I ‘ve recently read an interesting paper on the evolution and determinants of the firm profit share in the US (analyzed with a Marxian perspective). The paper uses an accounting identity framework for its analysis instead of an econometric setup which makes the analysis much more robust and clear. I will use a similar framework to look into the contributions of various sources to the evolution of the Greek firms profits during the Euro era.
According to Ameco, Gross Disposable Income (a close proxy for profits after tax without consumption of fixed investment) is equal to:
GDI = Balance of Primary Income (Gross) – Taxes on Income and Wealth + Net Current Transfers
BPI = Gross Value Added – Compensation of Employees – Other Taxes + Other Subsidies + Net Property Income.
I ‘ve listed the most important elements in nominal terms in the table below:
An initial inspection shows that:
- Gross Value Added increased substantially from €52.5bn in 2000 to €93bn in 2008 and then took a fall to €75.7bn in 2012.
- Current taxes did not change much throughout the Euro period.
- Compensation of employees increased by half the increase in GVA (less than €20bn compared to a bit more than €40bn). Nevertheless, the percentage increase was the same, maintaining the labor share of output at 44% of GVA. Since 2008 it fell quite heavily to 2002 levels of €27.4bn.
- Net property income increased by €10bn.
- GDI after dropping to €16.3bn in 2007, more than doubled during the crisis period to €34.6bn in 2012. Corporations were actually able to increase their income which was held as retained profits and not invested, something evident by the increase in net lending from €1bn in 2007 and €8.3bn in 2008 to €20bn in 2011 (i am not counting 2012 since that year’s high net lending of €30bn can be attributed to a large part to an increase in other capital income of €10.5bn).
Another way to examine the above statistics is to look at the contributions to the absolute change of the GDI (proxied by the sum of the absolute values of the above series). I ‘ve made the adjustments necessary so that any income will have a positive contribution while any expenditure a negative one. The crisis period 2008-2012 has different coloring:
The results are quite similar to the previous observations:
- Up until 2008 GVA shows very strong contribution, which reverses completely after 2008.
- Taxes (except from a few outliers) have only marginal contributions. This is especially true during the crisis period. As long as direct taxes are concerned, they do not appear to have played a serious role in the post-2008 crisis.
- Compensation of employees has (as expected) a negative contribution to profits during the expansion, though certainly much lower than the (positive) contribution of GVA. After 2008, it is one of the two main categories which contribute heavily to the increase in GDI, at the expense of employment and nominal wages. Actually, its contribution increased every year to reach 56% during 2012.
- Net property income contributed negatively to the firms balances during the expansion (especially in the 2005 – 2007 period) yet totally reversed course after 2007. Up to 2011 it was the main source of increased profits with contributions of 40-60% each year. This pattern changed heavily during 2012 with net property again contributing negatively.