The Quarterly Review of Economics & Business,
August 1962, Volume 2, Number 3;
Bureau of Economic and Business Research, University of Illinois.
The public has been privileged to observe, and indeed, to participate in, an interesting debate in recent years. The question in its most basic form is whether or not labor's gains are achieved at the expense of the economic welfare of society as a whole. This issue in itself is sometimes discussed; at other times it is brought up in the contexts of a host of other national economic and political issues -- economic growth, the balance-of-payments question, unemployment, the causes of inflation, and the question of union monopoly power, to mention a few. Not infrequently the debate on any of these issues centers around the share of labor in the national income.
On the one hand, business spokesmen assert that labor has increased its share of income at the expense of legitimate business profits. Invariably they disclaim any self-interest in holding this position. Rather, they want the public to become aware of the need for a larger element of profit to stimulate investment, raise the economy's growth rate, eliminate unemployment, correct the balance-of-payments deficit, or solve whatever other problem happens to be under discussion. Labor, on the other hand, maintains that its share of the social pie is not large enough. Again there is the disclaimer of self interest. Labor's spokesmen are really interested in raising purchasing power -- to stimulate investment, raise the economy's growth rate, eliminate unemployment, and so forth. Government spokesmen take a position of cautious ambivalence, but only because this is the most statesmanlike posture which can be assumed and not through fear of the political consequences which might attend any other position.
The individual's opinion in this matter is necessarily conditioned by his own social philosophy. But a helpful step in arriving at any opinion is a brief and inelegant (i.e., nonmathematical) review of what has been happening to distributive shares in the national income over the past three decades or so.
The basic data are the estimates of national income reported by the Department of Commerce for the years 1929-60, with the preliminary 1961 estimates from the President's Economic Report. The shares may be divided into four broad categories: (1) employee compensation, which may be further subdivided between the private and the governmental sectors of the economy; (2) the income of unincorporated enterprises, distinguishing between farm and nonfarm (business and professional) incomes; (3) corporate profits before taxes but with inventory valuation adjustments; and (4) rentier incomes in the form of interest and net rents. These shares, expressed as percentages of national income, are shown in the appendix tables.
The use of national income shares as an index of labor's participation in the fruits of the economy does involve, of course, a fairly broad conception of labor. "Employees' compensation" includes the wages and supplements of some widely diverse recipients, ranging from the man who wrestles with garbage cans on the local refuse removal truck to the chairman of the board of General Motors. Nevertheless, in a formal sense all employee compensation ultimately depends upon the consent of the hiring parties -- be they private entrepreneurs, corporate stockholders, or taxpayers. Thus, there is nothing illogical about the inclusion of the President of the United States with a Pentagon typist, the president of United States Steel with a stockroom clerk at the Fairless Works, and so on, in the ranks of hired labor.
A more serious problem is the nature of the time period involved, dominated as it is by depression, war, and postwar inflation, all of which tend to distort the pattern which might be observed in a lengthy period of peacetime full employment with a reasonably steady real income growth rate of, say, 3 percent a year. Whether there ever has been, or ever will be, such an ideal period is open to question. In any case, the Department of Commerce series begins with 1929. Were distributive shares in 1929 "reasonable" or "normal" or even "representative" of the pre-1930 economy? The question is moot. Truly comparable data do not exist for earlier years, so, whether we like it or not, it appears that we must start with 1929.
Clutching at remarkably fragile straws, we may assert that the share of hired labor has risen noticeably in the past 33 years, from less than 60 percent of the national income in 1929 to approximately 70 percent at the present time, a period of impressive growth in national output. The modest purpose of this paper is to raise two simple questions. Does the apparent growth in labor's share of the national income stem from the ability of labor, perhaps through the power of some of its organizations, to increase its compensation at a more rapid rate than other sectors of the economy? Or alternatively, is it possible that factors other than an increase in labor's bargaining power are capable of throwing some light on the relative shift in income shares? The latter question may be the easier, and perhaps the more valid one, to answer.
An eight-year-old at the dinner table may consider, resentfully, that a larger slice of cake for Uncle George means a smaller slice for himself. An outsider might reverse the order of causality and reason that a smaller share for the child leaves a little bit more cake for Uncle George. So with national income, we can approach the question of a growing distributive share by examining some possible reasons for a declining trend in another share. More specifically, the growth in the share of national income accruing to employees appears to have been accompanied by reductions in the shares going to rentier and noncorporate entrepreneurial incomes.
The share of national income accruing to factors of production through personal interest income, net rents, and royalties in recent years has been approximately half what it was in the first few years of the period. From 13.4 percent in 1929, this share rose to 19.1 percent in 1932, then declined fairly steadily to only 4.8 percent in 1944 as both the interest and rent components fell. Since the end of World War II, a rise in the interest component has served to offset the continuing decline in the net rent share and to increase the total. In the last four years, 1958-61, these components together have represented a stable 7.2 or 7.3 percent of the national income.
An important clue to the behavior of the net rent share of national income may be found in the BLS rent index, which plays a major role in Department of Commerce estimates of rental income from dwelling units (including the imputed rental of owner-occupied units). The net rent share was stable in the early stage of the post-1929 depression, when both national income and the BLS rent index moved downward. With recovery the rent index rose slowly and was still 20 percent below the 1929-31 average when the war ushered in an era of rent controls. In the postwar period, a combination of high personal income and governmental support of low-down-payment, long-term mortgage financing have encouraged a rapid expansion of home ownership, which in turn helped to restrain inflation in the rental housing market. As a result it was not until 1952 that the rent index reached the 1929 level of 117 (1947-49 = 100). Although rents have continued to rise, the index at the end of 1961 was only 23 percent above the 1929 level, in contrast to the over-all consumer price index, which was 75 percent above 1929.
Rentals from nonfarm dwelling units (as distinct from commercial properties and farm realty) account for about two-thirds of the net rental component of national income. Since gross rental rates have risen more slowly than maintenance costs, depreciation, and taxes in the past three decades, it is not surprising that the current net rent share of the national income is less than half of the 1929 share.
Net personal interest was a larger share of national income in 1961 (4.6 percent) than in any other year since 1940; but even this was far below the 7.3 percent of 1929. Dollarwise, net interest fell steadily, year by year (except for an insignificant rise in 1941), from 1929 to 1946. The rate of decline was less than that for national income from 1929 to 1932, with the result that in 1932 personal interest income accounted for nearly 13 percent of the national income. As interest continued to fall, in absolute amounts, after national income began to recover, the percentage share of interest in income fell to 1.7 percent by 1946. Thereafter, interest rose more rapidly than national income as a whole, with the absolute magnitude of interest rising nearly seven times and the percentage share nearly three times by 1961. Two influences are at work here: rising interest rates and the rapid credit expansion in the years since World War II. Significantly, this is the only share of national income, other than employee compensation, to show a noticeable growth trend in recent years.
One characteristic of the interest income series may be briefly noted. As a component of national income, the series understates the welfare of interest recipients, by virtue of the exclusion of net government interest. In 1929 net government interest accruing to persons was less than $1 billion, or about one-seventh as large as the net interest component of national income; in 1961, on the other hand, net government interest paid to persons exceeded $7 billion, an amount nearly one-third as large as the national income component. Indeed, from 1945 to 1947 personal interest income from government was greater than the interest included in national income.
Turning now to incomes of proprietors of unincorporated enterprises (farm, business, and professional), we find that they amounted to 16.9 percent of the national income in 1929. For the next twenty years, the annual share of this group fluctuated between 16 percent and 18 percent, excepting the depression lows of 1930-34 and the 1946 peak of 20 percent. But since 1950 there has been a clear trend downward, so that since 1959 these incomes have accounted for less than 12 percent of the national income, noticeably under even the 12.5 percent low of 1932.
Most of the volatility in the proprietors' share of national income can be traced to the agricultural sector of the economy. Farm owners received 6.8 percent of national income in 1929. Depression brought both a collapse in farm prices and an increase in the number of farmers, as workers who had left agriculture for factory employment in the 1920's returned to the soil in the 1930's. An unexpected marriage of the forces of man and nature -- New Deal crop restrictions and drought -- brought some recovery in farm prices, but not until World War II were farmers to experience the prosperity they had known from 1917 to 1920. From 1946 to 1948 an average of 8 percent of the national income went to farm proprietors. The slide in farm incomes which began in 1949 was temporarily halted by the Korean crisis, but resumed its course in 1952. By 1960 the share of farmers in the national income had fallen to an all-time low of 2.9 percent.
The business and professional subdivision of this series shows no trend, upward or downward, prior to 1950. Apart from 1932, 1933, and 1946, the shares of national income going to unincorporated business and professional proprietors fluctuated within approximately one-half of a percentage point above or below the 10 percent level of 1929. In short, this component generally moved in the same direction and at the same rate as the national income itself. In the years since 1950, however, the aggregate income of unincorporated nonfarm enterprises has not grown as rapidly as national income. As a result their share in the total has fallen slowly but steadily from the 10 percent level, reaching 8.5 percent in 1961.
The performance of the unincorporated entrepreneurial share reflects a shift away from this form of enterprise in the postwar, as contrasted to the prewar, economy. Department of Commerce employment estimates (in terms of full-time employment equivalents) show for 1929 some 10.3 million operators of unincorporated enterprises, a number which was 22.3 percent of all "persons engaged in production" (46.2 million). Passing over the influence of depression and war, we can see a downward trend in the number of unincorporated firms since 1947, in contrast to the growth in total employment. Thus, by 1960 there were 9.7 million operators of unincorporated enterprises, only 14.4 percent of the 67.4 million total employment.
For the most part, the decline is explained by the exodus from agriculture (2.9 million farm proprietors in 1960 compared with 5.6 million in 1929), which more than offset the increase in nonfarm categories. The number of proprietors of unincorporated nonfarm enterprises in the past decade has kept almost perfect pace with the rise in total employment; the 10 percent ratio of noncorporate proprietors to the total has been virtually identical to that in 1929. Despite the stability of this ratio, however, the relative contribution of unincorporated nonfarm enterprises to the economy has clearly been falling in comparison with that of the private corporate and government sectors.
Practically all of the net income of unincorporated private business arises in sole proprietorships and partnerships. Nonfarm national income originating in these firms is not separately reported. Since sales of incorporated farms amount to less than 10 percent of farm output, however, a rough measure of the nonfarm contribution may be derived by subtracting national income originating in farming from the total originating in sole proprietorships and partnerships. The last year in which the net income of unincorporated nonfarm enterprises exceeded 10 percent of national income was 1949. Using the rough but reasonable measure described, it appears that national income originating in nonfarm proprietorships and partnerships rose by 77 percent from 1949 to 1960. National income originating in the corporate sector rose by 96 percent in the same period, while that originating in the two principal employing sectors combined, business and government, increased by 103 percent. The decline in the share of national income accruing to the owners of unincorporated nonfarm enterprises, in other words, is consistent with the relative growth in importance of the corporate business and government sectors of the national accounts. With this decline reinforcing the decline in the farm share, it appears that the over-all reduction since 1950 in the share of national income represented by the profits of unincorporated private enterprise can best be explained in terms of structural change within the economy.
The corporate profit component of national income consists of profits accruing to United States residents, before income taxes and depletion allowances, exclusive of capital gains or losses, and adjusted for changes in inventory valuations. As one would expect, this share fluctuates rather widely with general business conditions. In 1929 corporate profits accounted for 11.5 percent of the national income. The sharp decline during the depression of the 1930's was followed by a revival to a level well above 1929 during World War II. The effects of reconversion may be seen in the reduction in this share in 1945 and 1946. In the ensuing years there have been further fluctuations, between a low of 10.2 percent in 1958 and a high of 14.8 percent in 1950. There is, however, no evidence of any secular shrinkage in this share as compared with 1929. Indeed, in 8 of the 15 years from 1947 to 1961, the share of national income accounted for by corporate profits was within 1 percentage point (i.e., between 10.5 and 12.5 percent) of the 1929 figure. In six years the share was more than 1 percentage point above the 1929 figure. And in only one year, 1958, did the corporate profit share fall below 1929 by even slightly more than a single percentage point.
While corporate profits before income taxes are clearly the pertinent measure of the corporate income share in the national income, much of the recent discussion has centered about corporate profits after taxes. Here, of course, there is no room for argument: profits after taxes are a smaller share of national income than in 1929. In the five-year period from 1957 to 1961 (including four years in which the economy was substantially below the full-employment level), profits after tax, but with no inventory valuation adjustment, have averaged 5.6 percent of the national income, compared with 9.5 percent in 1929.
Any significance attached to corporate profits after taxes, however, must be in relation to the equity capital invested in corporations, rather than to the national income. A measure of equity comparable with the national income concept of profits does not exist. But the Treasury's Statistics of Income may provide us with a rough basis for judgment. Stockholders' investment (stock and surplus) in all corporations amounted to $160.3 billion in 1929, $344.3 billion in 1957, $369.2 billion in 1958, and $389.0 billion in 1959, the latest year reported. Net profits, as compiled by the Internal Revenue Service, less federal income taxes amounted to $10.S billion in 1929, $24.5 billion in 1957, $20.4 billion in 1958, and $25.1 billion in 1959. The rate of return, after taxes, in 1929 of 6.5 percent was noticeably below the 7.1 percent of 1957 and identical to the 1959 rate. And it seems clear that the 5.5 percent return in 1958 reflects the divergence of actual national income from the full-employment level, rather than any "profit squeeze" resulting from high wages, material costs, or taxes. In other words, despite the apparent decline in the ratio of corporate profits after taxes to the national income, it is a reasonable hypothesis that the rate of return on corporate equity capital has been no lower in recent years than it was in the late 1920's.
To summarize what has been said so far, the combined shares of national income accounted for by the income of unincorporated enterprises, interest, and net rent have declined from 30.3 percent of the total in 1929 to 18.8 percent in 1961; there is no significant difference between the corporate profit share in 1929 and comparable shares in recent years. Further, it appears that the behavior of those shares which have declined can be explained perfectly well by factors other than the bargaining power of labor in the economy.
Thus, it may be said that the decline in non-employee shares other than corporate profits has made possible the increase in employees' compensation, from 58 percent of the national income in 1929 to 70 percent in recent years. One or two observations may be made with respect to this increase.
In the first place, although employee compensation accounts for a larger share of the national income today than in 1929, it is obvious that a larger proportion of the population participates in this share. Employees of private business and government constituted 77.7 percent of "persons engaged in production" (in terms of full-time equivalents) in 1929; since 1956 the proportion has been 85.0 percent or more, reaching 85.6 percent in 1960. The structural shift from self-employed to employee status within the economy, in other words, has been a sizable one.
In the second place, the nature of the shift can be easily isolated. It was stated earlier that the proportion of operators of nonfarm unincorporated enterprises to total persons engaged in production today is vely nearly the same as in 1929. The same statement may be made with respect to the proportion of employees of private business firms. This ratio was 70.8 percent in 1929 and averaged 70.2 percent from 1956 to 1960. Thus, the shift from self-employment to employee status reflects the declining importance of agricultural proprietorship and the increasing importance of government employment. Farm operators accounted for 12.8 percent of all persons engaged in production in 1929, but for only 4.3 percent in 1960. On the other hand, 6.9 percent of the total were employed in the civilian and military functions of government in 1929 and 15.3 percent in 1960. This shift is, of course, entirely consistent with the economic facts of life. On the one hand, we have seen a rapid increase in agricultural productivity without a concomitant growth in markets. On the other hand, government employment has grown both as a result of the expanding role of government within the domestic economy and as a result of the effects of a long period of international tension.
Significantly, this shift in employment status can explain approximately half of the increase of 12 percentage points in the employees' compensation share of national income since 1929. That is, had the combined shares of employees and the operators of unincorporated enterprises remained at the 1929 level, an increase in employees' compensation from 58.2 percent of national income in 1929 to 64.1 percent by 1960 would have been proportionate to the change in the ratio between the numbers of persons in each group.
Thus, what needs to be explained is not the difference between the employees' share in the national income in 1929 and at present, but rather the matter of some 6 percentage points between the current share and that share which could have been expected from the rise in the ratio of employees to total persons engaged in production. And this seems simple enough, in terms of the reduction in the share represented by interest and rent, with some slight assistance since 1958 from the pressure on business profits caused by our failure to maintain full employment.
In short, the rise in the employees' share of national income can be explained without recourse to any analysis of labor's influence. Some fairly heroic assumptions would be required to utilize the bargaining power of labor in the economy as an explanation for the decline in income shares represented by interest, rents, and farm profits. To the extent that one is convinced that this power exists, about the most he could say is that it may have prevented the residual left by declining shares from accruing to corporate profits. And this may be all for the best, since profits and depreciation allowances appear to have been sufficient in any case to provide the economy with a growth rate in productive capacity somewhat higher than our ability to utilize it.
| Year | National income (billions) | Percentages of national income | |||
|---|---|---|---|---|---|
| Compensation of employees | Unincorporated enterprisesa | Corporate profitsa | Interest and rents | ||
| 1929 | $ 87.8 | 58.2 | 16.9 | 11.5 | 13.4 |
| 1930 | 75.7 | 61.8 | 15.2 | 8.7 | 14.3 |
| 1931 | 59.7 | 66.6 | 14.7 | 2.7 | 16.1 |
| 1932 | 42.5 | 73.2 | 12.5 | (-4.7) | 19.1 |
| 1933 | 40.2 | 73.4 | 13.9 | (-5 0) | 17.4 |
| 1934 | 49.0 | 70.0 | 14.3 | 2.2 | 13.5 |
| 1935 | 57.1 | 65.3 | 18.2 | 5.1 | 11.4 |
| 1936 | 64.9 | 66.0 | 16.2 | 7.7 | 10.0 |
| 1937 | 73.6 | 65.1 | 17.2 | 8.4 | 9.3 |
| 1938 | 67.6 | 66.6 | 16.4 | 6.4 | 10.6 |
| 1939 | 72.8 | 66.0 | 16.1 | 7.8 | 10.0 |
| 1940 | 81.6 | 63.8 | 15.9 | 11.2 | 9.1 |
| 1941 | 104.7 | 61.9 | 16.6 | 13.8 | 7.6 |
| 1942 | 137.7 | 61.9 | 17.4 | 14.3 | 6.4 |
| 1943 | 170.3 | 64.4 | 16.6 | 14.0 | 5.2 |
| 1944 | 182.6 | 66.4 | 16.2 | 12.6 | 4.8 |
| 1945 | 181.2 | 68.0 | 17.0 | 10.2 | 4.9 |
| 1946 | 180.9 | 65.1 | 20.2 | 9.6 | 5.1 |
| 1947 | 198.2 | 65.0 | 17.9 | 11.9 | 5.2 |
| 1948 | 223.5 | 63.1 | 18.0 | 13.8 | 5.1 |
| 1949 | 217.7 | 64.7 | 16.4 | 13.0 | 6.0 |
| 1950 | 241.9 | 63.7 | 15.5 | 14.8 | 6.0 |
| 1951 | 279.3 | 64.6 | 15.1 | 14.7 | 5.6 |
| 1952 | 292.2 | 66.7 | 14.4 | 12.9 | 5.9 |
| 1953 | 305.8 | 68.3 | 13.3 | 12.2 | 6.1 |
| 1954 | 301.8 | 68.8 | 13.4 | 11.2 | 6.6 |
| 1955 | 330.2 | 67.8 | 12.7 | 13.1 | 6.4 |
| 1956 | 350.8 | 69.1 | 12.5 | 12.0 | 6.5 |
| 1957 | 366.5 | 69.7 | 12.1 | 11.4 | 6.8 |
| 1958 | 367.7 | 69.9 | 12.6 | 10.2 | 7.3 |
| 1959 | 399.6 | 69.5 | 11.6 | 11.6 | 7.2 |
| 1960 | 417.1 | 70.4 | 11.5 | 10.8 | 7.2 |
| 1961b | 430.2 | 70.4 | 11.5 | 10.7 | 7.3 |
a Before income taxes, and with inventory valuation adjustment.
b Preliminary.
Source: U.S. Department of Commerce.
(Percentages of national income)
| Year | Employees' compensation | Corporate profits | Income of unincorporated firms | Rentier income | ||||
|---|---|---|---|---|---|---|---|---|
| Private employers | Government (incl. military) | Before tax | After taxa | Farm | Nonfarm | Interest | Net rent | |
| 1929 | 52.5 | 5.7 | 11.5 | 9.5 | 6.8 | 10.1 | 7.3 | 6.1 |
| 1930 | 54.8 | 7.0 | 8.7 | 2.5 | 5.4 | 9.8 | 7.9 | 6.3 |
| 1931 | 57.5 | 9.2 | 2.7 | (-2.2) | 5.4 | 9.4 | 9.7 | 6.4 |
| 1932 | 60.9 | 12.2 | (-4.7) | (-8.0) | 4.5 | 8.0 | 12.7 | 6.4 |
| 1933 | 60.2 | 13.3 | (-5.0) | (-1.0) | 6.0 | 7.9 | 12.4 | 5.0 |
| 1934 | 57.1 | 12.9 | 2.2 | 2.0 | 4.9 | 9.4 | 10.0 | 3.5 |
| 1935 | 53.6 | 11.7 | 5.1 | 3.9 | 8.8 | 9.4 | 8.4 | 3.0 |
| 1936 | 53.6 | 12.4 | 7.7 | 6.6 | 6.2 | 10.0 | 7.2 | 2.8 |
| 1937 | 54.5 | 10.6 | 8.4 | 6.4 | 7.6 | 9.6 | 6.4 | 2.9 |
| 1938 | 54.0 | 12.7 | 6.4 | 3.4 | 6.4 | 10.0 | 6.8 | 3.8 |
| 1939 | 54.3 | 11.8 | 7.8 | 6.9 | 5.9 | 10.1 | 6.3 | 3.7 |
| 1940 | 53.0 | 10.8 | 11.2 | 8.0 | 5.6 | 10.3 | 5.5 | 3.6 |
| 1941 | 51.9 | 10.0 | 13.8 | 9.0 | 6.2 | 10.4 | 4.3 | 3.3 |
| 1942 | 50.0 | 11.9 | 14.3 | 6.9 | 7.3 | 10.1 | 3.1 | 3.3 |
| 1943 | 48.4 | 15.9 | 14.0 | 6.2 | 6.7 | 9.9 | 2.2 | 3.0 |
| 1944 | 47.9 | 18.5 | 12.6 | 5.7 | 6.3 | 9.9 | 1.8 | 3.0 |
| 1945 | 47.7 | 20.3 | 10.2 | 4.6 | 6.5 | 10.5 | 1.8 | 3.1 |
| 1946 | 52.5 | 12.6 | 9.6 | 7.4 | 8.5 | 11.8 | 1.7 | 3.4 |
| 1947 | 55.5 | 9.5 | 11.9 | 9.2 | 7.8 | 10.0 | 1.9 | 3.3 |
| 1948 | 54.2 | 8.9 | 13.8 | 9.2 | 8.0 | 10.0 | 1.9 | 3.3 |
| 1949 | 54.6 | 10.1 | 13.0 | 7.3 | 5.9 | 10.4 | 2.2 | 3.8 |
| 1950 | 54.0 | 9.7 | 14.8 | 9.4 | 5.8 | 9.7 | 2.3 | 3.7 |
| 1951 | 53.7 | 10.8 | 14.7 | 7.1 | 5.8 | 9.3 | 2.2 | 3.4 |
| 1952 | 55.0 | 11.8 | 12.9 | 5.9 | 5.2 | 9.2 | 2.4 | 3.5 |
| 1953 | 56.8 | 11.5 | 12.2 | 5.9 | 4.3 | 9.0 | 2.7 | 3.4 |
| 1954 | 56.9 | 11.9 | 11.2 | 5.7 | 4.2 | 9.2 | 3.0 | 3.6 |
| 1955 | 56.3 | 11.5 | 13.1 | 7.0 | 3.6 | 9.2 | 3.3 | 3.1 |
| 1956 | 57.6 | 11.5 | 12.0 | 6.7 | 3.3 | 9.1 | 3.3 | 3.1 |
| 1957 | 57.9 | 11.8 | 11.4 | 6.1 | 3.2 | 8.9 | 3.6 | 3.1 |
| 1958 | 57.2 | 12.7 | 10.2 | 5.2 | 3.8 | 8.8 | 4.0 | 3.3 |
| 1959 | 57.3 | 12.2 | 11.6 | 6.0 | 3.0 | 8.7 | 4.1 | 3.1 |
| 1960 | 58.0 | 12.4 | 10.8 | 5.4 | 2.9 | 8.7 | 4.4 | 2.8 |
| 1961 | 57.3 | 13.1 | 10.7 | 5.4 | 3.0 | 8.5 | 4.6 | 2.7 |
a Without inventory valuation adjustment.