Corporate Profits Versus Wages

Robert Reich says that the ratio of corporate profits to wages is the highest since the Great Depression.  Politifact checks it out, and it's true (h/t Ritholtz):

One of the statistics Reich offered was this: "The ratio of corporate profits to wages is now higher than at any time since just before the Great Depression."

A reader asked us to check this out, so we did.

We turned to statistics compiled by the Bureau of Economic Analysis, the federal office that calculates official statistics about the economy. We found numbers for corporate profits as well as for two measures of worker income -- wage and salary disbursements, and total employee compensation received. We then divided corporate profits by both of the income measurements, all the way back to 1929. (Here are the full statistics from 1929 to 2011 as we calculated them.)

For wages, we found that Reich was essentially correct. The ratio in 2010 -- the last full year in the statistics -- was .281, which was higher than any year back to at least 1929, the earliest year in the BEA database. The next highest ratio was in 2006, at .265. (We didn’t find pre-1929 data, so the one part of Reich’s statement that we can’t prove is that the ratio was higher "just before the Great Depression.")

We also looked at total compensation, since the portion of worker compensation delivered outside of wages has grown significantly since 1929. The numbers were slightly different, but the general pattern still held. The ratio in 2010 was .226, which was matched or exceeded in only four years -- 1941, 1942, 1943 and 1950.

To capture the most up-to-date trends, we also looked at the ratios for the last six quarters. For both wages and compensation, the ratio has risen steadily over that year-and-a-half period. For wages, the ratio has climbed from .274 in the first quarter of 2010 to .290 in the second quarter of 2011. For compensation, the ratio has risen from .220 in the first quarter of 2010 to .234 in the second quarter of 2011.

So numerically, there’s little question that Reich is essentially right. (Or, at least for now he is. Economists note that statistics about corporate profits and wages are often revised after the fact.) A more interesting question is what this trendline actually means.

Correlation is not causation, but I get a funny feeling that very large contractions will last a long time if income inequality is very high.  Again, income inequality is higher than it has been since...wait for it.....before the Great Depression.  In the timeframe after the Great Crash, we saw executive pay limited by extremely high marginal rates on very high incomes.  After the marginal rates were cut, we saw executive pay skyrocket.  Hmmm.......Now all the talk is about tax reform, where deductions are cut, but marginal rates are lowered.  Why is this?  Why can't we increase marginal rates on very high incomes?   It seems to work in decreasing income inequality, which may be one of the factors for why the recovery is so weak.  I think we ought to give it a whirl.