- The Washington Times - Saturday, November 27, 2004

It’s no wonder many Americans express doubts about the health of the economy. Recent Commerce Department data show continuation of a disturbing trend for American workers: the share of U.S. income that goes to wages and salaries is steadily declining, while the share going to corporate profits has increased substantially.

In his column “Mythology of wages vs. profits,” Nov. 14, Alan Reynolds labels our analysis of this trend “political propaganda” and criticizes The Washington Post for citing it. Yet contrary to Mr. Reynolds’ claims, this trend is a matter of fact, not interpretation.

The share of the country’s gross domestic product (GDP) — which measures the overall size of the economy — that goes to employees’ wages and salaries has fallen for 3 years. This trend began after the economy entered a recession at the beginning of 2001 and has continued through third-quarter 2004. Such a long decline in the share of the economy going to wages and salaries is unprecedented in the post-World War II era.

Over this period, the share of GDP going to wages and salaries dropped from 49.5 percent in the first quarter of 2001 to 45.4 percent today. The drop of 4.1 percentage points of GDP is equivalent to $480 billion. This, too, is a record. In no other period of similar length on record has the share of GDP going to wages and salaries dropped this much. (Data go back to 1947.)

At the same time workers’ wages and salaries have fallen as a share of GDP, corporations have enjoyed a larger slice of the economic pie. According to the Commerce Department, from the beginning of 2001 through the first half of 2004, corporate profits climbed from 7.8 percent of GDP to 10.1 percent. (Data on corporate profits are available only through second-quarter 2004.) This 2.3 percentage point climb is equivalent to about $270 billion.

Mr. Reynolds notes that employers’ contributions for workers’ health insurance and pensions have grown rapidly and, in addition to wages and salaries, should be taken into account in assessing how workers have fared recently. He implies we ignore these benefits, making the recent period look much worse for workers than it actually has been.

Mr. Reynolds’ critique misleads in two ways. First, as opposed to increased wages and salaries, employers’ added payments for health insurance and pensions haven’t necessarily enhanced workers’ living standards. For instance, rising employer payments for health insurance premiums reflect the acceleration growth in health-care costs, which may not have appreciably improved the care workers receive. Similarly, many employers with pension plans that promise a particular level of benefits have had to increase their pension contributions to make up for the drop in the stock market, which battered many pension plans’ portfolios. Those added pension contributions don’t make workers any better off than they were a few years ago; they just enable the company to provide the pension benefit it has promised.

Second, our analysis explicitly addressed contributions for insurance and pensions. We found that, even if you assumed workers directly benefit from all of the added contributions, employee compensation has fallen significantly over the last 3 years — 3.1 percentage points as a share of GDP since 2001. In no other period on record has total employee compensation fallen so substantially.

Further, the share of GDP going to total employee compensation is significantly below its average since 1970, while the share to corporate profits is significantly above average. Therefore, workers’ incomes have fared poorly in recent years.

On a more technical issue, Mr. Reynolds criticizes our use of GDP in our calculations: “Serious calculations compare shares of profits and pay to national income, not GDP.” We agree national income is a slightly preferable measure, and we discussed this in our study. But national income data aren’t yet available for third-quarter 2004, while GDP data are. So we used GDP data. As we explained, national income and GDP are related. So the essential story is the same, whether national income or GDP is used.

There is room to disagree about what we should do about the fact workers’ incomes lag while corporate profits grow. But the trend is real.


Research assistant


Senior fellow

Center on Budget and Policy Priorities

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