Wages, profits, and inequality

Posted: 7 December 2015 in Uncategorized

1108WAGESPROFITSv3

One of the legacies of the hegemony of neoclassical economics in the postwar period was a general lack of interest in issues pertaining to inequality, especially the analysis of the role of class in causing inequality in the distribution of income.

Unlike both classical economists (such as David Ricardo) and critics of classical economics (such as Karl Marx), postwar neoclassical economists weren’t much concerned with the class—or, as they referred to it, the functional—distribution of income. The argument was that factor (labor and capital) shares were relatively constant and therefore not particularly important in explaining economic inequality or much of anything else.

Well, that has changed in recent decades, with growing inequality, the decline in the labor share, and the rise in the capital share of national income. The relation between class and inequality simply can’t be ignored any longer.

Or can it?

Maura Francese and Carlos Mulas-Granados (pdf), in a recent paper for the IMF, noted that “the wage share has indeed been declining since the 1970s while inequality has been on the rise” but concluded that the declining labor share of income has not been a key driving factor for the growth in inequality.* Their analysis suggests that, instead,

the most important determinant of rising income inequality has been the growing dispersion of wages, especially at the top of the wage distribution.

The key question is, can those two results be reconciled? In other words, is it possible that growing inequality has been caused by changes in the class distribution of income and by the growing dispersion of wages?

Roser-1

Data on the income sources of the top 1 percent as shares of total income in the United States, illustrated by Max Roser, suggests the answer.

As is clear from the chart above, a growing share of the total income going to the top 1 percent has come from wage income (technically, wages, salaries, and pensions), beginning especially in the 1970s. That’s the fundamental difference between the two peaks in the share of income going to the top 1 percent, in 1929 and 2007:  then, most of their income came in the form of profits, dividends, interest, and rent; later, a growing percentage came in the form of wage income.

But, of course, the wages being paid to those in the top 1 percent are not the same as wages paid to everyone else. They represent, instead, a share of the surplus that is distributed to them in their role as CEOs of industrial corporations and employees in large financial institutions. So, they’re really a form of capital income—which, to keep things straight, should be added to the profit share and deducted from the wage share.

Once we make that adjustment, then contra Francese and Mulas-Granados, it becomes possible to connect growing inequality in the distribution of income to the declining wage share and to the growing dispersion of wages.

It’s the conclusion neoclassical economists fear and one they work so hard to banish from economic discourse: class changes have played an important role in make the distribution of income increasingly unequal.

 

* Readers will find a less technical presentation of Francese and Mulas-Granados’s argument here.

Comments
  1. Guillem Murcia says:

    Spot on Professor Ruccio. I remember you making this point some time ago when commenting on the whole Rognlie-Piketty debate. Profit hoarding now gets masqueraded under wage income, thus providing a convenient way to fit everything under the “labor/capital is not the problem, the problem is within labor!” discourse.

  2. […] are the wages that distort the usual calculations of the profit-wage ratio (as I explained here and here). To obtain a more accurate sense of capital and labor shares, the wages of the 1 percent should […]

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