Tuesday, November 21, 2006

Class Struggle?

The graph above is real corporate profits (blue) compared to real worker compensation (pink). In America’s heyday, the 1940s – 1960s the two moved together in almost lockstep with corporate profits at about a fifth of worker compensation. Then in the 1970s compensation growth began to outstrip profit growth.

In fact, it seems as if you can just see them start to really diverge in 1973, the year economists often point to as the beginning of the era of diminished expectations. Corporate profits begin to trend down while worker compensation trends up. During that period, however, average real worker compensation had already begun to flatten out. The growth in compensation is, therefore, probably due to an increase in the size of the workforce during the 1970s.

The interesting thing is that movements in corporate profits seem to lead movements in compensation. When corporate profits experience a downward cycle, compensation flattens out or in a few cases even shrinks. The two are linked and broadly speaking what’s good for the worker is good for the company and vise-versa

The run-up in corporate profits during the 1990s lead the spike in compensation we all remember so well, and the gargantuan trough, beginning in the late 90s interestingly, lead the rough times we’ve seen over the last few years. Yet, corporate profits have rebounded sharply and perhaps compensation will soon.