July 27, 2019
I was eagerly (okay, maybe not the right word) awaiting the data revisions that accompanied the 2nd quarter GDP report that came out yesterday. One of the items that often gets substantially revised is profits. I was surprised that initial reports showed the profit share increasing slightly in 2018 from 2017. That surprised me both because I had expected a tight labor market to allow workers to reclaim some of the share they lost to capital in the weak labor market following the Great Recession and because wage growth appeared to be somewhat outpacing productivity growth.
The revised data show a different picture. They show that the profit share fell by 0.4 percentage points in 2018, which means a total drop of 3.2 percentage points from their 2014 peak. If this pace of decline continues, then by 2022 the profit share will be pretty much back to its normal level.
This is good news for workers and also matters hugely for how we think about the economy. There have been many who argue that the shift from wages to profits, which began early in the last decade (I would argue the total is distorted by phony profits earned by the financial industry in the bubble years), is due to increasing monopoly power. This is the story of huge firms like Google, Apple, and Facebook dominating markets. On the other side, many of us think that the bigger story is weaker worker bargaining power due to declining unionization, weaker labor protections, and high unemployment.
If the first group is right, the key to restoring the labor share is breaking up the monopolies. If the second group is right, then the key is to restore workers’ bargaining power, most immediately by maintaining a tight labor market. (Higher unionization rates would be great, as are increasing employment protections, but these are a bigger lift than keeping the Fed from raising interest rates excessively.)
The latest data make it look like the weak labor market gang is correct. Of course, there are still good reasons for breaking up monopolies. Also, data will be revised again next year, so the picture may look different in July of 2020.
Btw, as best I can tell, the revised profit data got zero attention in reporting on the GDP release.
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