Tuesday, November 29, 2011

US National Income Shares

(1) National Income (NI) is growing slowly. During Q3, NI totaled a record $13.4 trillion (saar), up only 3.8% y/y. That’s down from a recent peak of 6.7% during Q3-2010, and the slowest since Q4-2009. Over the past four quarters, compensation rose just 2.8% while profits rose 7.9%. This divergence suggests that profits have been gaining share of NI at the expense of labor. However, it also reflects the fact that compensation is tied to domestic growth, which has been subpar in the US, while profits have been getting a boost from faster global economic growth.

(2) The rebound in profits’ share of National Income has been spectacular. It jumped from a recession low of 7.9% during Q4-2008 to 14.7% during the third quarter of this year. That surpasses all previous cyclical peaks.

(3) After-tax comparisons show even more remarkable results for profits. NI share comparisons only make sense on a strictly pre-tax basis. But let’s do them on an after-tax basis to glean some insights on how our taxation and social welfare systems redistribute income. After-tax corporate profits rose to a record high 11.6% of NI during Q3, far surpassing any previous peak.

(4) Compensation of employees continued to lose share of National Income during Q3. It fell to 61.4%, the lowest since Q3-1965, and down from a record high of 68.5% during Q2-1980. It may be returning to the 58%-60% “norm” of the late 1940s. This round trip coincides with the rise and fall of the membership and power of private sector unions in the United States. The picture looks much worse for compensation from wages and salaries (excluding benefits). This share fell to a record low of 49.4% of NI during Q3. It has been on a downtrend since the late 1960s, when the norm had been around 57% following the end of World War II.

(5) Workers have opted for a larger share of their compensation in benefits. These benefits tend to be dominated by health care benefits, which are provided on a tax-free basis. As a result, the share of compensation paid as “supplements to wages and salaries” rose from about 3% in the late 1940s to about 12% in the early 1980s. This NI share has continued to fluctuate around this level since then. It was 12.0% during Q3.

(6) Personal income both before and after taxes remains very high relative to National Income. Notwithstanding the dismal downward trends of the NI shares of pre-tax compensation measures, personal income was 96.6% of NI during Q3, which is where it has been since the mid-1980s. Disposable personal income was 86.1% of NI during Q3, which is down only slightly from the recent record high of 89.9% during Q2-2009.

How can this be? What’s propping up pre-tax and after-tax personal income to offset the downward pressure on compensation measures relative to National Income? Government social benefits paid to individuals have soared from less than 4% of NI during the early 1950s to over 17% recently. Such benefits were mostly covered by payroll taxes collected from employers and employees until 2001.

This pay-as-you-go system has been derailed since then as the deficit between entitlements and payroll tax revenues ballooned from zero at the beginning of the previous decade to nearly $900 billion over the past 12 months through October. In other words, pre-tax and after-tax personal incomes have been propped up by deficit-financed government transfers to individuals.

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