Friday, October 23, 2015

It needs work

Last Sunday I showed Ed Lambert's corporate "after tax profits in real terms" on a graph with "Labor Share". Why labor share? Because Lambert says "labor share of income must be raised because increased volume of business with labor would allow for better profits."

I said the graph was "interesting. But it doesn't support the view that boosting labor share will boost profits."

The graph shows that when labor share falls slowly, business profits increase slowly. And when labor share falls rapidly, business profits increase rapidly. One has to assume, then, that when labor share increases slowly, business profits fall slowly; and when labor share increases rapidly, business profits fall rapidly. Thus, the graph does not support the view that boosting labor share will boost profits.

I don't know how that analysis sits with you, but I didn't like it much myself. As I said on Sunday,

I agree with Lambert on the labor share thing... You can't squeeze the life out of one sector of the economy and still expect the economy to be just fine. It doesn't work that way. I agree with Lambert that the fall of labor share is a problem.

Not explicit, my thought at the time was not that Lambert was wrong to say falling labor share is a problem. (I agree with him on the labor share thing.) My thought was: It's not the right graph.

Lambert says

After the 2001 recession, labor share of income began falling to never before seen lows...

What has been the result? Firms have been able to increase after tax profits in real terms to new records after the 2001 recession.

But he doesn't show a graph comparing labor share and after tax profits. So I took the bait. I took his graph of after tax profits and added labor share to it. And looking at that graph, I can only say it does not support the view that boosting labor share will boost profits.

Lambert's argument, however, is not so simple. He says firms increased profits since 2001 by finding alternative sources of income. By finding alternatives, rather than depending on labor to spend enough to boost business profits:

Firms began to open up new ways to increase profits through the channels of the Financial sector, government and foreign markets. Interest rates have been falling. Money is cheaper. Effective tax rates have been falling. Outsourcing increased. Sales in foreign countries increased. Firms became less dependent upon domestic labor’s income.

Profits went up even though sales fell, Lambert says, because financial costs went down and taxes went down for business and foreign markets expanded. His conclusion:

For me, the solution lies in making firms more dependent upon the money flows with labor... Firms will have to realize that labor share of income must be raised because increased volume of business with labor would allow for better profits.

Could be. But Lambert leaves me in exactly the same position as before: lacking a graph that shows evidence to support his argument.

Last time, I took his profits graph and added labor share myself. But that graph couldn't carry the load. I was thinking about this. And it seems to me that a better graph might be one built on Shares of Gross Domestic Income.

I went to FRED and searched for shares of gdi. FRED returned one page of results. 25 series. It's kind of a jumble for me. I'm not familiar with the way they break down the numbers into categories. So I have to look at that.

I saved the FRED page as a text file (that's a menu option in FireFox) and went through the file by hand, keeping Series ID info and deleting a lot of HTML formatting. Tedious crap.

Yeah. After I got seven of the 25 entries reformatted, I thought to check the source where FRED gets this data: BEA. Found Table 1.11: "Percentage Shares of Gross Domestic Income". That might be better. The work is done already.

Here's what I was looking for. A breakdown by category, the components of GDI:

Components of GDI. From BEA Table 1.11
For some reason (or maybe for no reason) BEA does not provide a direct link to their tables. I've got Table 1.11 on the screen now, but the URL

gets me to their "National Data" page. From there, click "SECTION 1 - DOMESTIC PRODUCT AND INCOME" and read down the list to find Table 1.11. And then "Modify" and "Select all years" and "Refresh Table".

Could be worse. (Have you tried ONS?)

Anyway, I can look on FRED's list of 25 series for the ones that are not indented on the BEA list. The major categories, not the sub-categories.

For some reason, or maybe for no reason, the "Net Operating Surplus" series starts in 1959. The other ones all start in 1929.

Graph #1: (Stacked Graph.) Not Useful. "Net Operating Surplus" Starts Late
You can see everything drops suddenly there just before 1960. That's when "Net Operating Surplus" gets added into the mix, taking a share of the 100% total on this stacked graph. So all the other shares fall.

Couple other things to see: 1. The purple line runs very close to the blue line. On a stacked graph, that means that the purple line doesn't add much to the total. The purple line is "Subsidies". So we know that subsidies are a small part of the total. And

2. The blue line, running right close to the purple one, runs low on the graph. Near the bottom of the plot window. But after 1959, it runs between 50 and 60 percent of GDI. That's more than half the total. FRED starts the vertical axis at 50%, not at zero. The blue line looks lower than it is in fact.

That blue line is Compensation of employees.

One other thing about this graph: Compensation of employees -- that blue line -- trends down since 1970. The green and red lines appear to trend down since 1980.  Doesn't stand out on this graph, but it is there if you look: "Net operating surplus" is crowding out "Compensation of employees" and the other categories.

Net operating surplus is mostly the "surplus" of "Private enterprises". Proprietors' income and corporate profits and such.

It needs work, but I want to say this graph supports Ed Lambert's view.


The Arthurian said...

Here's the thing. If we're comparing profits and labor share, we're comparing two shares of income -- essentially, we're comparing two parts of GDP.

GDP being what it is, if I get more of it then you have to get less. If you get more, I have to get less.

In order for both shares of income to increase (without crowding out any other shares) it is necessary for the total to increase. It is necessary for GDP (and GDI) to increase.

Trouble is, if you're looking at "compensation of employees" as a share of GDI, or profits as a share of GDI, you're not seeing the increase in GDI. And if it does increase, it makes the ratio look smaller!

The Arthurian said...

Q: When labor share is rising, does GDP growth tend to be better, or worse?

Q: When labor share is falling, does GDP growth tend to be better, or worse?

I need at least two lines on the graph to make this comparison. Can't do it with a ratio.