Wednesday, June 23, 2010

Parsing the Question (Part 2)

Let no one any longer labor under the false assumption that wages and salaries make up anything like 65% of business expenses. The number is less than 12%.

This does not mean that a substantial increase in labor cost would have a negligible effect on prices. What it does mean is that, if we want an explanation of the costs that drive prices up, there's more to look at than just the cost of labor.

In 2006 (to bring numbers forward from my previous post) deductions for corporate expenses came to $25.5 trillion. Of that, labor amounted to less than $3 trillion, about 12% of cost. ("Labor" here includes salaries, wages, and compensation of officers.)

As long as our focus is only the cost of labor, there is a very big cost number that remains unexamined: 88% of 25.5 trillion, some $22 trillion plus.

Included in that 88% is the interest expense associated with corporate business activity. Interest expense, as you may know, is the focus and concern of Arthurian economics.

The 2006 numbers show that corporate interest expenses amounted to nearly $1.8 trillion. That's more than 60% of the total of wages, salaries, and compensation of officers combined. If we cut interest costs in half, everybody could get a 30% raise and it would not increase corporate costs by even a penny.

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