April 27, 2015
Are Corporations Really Hogging Workers’ Wages?
Posted on Apr 9, 2014
Where did the EPI go wrong? The problem lies in the peculiar way the institute adjusts productivity and compensation data in order to account for inflation. What results is the age-old problem of comparing apples and oranges.
The numbers EPI analysts used to perform this adjustment are called “price indexes.” They represent the average price of goods and services at particular times. If the EPI had used a single price index to adjust the productivity and compensation numbers, it would have been comparing apples with apples—and it would not have obtained a “productivity/compensation gap” that was so large and so misleading.
But the EPI used two different price indexes. It did this to reflect the fact that the prices of goods and services that workers buy have increased substantially faster than the prices of goods and services that companies produce. (This occurred because the prices of “investment goods”—plant, machinery and other equipment used in production—which some companies produce have not risen as quickly as the prices of consumer goods.) Much of what the EPI regards as a divergence of pay and productivity stems from the quicker growth of consumer prices rather than from the slow growth of pay. To make up for the particularly rapid inflation workers experienced, and thereby eliminate the “divergence of pay and productivity,” their compensation would have had to rise more rapidly than total income. And as we just saw, their share of income would eventually have had to rise to the point where it wiped out all profit and other business income.
It is reasonable to want statistics that reflect the particularly rapid inflation that consumers have experienced. Nonetheless, to offer another analogy, the EPI’s procedure produces a lopsided growth of productivity relative to compensation in much the same way that you would make a car lopsided by deflating the tires a little on one side and a lot on the other. The numbers cannot be fairly compared.
Square, Site wide
Furthermore, a growing productivity/compensation gap produced in this manner tells us nothing about the distribution of income between employee compensation and corporate profits. If compensation grew more slowly than productivity, it has to be the case that corporate profits grew more rapidly—at least it must be if the analyst involved used a single price index to make the inflation adjustment. But an analyst who used two price indexes might well report that compensation and profits have both grown more slowly than productivity during the last three decades.
So when two price indexes are used, a widening gap between productivity and the compensation of employees doesn’t mean that profits grew more quickly than productivity or that the profit share of the net domestic product (the annual measure of gross domestic product minus depreciation) increased at the expense of the compensation share. As indicated earlier, Henwood’s recent claim in The New York Times that “corporate profits skyrocketed” because “productivity rose 93 percent between 1980 and 2013, while pay rose 38 percent,” is simply incorrect. The “extraordinarily lopsided” growth he reports is produced by lopsided inflation adjustment. As we’ve seen, the gap between “productivity” and average hourly “compensation” grew larger and larger, but the employee-compensation share of the net domestic product didn’t fall. It follows that the remaining share, the profits left for corporations and other businesses, didn’t rise.
Thus, although the typical worker’s share fell to some degree, what actually rose at his or her expense was the share of the income distributed to more highly paid employees. The 38 percent pay rise Henwood cites is the average rise of all employees, from janitors to CEOs. But the pay of professionals, managers and many financial-sector employees grew much faster than the pay of those at the bottom. Growing inequality of compensation among workers is a significant but under-appreciated part of the developing inequality picture, and one I will discuss in a future article.
 Corporations’ net domestic product (net value added) and compensation data are reported in National Income and Product Account (NIPA) Table 1.14, lines 3 and 4, respectively. Business-sector net output is reported in NIPA Table 1.9.5, line 2, while total business-sector compensation is the sum of lines 3 and 11 of NIPA Table 1.13. Net domestic product is the sector’s contribution to gross domestic product minus depreciation.
 The data in this and the following graph pertain to the sectors of the economy in which production/nonsupervisory workers are counted, plus farms. Most of the data come from National Income and Product Account Table 1.13. National income: sum of lines 3, 19, 28, and 49; compensation: sum of lines 4, 20, 29, and 50; tax and transfer payments: sum of lines 9, 27, 35, and 55; interest and rental: sum of lines 8, 26, 33, 34, 53, and 54; corporate profit and proprietors’ income: sum of lines 7, 23, and 32. “Missing” compensation of production/nonsupervisory workers was computed as follows. Real average hourly compensation in the absence of a productivity/compensation gap is the product of the EPI’s productivity series and the ratio of the 1972 values of its real average hourly compensation and productivity figures (both reported in the “4U” spreadsheet of its “Wages” data file). To obtain nominal figures, this hypothetical series and actual average hourly compensation series were multiplied by the CPI-U-RS price index (available here) that the EPI used to obtain its real figures. The difference between the hypothetical and actual nominal figures is the “missing” compensation per hour. Total “missing” compensation is the hourly figure multiplied by the total hours worked by production/nonsupervisory workers, which is 52 times the product of the number of workers employed and their average weekly hours (reported in Current Employment Statistics Tables B-6 and B-7, respectively).
Andrew Kliman is a professor of economics at Pace University in New York and author of “The Failure of Capitalist Production: Underlying Causes of the Great Recession” (Pluto Books, 2012) and “Reclaiming Marx’s ‘Capital’: A Refutation of the Myth of Inconsistency” (Lexington Books, 2007). See his website here.
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