March 13, 2019
This is getting annoying. According to data in the Fed’s Financial Accounts for the 4th quarter of 2018, the profit share of national income rose again in 2018. While national income rose 4.7 percent, profits rose 7.8 percent. There are two reasons this is annoying.
The first is that these are before-tax profits. Remember that big corporate income tax the Republicans pushed through Congress in 2017? One of the stories why this was going to be good for all of us, and not just for that small group who own lots of shares of stock, is that a portion of the tax cut would be passed on as a higher before-tax wage share. Well, it’s only year one, and these data are subject to large revisions, but it looks like we’re going the wrong way here. Since taxes fell sharply, after-tax profits were up 16.2 percent.
For those keeping score at home, the share of profits paid in taxes fell to 10.2 percent. One of the claims with the tax cut was that they were lowering the tax rate, but eliminating the deductions, so we would collect something close to the new 21 percent nominal tax rate. Well, it seems the Republicans got half of that right.
The other reason this is annoying is that the unemployment rate was below 4.0 percent last year. This is supposed to be inflation territory, where tight labor markets force employers to bid up wages, as that is the only way they can find workers. (Just a few years back, most economists would have told us that we hit inflation territory when the unemployment rate fell below 5.5 percent, or even 6.0 percent.)
Anyhow, if the profit share is still rising, then we obviously have not hit inflation territory. Employers can clearly afford to pay higher wages, without raising prices. Profit shares increased hugely in the weak labor market following the collapse of the housing bubble. I had been expecting (and hoping) that some of this increase would be taken back as the labor market tightens, but apparently, we’re still going the other way.
Keep this in mind next time you hear see a story about labor shortages and employers not being able to find workers. That’s not true on this planet.
This diatribe comes with one very important qualification. Profit data are highly erratic and subject to large revisions. It is possible that this picture will look different as it is revised later this year, or possibly in subsequent years. But given the data we have now, workers should be getting more — much more.
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