Aggregate profits in the national economy, while volatile, have grown rapidly over the past decade, while employee compensation has been lackluster. Profits (defined here as including corporate profits [the largest component], proprietor’s income, rental income, net interest income and business transfers) plus Compensation of Employees (along with a smaller third category, for taxes on production and imports less subsidies, plus the net surplus or deficit on government enterprises such as the Post Office), sum up to National Income. Note that Compensation of Employees is the total compensation for all workers as a group, and is not per worker. The Bureau of Economic Analysis of the US Department of Commerce provides estimates as part of the National Income and Product Accounts, and the most recent figures were released on November 22. The graphs and figures shown here come from analysis of that underlying data.
Profits, Employee Compensation, and overall National Income grew at similar (and slow) rates between 2001 and the third quarter of 2003. Profits then took off, rising rapidly until mid-2006, after which they pulled back some (but with levels relative to 2001 still well above the levels for Employee Compensation; overall National Income will be in between). Profits then fell rapidly with the 2008 economic collapse, as did Employee Compensation and hence overall National Income, so that by early 2009 they were each only 8% above (in real terms) their level in early 2001, eight years before. But from that trough, Profits bounced back rapidly, so that by late 2010 they had surpassed their previous mid-2006 peak, and then continued to grow strongly in 2011. Total Compensation of Employees, in contrast, has grown only modestly from its 2009 trough. Overall National Income is now almost back to its previous peak, but Compensation of Employees is well below, while Profits are well above, their previous peaks.
One can also look at the changes over the cycle: from 2001 to the peak in National Income in the first quarter of 2008, from that peak to the trough in the second quarter of 2009, and then from that trough to now (the third quarter of 2011). In the table below, “Growth” is the growth of that component of National Income (in real terms) over the full period, while “Change” is the change over the period in the aggregate income of that group, in real (2005) dollars, in billions:
change in National Income Components
2001Q1 to Peak
|Peak to Trough||
Trough to 2011Q3
|2005 prices, % growth and billions of US$||Growth||Change||Growth||Change||Growth||Change|
|Taxes + Gov’t Firms||19.7%||$148b||-4.9%||-$44b||4.2%||$36b|
The contrast in the truly abysmal growth in total Compensation of Employees in the recovery (of just 1.4% in real terms from the mid-2009 trough to now), with the rapid growth in Profits (of 21.6% in real terms over this same period), is stark. Put another way, Profits obtained 83% of the growth in National Income from the trough in the second quarter of 2009 to now (83% = $646b/$780b), even though it only accounted for 27% of National Income at the trough (and 31% now). Obama has been loudly blamed by Republican politicians for hurting business profits. There is no evidence of that here. There has been a strong growth in Profits in this recovery. While the data analyzed here cannot allow us to determine the causes of these trends, they do allow us to see whether Profits are depressed in the economic recovery. They clearly are not.
Finally, the data can be used to calculate the share of National Income going to Profits. This is shown below. The Profits share has grown strongly over the past decade, and while it fell in the economic collapse in the last year of the Bush Presidency, it has now bounced back to above its previous peak.
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