Labor's Declining Share of Corporate Income: Impact on Income Inequality and the U.S. Job Recovery

The distribution of corporate income between profits and compensation had been stable for decades, but, beginning around 1980, U.S. firms shifted corporate income away from labor and toward capital, decreasing labor’s share. Labor’s declining share of corporate income has contributed both to widening income inequality and slowing the recovery of jobs lost during the past recession.The declining labor share exacerbated income inequality, with total compensation decreasing by roughly 2 percent annually during 1995-99, 4 percent per annum in 2001-07, and 7 percent per year in 2009-12. Rising economic inequality appears to explain about two-thirds of the failure of typical workers’ pay to keep pace with overall economic growth, as measured by productivity. The decline in labor’s share slowed the economic recovery from the last recession by constraining wage-based household consumption. The decline in the corporate investment rate translates to cumulative post-1986 underinvestment of about $4.6 trillion, which is associated with roughly 5.4 million jobs lost through 2012. These lost jobs represent 53 percent of the shortfall of 10.1 million jobs which has persisted from November 2011 through the end of 2013. The post-2005 decline in household investment rates placed increasing reliance on the corporate sector to fund investments. Several intertwined long-term economic processes and trends are associated with widening income inequality and dampening economic recovery. Globalization is associated with rising income inequality. With high-skill jobs no longer immune to replacement by machines and software, job opportunities may be on the cusp of being further diminished by advances in digital technology. Globalization and technological change have contributed to devaluation of the labor force and polarization of job opportunities. Financialization appears to be a major cause of rising income inequality. Declines in union bargaining power increased the vulnerability of domestic workers. Government underinvestment in the underlying productive capacity of the economy contributed in part to below-average GDP growth.The dearth of jobs created during 2000-2012 suggests yet another burgeoning disparity – inequality in job opportunities – between the fortunate few with entree to high-paying and high-skilled positions generated by technological advances and the large marginalized majority vying for low-income, low-skilled jobs in competition with even-lower-paid workers from emerging markets. Labor has been marginalized by the declining labor share; widening inequalities in wages, income, wealth, and job opportunities; declining corporate and government investment rates; the spreading gap between wage growth and productivity gains; below-two-percent average annual growth in real GDP during 2000-13; negative job creation beginning in 2000 and job losses in the past two recessions. The paper contains over 60 charts illustrating many of these observations.