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GDP versus Wages

Posted By Barry Ritholtz On March 27, 2006 @ 5:51 am In Economy,Politics,Wages & Income | Comments Disabled

The wealthiest quintile’s total wages income are down 8.3% after taxes? That counter-inutitive statement is shown in the chart below from today’s WSJ.

My own experience has been that the cut in Capital Gains tax (from 20% to 15%) had an impact, but most especially, the slashing of the Dividends Tax (from as high as 39% top bracket down to 15%) has had a huge, after tax impact.

Down 8.3% over 5 years doesn’t ring true to me (Source is CBO):

Wages_vs_productivity_20060326_1 [1]

Here’s the WSJ discussion [2] on the subject:

Since the end of 2000, gross domestic product per person in the U.S. has expanded 8.4%, adjusted for inflation, but the average weekly wage has edged down 0.3%.

That contrast goes a long way in explaining why many Americans tell pollsters they don’t believe the Bush administration when it trumpets the economy’s strength. What is behind the divergence? And what will change it?

Some factors aren’t in dispute. Since the end of the recession of 2001, a lot of the growth in GDP per person — that is, productivity — has gone to profits, not wages. This reflects workers’ lack of bargaining power in the face of high unemployment and companies’ use of cost-cutting technology. Since 2000, labor’s share of GDP, or the total value of goods and services produced in the nation, has fallen to 57% from 58% while profits’ share has risen to almost 9% from 6%. (The remainder goes to interest, rent and other items.)

The author, Greg Ip, concludes that "History suggests that with unemployment low and growth steady, the typical family will see its income rise noticeably. As that happens, Americans’ spirits will rise, as well."

That is more likely to be true if the factors impacting wage disparity and employment mobility attenuate: technology and globalization. At the moment, the odds of that happening look pretty slim . . .

The rest of the article [2] is available to non-subscribers free . . .

Wages Fail to Keep Pace With Productivity
Increases, Aggravating Income Inequality
WSJ, March 27, 2006; Page A2

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URLs in this post:

[1] Image: http://bigpicture.typepad.com/photos/uncategorized/wages_vs_productivity_20060326_1.gif

[2] WSJ discussion: http://online.wsj.com/public/article/SB114341649383308604-n4_olq41qXEvqTb_wgFhndoEDow_20070327.html?mod=blogs

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