Monday, December 5, 2016

How Workers' Share of Gross Domestic Income Has Shaped America's Angst

In this posting, I want to look at an economic measure that many of my readers will not be familiar with since it is much less commonly covered by the mainstream media that gross domestic product (GDP).  In this posting, I will look at gross domestic income (GDI) and show how the components that make up this measure of economic health have changed over the past five decades.

Gross domestic income (GDI) is defined by Investopedia as:

"GDI is calculated as the total income payable in GDP income accounts. It can be calculated in two ways:

1. GDI = compensation of employees + gross operating surplus + gross mixed income + taxes – subsidies on production and imports

Compensation of employees encompasses the total compensation to employees for services rendered. Gross operating surplus, also known as profits, refers to the surpluses of incorporated businesses. Gross mixed income is the same as gross operating surplus, but for unincorporated businesses.

2. GDI = rental income + interest income + profits + wages + statistical adjustments

Statistical adjustments may include corporate income tax, dividends and undistributed profits."

Basically, gross domestic income is what we are paid to produce gross domestic product.  It includes wages, profits, interest and taxes on production and imports.  In contrast, gross domestic product measures what the economy produces in goods, services, technology etcetera.

Here is a graph from FRED showing the year-over-year changes in both real GDI (in red) and real GDP (in black) going back to 1948:

You will notice that GDI and GDP tend to track each other and that both are showing a relatively modest level of growth since the end of the Great Recession when compared to other economic expansions.  According to the Bureau of Economic Analysis, GDI and GDP are conceptually equal, however, they differ because different sources of information are used in their computation.   There is even a name for this difference; it's called the "statistical discrepancy".  That said, over the longer term, both GDI and GDP provide a similar picture of economic health (or lack thereof).

Now, let's focus on one key component of GDI, compensation paid to employees in the form of wages and salaries.  Here is a graph that shows the how the wages and salaries component of GDI has varied over time going back to 1948:

Between 1948 and 1975, wages and salaries comprised between 49 and 51.5 percent of gross domestic income.  This began to drop in the early 1970s and continued to fall right through the 1980s and 1990s.

Let's focus on the period since 1970 with the red line showing the trend:

In 1980, wages and salaries made up 51.5 percent of GDI, hitting a two and a half decade, pre-Great Recession low of 43 percent in 2006.  While the level did rise to 44.6 percent in 2008, it has since fallen, hitting a new, all-time low of 42.2 percent in 2013.  Looking back to its peak of 51.5 percent in 1970 (and 1953), that's a drop of 9.3 percentage points or 18.1 percent.  That's four and one-half decades that workers have experienced a declining share of gross domestic income.

In contrast and to close off this posting, let's look at the corporate profit component of gross domestic income and how it has changed since 1948:

Let's focus on the period from 2000 to the present:

You will quickly notice that the corporate profit share of GDP rose rather sharply in the early years of the new millennium, more than doubling from 4.54 percent in 2001 to a high of 10.3 percent in 2012, a five decade high.

And we wonder why there is anger seething just below the surface among America's working class who have seen the benefits of a growing economy head straight into the pockets of those who dwell in upper floor corner offices.

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