Off The Charts: As Corporate Profits Rise, Workers’ Income Declines

The Commerce Department last week reduced its estimates of economic growth in 2010 and early 2011. At the same time, it said corporate income was much better than it had thought. Using newly available data from 2009 corporate tax returns, the department raised its estimates of corporate profits by 8.3 percent for 2009 and 10.8 percent for 2010.

The new figures indicate that corporate profits accounted for 14 percent of the total national income in 2010, the highest proportion ever recorded. The previous peak, of 13.6 percent, was set in 1942 when the need for war materials filled the order books of companies at the same time as the government imposed wage and price controls, holding down the costs companies had to pay.

In the first quarter of 2011, the latest figures available, the new estimates indicate corporate profits accounted for 14.2 percent of national income, well above the 13.1 percent that had previously been estimated.

The news is not so good for smaller enterprises. The government category for many such businesses, known as proprietors and partnerships, is based on the type of tax returns filed, and is not completely accurate because some large enterprises file partnership tax returns while some smaller ones file as corporations. But it is generally used as a proxy for small business.

The latest figures indicate the smaller businesses’ share of national income fell to a 17-year low of 7.7 percent in 2009, but recovered to 8.3 percent in 2010 and in the first quarter of this year.

Employees have always received more than half the total national income, until now. In 2010, the percentage of national income devoted to wages and salaries fell to 49.9 percent, and it slipped a little more to 49.6 percent in the first quarter of this year. That continued decline may help explain the economic worries of many Americans who have jobs but still fear they are falling behind.

The figure for wages and salaries reflects only what employees are directly paid, and does not include the cost paid by employers for benefits, which has been steadily rising over the years. It is thus not an accurate gauge from the point of view of employers, for whom a dollar spent on health insurance premiums is no less real than one spent on wages.

Adding the two categories together may provide a better view of the share of national income going to workers or being spent for their benefit.

The 2010 total, of 62.1 percent, is not close to the record low share of 54.5 percent, set in 1929, the first year for which numbers are available. But it is the lowest for any full year since 1965. In the first quarter of 2011, it slipped further, to 61.7 percent.

National income, as calculated by the Commerce Department, is similar to gross domestic product but excludes some items, most notably an estimate of depreciation. Besides the ones shown in the charts, there are other categories included in national income, including rental income and net interest income, so the figures shown do not add up to 100 percent.

One way to look at recent trends is to compare the total income figures for 2010 with those of 2006, before the economy began to slide into recession. In nominal dollars, not adjusted for inflation, national income was 6.7 percent higher in 2010 — a gain that did not come close to matching the 8.2 percent rise in the consumer price index.

Total employee compensation, including benefits, rose 6.6 percent, although wages and salaries gained only 5.6 percent. Corporate profits were 11.9 percent higher, while proprietors’ income was down 8.5 percent. Corporate profits more than kept up with inflation. Other categories of income did not.

It can be misleading to look at shares of income without examining their magnitude. A small share of a big pie may be larger than a big share of a small pie. The record high share for wages and salaries, of 59.7 percent, came in 1932. Worker pay was plunging in those days, but not as fast as corporate profits. Companies as a group lost money that year.

Nonetheless, President John F. Kennedy’s observation that a rising tide lifts all boats is no longer as true as it once was.

There have been 10 years when corporate profits as a share of national income exceeded 13 percent — 1941, ’42, ’43, ’50, ’51, ’55, ’65, ’66, 2006 and 2010. In eight of those years, the economy, as measured by real gross national product, grew at a rate of greater than 6 percent.

The exceptions were 2006, when real growth was just 2.7 percent, and 2010, when it was 3 percent.

Similarly, in the past, unemployment was generally low when corporate profits were high. In 2006, the unemployment rate ended the year at 4.4 percent — and that was higher than it had been in other postwar years when the corporate share of national income was high. At the end of 2010, the jobless rate was 9.4 percent. On Friday, the government reported that the rate was 9.1 percent in July.

Floyd Norris comments on finance and economics in his blog at norris.blogs.nytimes.com

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