Tuesday, September 12, 2006

Wages and Profits: Who Is Hurting?

If the economy is doing so well, why am I doing so poorly? This is a refrain heard often and used by the interventionist to justify market manipulation. The market manipulators argue that current economic growth is adding to profits at the same time that it is shortchanging labor. Unfortunately, the anti-market folks are wrong again.

In 1998 wages and salaries were 46.1 percent of GDP while profits were 8.8 percent of GDP. By 2005, wages and salaries had expanded to 51.3 percent of GDP while profits had advanced to 12.0 percent of GDP. So both labor and capital captured a larger share of growth between 1998 and 2005.


So who lost relatively speaking? All of you who took macroeconomics in college remember that GDP (total U.S. output) = W (wages) + I (interest) + R (rents) + P (profits). So the losers were those that depend on interest income and those who depend on rental income.

Of course within labor, there have been winners and losers. In general the winners were workers in industries that experienced large productivity gains (computer systems design) and those in industries with pricing power (gasoline refining). The losers were working in industries with little or no productivity gains (broadcasting) and those with little pricing power (airlines).

So in planning your career in terms of salaries, choose those industries that are likely to experience rapid productivity growth and are able to increase their prices (industries in which there is little competition).

1 comment:

Shawn Deluhery said...

I have one question though. One, which salaries are increasing from the period of 1998 to 2005?

How come during the 90s all wages were going up? Were all companies during this time period productive? We keep reading in the economist, wall street, and in other news sources of how productive businesses are becoming. However, these are not translating to wages.

What do you recommend to people who do not have the luxury of career planning or those who do not have the skill level to adapt to rapidly changing markets?

Your last sentence says, industries with little competition are able to increase their prices. I thought competition was something to be admired!

This reminds me of marketing class, where I learned companies win by manipulating the market to their own advantage. Oil companies and farmers continue to get big subsidies, while the air line industry and automotive industry face massive lay-offs. I'm not saying the oil and farmers should not get subsidies. I am saying we should help the air line industry and the automotive industry. Jobs, income, are at stake here, which is a key to demand.