Profits Are Up, While Employee Compensation Stagnates

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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
Employee Compensation 12.6% $839b -5.5% -$415b 1.4% $98b
Profits 20.2% $562b -11.2% -$377b 21.6% $646b
Taxes + Gov’t Firms 19.7% $148b -4.9% -$44b 4.2% $36b
National Income 15.1% $1,549b -7.1% -$836b 7.1% $780b

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.

GDP Growth in the Recovery Remains Slow, But Policies Are Not Holding Back Business Investment

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GDP growth in the economic recovery from the 2008 collapse remains weak.  The recently released GDP figures for the second quarter of 2011 (second revision, from the Bureau of Economic Analysis of the Department of Commerce), revises downward the growth estimate to 2.0% from the previous estimate of 2.5% (all figures are quarter on quarter growth, seasonally adjusted at annual rates).  While still positive, and better than earlier in the year, such growth is insufficient to bring down the still high unemployment to a significant degree.

Four points:

  1. The overall GDP growth rate would have been 1.55% points higher (i.e. a more decent 3 1/2%) if the change in private inventories had remained the same as it had been in the second quarter of 2011.  Over time, the contribution to GDP growth from inventory accumulation is on average close to zero, so one would expect that over the next couple of quarters this will switch back to positive from negative to balance out desired inventories.  Note that the contribution to the growth in GDP in any period is the change in the change in private inventories.  Private inventories did not fall in the third quarter of 2011:  they merely failed to grow as fast as they had in the second quarter.  I will try to prepare a methodology note discussing this arithmetic at some point in the future, and post it in the Econ 101 section of this blog.  (Update:  It is now posted here.)
  2. Obama has been strongly criticized by Republicans that his policies have been anti-business, and hence have led business not to invest, with this then resulting in the disappointing growth of GDP.  But the figures do not support this.  Business investment has in fact been quite good, as seen in the figure above, with growth of 15% in the most recent quarter, and generally quite strong growth since the beginning of 2010.  This is especially surprising as capacity utilization (as estimated by the US Fed) is still only 78% of potential capacity (and while never at 100%, this figure will be at around 85% when the economy is close to full capacity utilization).  Business is investing even with the current excess in capacity.
  3. An economic headwind that has been hurting growth, starting in late 2010 and then into 2011, has been the fall in government demand.  This has principally been from cutbacks in state and local governments.  If government demand had simply not been cut, GDP growth would have been about half a percentage point higher than what it was from simply the direct impact of the government cut-backs, and even higher if multiplier effects are included.
  4. And, perhaps stating the obvious, while Obama is now being blamed for the downturn, the critics need to be reminded that the sharp collapse in output came in 2008.  This was then turned around in 2009, after Obama took office, with growth since.  The growth has not been fast enough, and the economy remains well below its potential capacity, but reverting to the previous policies is the last thing one should do.

Weekly Initial Claims for Unemployment

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While Republican politicians have charged that Obama and his policies have been responsible for the high levels of unemployment in the US, the increase was well underway in the Bush Presidency.  The weekly figure for initial claims for unemployment began its rise in late 2007, reached its peak two months after Obama’s inauguration, and has fallen since.  The levels are still unacceptably high, and are not yet at levels consistent with what they would need to be full employment (new claims will never be zero, as there is always labor turnover), but this is a consequence of the insufficient scale of the stimulus program and other such policies rather than the nature of the policies themselves.