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September 08, 2011

Labor Share and Corporate Profits
By Eric Przybylinski, CAIA, Senior Research Analyst

The chart above shows labor share on the left axis, and corporate profits as a percentage of GDP on the right axis. Labor share is calculated by the U.S. Bureau of Labor Statistics, and measures the percentage of output that employers pay in employee compensation. Corporate profits as a percentage of GDP is calculated based on the U.S. Bureau of Economic Analysis (BEA). It includes income earned abroad by corporations.

Since the 1980’s until the most recent recession, the U.S. maintained relatively stable GDP growth. However, this growth was not evenly apportioned. During this time, income inequality increased, and labor’s share of output declined. Over the past decade this loss in income was supplemented with an increase in leverage, including mortgage debt. The subsequent consumer deleveraging has led to weak aggregate demand and tepid GDP growth out of the recession. With lower wage costs and new sources of global demand, corporate profits soared.

In the near term, these imbalances still seem firmly in place. Aggregate demand, and thus economic growth, is weak. Earnings growth remains comparatively strong. In the long-term, what may be good for the economy may or may not be good for corporations and the stock market. Wage inflation would improve household balance sheets by both increasing income and decreasing nominal debt burdens. However, higher costs would lead to declining corporate profits.

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