The Shortfall in Wages

For some reason, while national income has risen at a moderate rate during this recovery, workers’ real salaries and wages have risen almost not at all. Instead, most of the increase in national income during this recovery has come in the form of profits. The portion of national income that goes to workers in the form of wages and salaries has hit an all-time low of less than 52%, as the following graph illustrates.

Instead of wages and salaries, the increased national income that the US has enjoyed in recent years has gone overwhelmingly into corporate profits. By itself this is not necessarily bad; increased profits may be used by companies to invest in new capacity, and if not, then end up as income to individuals — specifically, the firm’s owners. However, if firms do not use those profits to expand future production (a possibility suggested here), and if the individuals who earn firms’ profits as income tend to be wealthy and thus tend to save most of the increase in income (a possibility suggested here), then it’s conceivable that the increase in profits may have relatively little impact on the economy.

That’s because if those two premises are true, then higher profits would simply end up in the bank accounts of wealthy individuals, instead of being spent again. Put simply, the question is this: is it possible that the multiplier effect is smaller if income growth comes in the form of profits instead of salaries and wages? If so, then the simple fact that firms are earning more income while middle-class people are not may go some way toward explaining the sluggishness of this recovery.