Corporate profits

Why the EPI is wrong about the labor share and company profits

We have one of the Economic Policy Institute’s usual whining about how capitalist plutocrats are cheating on the American worker. It seems they are looking in economic statistics for anything that would justify such outcry. And there are a lot of numbers that can be used to support the argument, this is most definitely true. However, whether a number really supports the argument doesn’t just depend on “Look, look! See! ”Which is, sad to say, the most normal EPI tactic.

Here, they note that the amount of corporate income within U.S. firms (so, this is gross profits, after payments for everything except labor. So what he understands are profits, interest and whatever is spent on labor: wages, yes, but all taxes on labor employment, all labor benefits like health insurance, etc.). It is not even a bad number to use to monitor the divide we are talking about, that between capital and labor. However, it still doesn’t show what they think it shows. Because they forget other possible explanations for the same changes they notice.

Here’s what they actually say:

As Lawrence Mishel and I discuss in our recent article, the biggest gap that is driving the growing gap between economy-wide productivity and the typical wage of workers is increasing inequality. Part of this increase in inequality is the shift in national income from the remuneration of labor to the income of capital. Since 2000, this decline in the labor income share has become an important factor in the inequality wedge. The figure shows the share of labor in the income of the business sector. Since all business sector income is classified as labor compensation or capital income (profit plus net interest), this makes it a good first place to look for this labor-capital transfer.

And here is their table:

Just to repeat once again, there is nothing wrong with the numbers here. It is the interpretation that contains the error.

They speculate that this change in this distribution of corporate income shows that American workers are getting the hang of it. And that’s obviously not true, to say the least. Because think about what we also know about the profits of American companies since 2000. It is true: more and more of them are coming from the activities abroad of American companies. All those hundreds of billions a year that people like


and so on is piling up in those Caribbean accounts where the money can get a good rum punch and a tan. And it is also a very important sum of money:

American companies are making record profits. And more of the money stays abroad and is taxed lightly.

A Wall Street Journal analysis of 60 major U.S. companies found that together they parked a total of $ 166 billion overseas last year. This protected over 40% of their annual profits from U.S. taxes, even though it left money off limits for paying dividends, buying back shares, or making investments in the United States. The 60 companies were chosen for the analysis because each of them had held at least $ 5 billion abroad in 2011.

Okay, 40% of profits made overseas are only for the top 60 companies. But it’s still a huge number. These are, for example, real percentage points of GDP. And yes, the way the US national accounts are compiled, these profits are included (maybe not correctly) in GDP. They are certainly included in the figure used by the EPI, the income of US corporations. And here’s the point: The overseas profits made by American corporations have little to do with the price of American labor. Because obviously a large amount of non-U.S. Labor is used to make these profits overseas and what that foreign labor is paid for is certainly not included in our figures on the American economy. And so, it does not appear in the labor share in the United States.

So what we have is American companies are making more and more profits using foreign labor. We include these profits in the share of US corporate profits in the US economy, but we do not include what that foreign labor is paid in our share of the labor in the US economy.

So, the more foreign profits that US corporations make, the worse the number that the PEI tracks, the percentage labor share of all corporate earnings, is going to look like. Not at all, necessarily, because inequality is increasing, not because capitalist plutocrats give workers a hard time, but simply because of the way we put the numbers together.

Is this sufficient to explain all the change observed by the EPI? I am not sure. Because I’m not sure about the effect of changing overseas profits as a percentage of GDP to the extent they use, the labor share, and the profit share of all business income. We know that the increase in foreign profits is of the order of 2 to 3% of GDP over the past 15 years with the gallop of globalization. And I might well believe that translates into a 5% change in the distribution of corporate income. But I wouldn’t want to have to prove it, it’s way above my technical level.

However, I stress that this is at least a part, probably the majority, of what is seen here. The EPI insists that labor gets a smaller slice of the pie. Not necessarily: we are counting both the foreign and domestic capital share of income while only using the domestic labor share on the other side. What we don’t count is the labor share of the ever-growing amount of foreign labor that American companies use to make such profits. So we don’t know at all what the distribution of the labor share is. I very much doubt that it is increasing but it is absolutely not decreasing as the EPI says.

Which brings us to two public policy points. The first is that you really have to be very careful with the statistics that are used to prove one point or another. It is only after we have properly examined the underlying assumptions that we can say whether or not they are useful. This one is not. The second is that of course the answer is that taxes on corporations and the wealthy should increase. Not because of anything the PPE has proven here, but simply because that’s what the PPE always says. And because they always say it, we should really take a look a little bit askance at the numbers they come up with to prove it.