I find studies of income inequality and economic growth especially interesting since, apart from anything else, they highlight the differences between the neo-classical consensus and the post-keynesian view of the world. In this context I found two papers by Simon Mohun published on the Cambridge Journal of Economics and focusing on income inequality due to supervisory wages growth and on capital productivity long-term movements very enlightening. The fact that the author uses simple accounting exercises instead of relying on heavy econometric work is also quite positive since it keeps the analysis simple and not easily questionable.
The author starts by looking at the evolution of the US profit share (defined as profits to the capital stock) since the early ’60s. The rate is decomposed in the profit share (profits to value added) and capital productivity (value added to the capital stock) using a simple chain rule:
What the author then does is to decompose the economy into ‘productive’ and un-productive sectors and the workers into supervisory and non-supervisory employees. It turns out that supervisory workers saw a large increase in their wage share especially after 1980 while non-supervisory workers experienced a large fall in their own share after a mild increase in the 1964-1979 period:
If one expands the ‘capitalist class’ to also include supervisory workers which means that their wages should be included in the profit share, the actual path of the profit share turns out to be quite different than the original series:
As a result, the ‘expanded’ profit rate actually shows a significant increase after 1980 with a large part attributed to the expansion of supervisory wages and not only to the increase of capital productivity:
What should be stressed at this point though is that this expanded profit rate does not provide the financing means for an expansion in investment (which would be naively assumed to be the driver of the increase in capital productivity) but rather is appropriated by the supervisor ‘worker’ class.
In the second paper, Mohun takes a deeper look at capital productivity as well. Keeping with the productive/un-productive distinction, the capital productivity growth is decomposed into:
- the expansion of the productive and un-productive fixed assets (which tend to explain a small part of the growth)
- relative prices (between capital goods and general output) and
- the ratio of labor productivity to capital deepening (the ratio of the capital stock to labor hours).
The findings on relative prices are in agreement with other studies on the subject which find that capital goods ‘got cheaper’ since 1980 and were a significant driver of the divergence between labor productivity and real wages. The author finds that during 1982-1998 relative prices contributed around 35% to the change in capital productivity:
The major driver though was the large change in capital intensity. While capital deepening (it is named technical composition of capital in the paper) grew close to 3% in the 1966-1982 period, it stagnated (-0.1%) in the 1982-99 period. Labor productivity growth remained roughly the same at 1.5% and 1.4% respectively.
So it seems that firms not only took advantage of lower capital goods inflation in order to increase their capital productivity but were actually able to maintain growth in labor productivity without investing into productive capacity (at least in relative terms). The paper speculates that this growth was achieved through the introduction of more efficient ‘management and organization techniques’.
In any case, the papers make it quite clear that the deepening income inequality since 1980 was driven primarily by the rise of the manager class whose renumeration grew at the expense of productive workers and normal profits. This growth was made possible by the lower relative fixed assets inflation and continued increases in labor productivity despite a complete reversal in capital intensity by corporations.
The above is also reflected in a more detailed study of income growth in the top income earners based on US tax return data:
Table 7 shows that the share of national income (excluding capital gains) received by the top 0.1 percent of income recipients increased from 2.8 percent in 1979 to 7.3 percent in 2005. Again, the shares received by executives, managers, supervisors, and financial professionals increased markedly, with the increase in the share of income among these occupations accounting for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005. The pattern is similar in Table 7a when we include capital gains.
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24 Ιανουαρίου, 2014 στις 10:26
Konstantinos Koukopoulos
So what are these managers doing with the cash? Why are they not financing an expansion in investment, contrary to a naive, as you said, assumption? Obviously they are spending a great deal of their profit on consumption, and maybe little in reinvestment.
And if, as it seems, they have kept up productivity by managing others then how do they as “human capital” compare with other investments in capital? Are they a good investment or not? Is, for example, investing in more efficient air conditioning a better investment than investing in say a manager who knows a system like Kanban?
24 Ιανουαρίου, 2014 στις 10:59
kkalev
Cash holders found it more ‘productive’ to finance debt-driven consumption by the 90%. Coupled with the secular decline in interest rates since 1980 and the fall in capital gains taxes this has allowed them to earn a large part of their income from interest and capital gains:
http://slackwire.blogspot.gr/2013/03/where-do-rich-get-their-money-again.html
Investment of profits also saw a regime change since 1980 with profits going to dividends and stock repurchases rather than to finance long-term investment projects.
http://slackwire.blogspot.gr/2011/10/disgorge-cash.html
Regarding the second paragraph I ‘m sorry but I do not have an answer. The question though is not if managers/supervisors should get a hefty pay increase for their work but why wages of the rest of the production workers do not follow their productivity increase.
25 Ιανουαρίου, 2014 στις 22:28
Konstantinos Koukopoulos
And by cash holders you mean not only the managerial class but also the investment funds/banks correct? Also, wouldn’t you say that if there is a shortage of worthwhile long term investments and a demand for credit then it makes some sense to finance consumption of today’s products rather than the development of tomorrow’s? Get the low hanging fruit so to say. Last, what do you think is the answer why workers wages are not in-line with their productivity?
25 Ιανουαρίου, 2014 στις 23:25
helsworth
Great article, sir. Hail from a fellow MMTer (from Romania).
26 Ιανουαρίου, 2014 στις 17:42
kkalev
@Konstantinos Koukopoulos
1) Cash holders usually invest through mutual/hedge funds, not directly. And the increased demand for safe assets (coupled with the increasing holdings of government securities by foreign central banks which were ‘taken out’ of the market) were a large contributor for the financial engineering that created the whole line of securitized products (such as CDOs).
2) From an entrepreneur’s point of view, financing today’s consumption through debt instead of paying higher wages is an excellent choice.. until a credit crisis.
3) The last question is the subject of extensive research with no absolutely clear result. In my view the move away from full employment after 1980 (with the adoption of the NAIRU) regarding monetary and fiscal policy, anti-union policy and to a lesser extent globalization have all been contributors. You need a large and persistent reserve army of the unemployed in order to achieve long-term results. It’s no coincidence that real wages followed productivity in the Clinton years when Greenspan lowered unemployment close to 4%.