Incredible Shrinking Workers’ Income

June 12th, 2011 at 11:58 pm David Frum | 91 Comments |

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Workers’ share of U.S, national income is collapsing.

Two questions for the Republican presidential candidates:

1) Is this a problem?

2) If yes, what can be done about it?

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91 Comments so far ↓

  • ottovbvs

    It seems to me that this chart is just misleading as a result.

    How is it misleading? Haven’t the real incomes of workers declined? Just because the amount of capital per worker has has increased it doesn’t mean any of that showed up in their pay packets. Obviously more capital in the economy accounts for increases in productivity. The problem is the benefit of that increased productivity hasn’t flowed to workers. Do you look to see at what is behind the numbers?

  • Langford

    Every government sector job lost leads to 1.3 jobs lost in the private sector. Then surely

    Every American job outsourced to another country leads to 1.3 more private sector jobs lost.

  • condere

    Looks like I may have found a new site to follow.

    Anyways, here is my take on things after being a long-time trickle down economics person. Awhile back, I came across tax data that showed while Reagan cut A LOT of taxes, he was also forced by threats of veto to also sign into law A LOT of tax increases.

    These tax increase were by and large closing of loopholes and tax exemptions, which mainly affected richer tax filers. So much so in fact, that people in the higher tax brackets were paying more in taxes by the start of Reagan’s second term, than when Reagan was first elected.

    http://www.house.gov/jec/fiscal/tx-grwth/reagtxct/fig-1.gif

    After looking into this, I still haven’t figured out where history got distorted. However, it seems that what happened during the Reagan years to get things “jump-started” was taxing the rich more, and taxing the middle class less.

    And that goes against EVERYTHING that “conservatives” say today.

    • TheMiddleWins

      Actually what the graph shows is the increased tax burden of the Top taxpayers. In 1980, the Top 1% earned 9% of total U.S. income. By 2010, the Top 1% now earns nearly 23% of total U.S. income.

      As more income flows upward, of course more tax “burden” will follow. From 1900 – 1980 there were approximately 12 – 13 Billionaires in the U.S. From 1980 – 1989, the number jumped from 12 to 99 and within 20 more years that number jumped to nearly 500.

      Trickle down in a vacuum is an outstanding idea…Trickle down in an environment where money, capital and resources continue to flee our borders, is a pipe dream. David Stockman, Reagan Budget Director and architect of his Trickle down policies, today publicly admits that Trickle down has been a failure.

      I still believe in the principle when applied to a micro level, i.e. the small business that opens in a depressed market, but in a macro level, all it has accomplished is an explosion of wealth for a very select few, while seeing the stagnation and/or reduction of income for the American Middle Class.

  • condere

    Forgot to add, that I do know about inflation, the laffer curve, and everything else.

    It’s just that when looking at data such as the graph that I linked to, a number of questions do come up when people try to respond to me.

    If you want to argue that it’s due to inflation, why (in regards to that graph) doesn’t the blue bars rise as well?

    On the flip side of the coin, I’ll cede the point that it is due to inflation. Then couldn’t one argue that the downward trend of the blue bars shows a failure of trickle down economics? Factoring in inflation, it would seem to me that the wealthy are only keeping and paying more taxes on their gains in income, while people represented by the blue bars are getting less income when adjusted for income which is indicated by their smaller tax revenues.

    I’ve had people argue bracket creep with me too, but seriously? How much bracket creep can you have over a time span of two or three years?

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  • txslr

    Data by itself is of little value. This data may be of less than little value. It is not clear that the BLS can reasonably accurately calculate labor’s share of national income. Alternative methods often come up with very different estimates, so don’t hang too much on this bit of analysis. Unless you are looking for a handy stick with which to beat people you don’t like, in which case, have at it! Here are a few points, though:

    Do these numbers include the value of employer-provided health care? I don’t know, but it would make a difference, particularly given how quickly those costs have risen over the past several decades. Since tax law incentivizes employers to provide (and employees to accept) compensation in the form of health care rather than cash, this could be significant, as could be the BLS’s ability to measure it accurately.

    Labor’s share of national income cannot go up without the share going to other factors of production declining. So one would expect to see changes in the proportions of national income going to different factors of production fluctuate over time depending upon the relative scarcity of the factors. Another way of interpreting the same numbers is to conclude that the relative value of capital has been increasing. If the allocation of that capital is efficient and national income grows, then labor’s wealth could grow at a healthy clip even as its share declines. That is, the fact of the decline alone tells us little, even if BLS has gotten it right.

    Given the large proportion of providers of labor who are also providers of capital (through pension funds, 401K plans, etc) a decrease in the proportion of national income going to labor does not map directly to decreases in household income (especially including capital gains). This is a much more complicated picture.

    The decline in the power of unions is a theory, but one should be careful in applying it. Unions do not raise labor’s share of national income. At best they raise their membership’s share by creating labor shortages through restricting employers’ access to labor markets. So an increase in organized labor’s income means a decrease in income, and employment, for non-organized labor. Which dominates is not obvious. At the same time, the misallocation of labor as a result of the actions of labor unions to disrupt the labor markets will tend to decrease overall economic growth. Been to Detroit lately?

    • Langford

      TXSLR, you wrote “Unions do not raise labor’s share of national income.” I don’t know how easy or difficult it may be to prove that point. But according to an article that appeared in Forbes a while back (here: http://www.forbes.com/2009/08/31/europe-minimum-wage-lifestyle-wages.html )

      “The Scandinavian countries of Sweden, Norway, Finland and Denmark don’t don’t have a minimum wage at all because they are so highly unionized. “The unions there felt that a national minimum wage would interfere with collective bargaining, and it might even bring the price of labor down,” says Chater. “Nordic countries prefer to have a collective agreement between unions and employers as the reference point for wages, not one set by the government. In some cases, particularly in Denmark, Chater says that has led to a very strong degree of cooperation between employers and workers. “It’s quite harmonious. There’s a balance in the level of compromise.”

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  • AlanDownunder

    1. It is not a problem – it is proof of success.
    2. No need to answer.
    The Reagan revolution has succeeded in large degree, but we have not yet achieved a perfect plutocracy. Thankfully, Obama has not shown any real willingness to reverse matters. He extended Dubya’s expiring tax cuts for millionaires. Of course we should still keep calling him a socialist, just in case he gets any ideas.

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  • rucb_alum

    If the average 1962 American wage had kept pace with the growth in the economy, average yearly income would be over $104K. Our economy is generating this amount of income and the upper percentiles have nearly tripled their rake yet very little appears to be ‘trickling down’. Why is that? My opinion is private campaign donations. Donation-sensitive politicians vote to protect their donors and NOT in the people’s interest.

    Eliminate all tax deductions and credits. That’s right — All of them! Then maybe politicians can think about what’s good for the republic rather than what tax law changes are good for their donors.

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