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:

pre-tax average rate of profit profit rate - profit share - capital productivity

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:

table 5 - growth in shares of MVA

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:

profits and supervisory wagesAs 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:

expanded profit rate - profit share - capital productivityWhat 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:

price of net fixed assets and inventories relative to the price of output

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.

table 5 - annual rates of growth - labor productivity - capital deepeningSo 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.