, your job of keeping them gets harder. If times were booming, and other companies wanted to hire your workers away, then you’d have to do something – like raising wages – to keep them, or to hire others. Note that you would be raising wages as a means to making more money – you need the workers because profitable work is out there, be it widget making, selling financing, or slinging hash. In a stagnant economy, with no profitable work out there, there’s no business reason to raise wages.

Retained earnings, above a prudent level, are in fact a bit of an embarrassment for companies – they mean that you, the management of the company, can’t find any way to profitably invest your investors’ money (like, say, hiring new workers to produce something you can sell). Many people think that companies should pay out those earnings in dividends, but this doesn’t really work – to a certain extent, the stockholders would expect the value of their holdings to fall by roughly whatever amount you pay out in dividends – and, there are taxes on the dividends. So, the actual people – mutual funds, pension funds, employees –  to whom the dividends are to be paid are unlikely to want them: they can always just sell some stock to get money when they need it, and, since that is the case, they want the stock value to stay as high as possible – and paying dividends will not usually help the stock price stay high.

Would company like to see clear, profitable investment opportunities, and start spending all that cash on new capacity? Would they like to hire more people, and give raises to current employees because, gosh darn it, there just so much money to be made out there that they’d be crazy not to? Of course they do.  Why don’t they see such opportunities? Here’s 4 reasons:

– Debt. Our government continues to borrow money and effectively burn it. This makes business people think ‘Wiemar Republic’ – and only a fool would invest into a Wiemar Republic.  All the bailouts, shell games, government ‘investments’ and general monkey business where favorites like Goldman Sachs keep making money, while banks that didn’t kiss enough of the right hiney got forced out of business just makes it worse.

– Demographics: Young people who start families are just great for the economy in so many ways – they work hard, try to better themselves, and POSITIVELY HEMORRHAGE CASH – oops, sorry, that was the dad of multiple college-age children speaking, what I meant was: reliably consume a wide range of goods and services, from food and gas to houses and cars. So, when there were millions upon millions of such families, the economy was good, growing, improving. But now we have mostly old people who not only don’t buy a lot of basics (comparatively) but also tend to free up assets, such as houses, which their heirs either sell – further suppressing prices – or use or live in – taking a potential buyer off the market.

– Political Instability: while guessing what Obama will do next is problematic, guessing that it won’t be good for business (unless that business was a substantial donor) is a pretty good bet. In general, business people hate political uncertainty.

– Unconscious Regulations: So, we ‘reformed’ the financial sector in such a way that Goldman got to keep its money and didn’t have to change a thing, while my industry – equipment finance – needs to start complying with consumer-level disclosure, reporting and record-keeping, even though our customers are businesses and we had no role in the economic collapse. Businesses see this kind of stuff, and it does not inspire confidence.

Conclusion: Corporations very well might be evil; wage earners very well might be underpaid; but the information in the graphs above do not show either of those things – they show business people behaving exactly as anyone who understands business would expect them to behave.

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Author: Joseph Moore

Enough with the smarty-pants Dante quote. Just some opinionated blogger dude.

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