Shifting Nature of Income

Kevin Drum takes the following statistic:

As a result, wages and salaries no longer make up the smallest share of
the gross domestic product since World War II. They accounted for 46.1
percent of all economic output in the second quarter, down from a high
of 53.6 percent in 1970 but up from 45.4 percent in the spring of 2005.

And declares it to be a bad thing.  He doesn't really explain, but as a frequent reader of his site I can guess his issue is that he interprets this statement as a sign of the weakening fortunes of the American wage earner.

Isn't it really dangerous to leap to such a conclusion?  I can think of a number of perfectly innocuous, even positive trends that would cause such a shift:

  • Aging of population means more people retirement age who take their income in form of dividends, investment returns, pensions, social security, etc., none of which are included in "wages"
  • Ownership of investment assets, and thus income from these assets, has spread from just the rich to the middle class, meaning most people get more of a share of their personal income from investments and asset (e.g. house) appreciation
  • Entrepreneurship rates are way up since 1970.  This means many more people, particularly in the middle class, have given up working for someone else for a wage and now work for themselves for a business profit.

I know Drum wants to interpret it as a "the poor are poor because the rich take all the money" zero sum game.  Anyone know what is really going on behind these numbers?


  1. Doug:

    The next paragraph of the NYT article reads:

    "Total compensation — including employee health benefits, which have risen in cost in recent years — equaled 57.1 percent of the economy, down from 59.8 percent in 1970. Still, compensation makes up a larger share of the economy than it did through the 1950’s and early 60’s, as well as during parts of the mid-1990’s and the last couple of years."

    So if you go by total compensation, not just wages, it's only a 2.7 percentage point difference, which is barely more than statistical noise. Sure, health costs are rising, but the quality of health care is much better today than in 1970. Also, forgive my youthful ignorance, but did employers even provide health care in 1970?

  2. Doug Murray:

    While there's probably some validity in comparing wages to GDP, is it correct to say they "make up" any part of it? Are wages actually a component of GDP?

    As far as some other possibilities, if people are saving more of their income, that will raise GDP (investments) and lower the ratio. If more of GDP goes to exports, the ratio goes down but so does the ever worrisome "trade deficit".

    Sounds to me like just another example of finding the cloud in every silver lining.

    To the other Doug: In the seventies employers did provide health care, which was a great help paying the hospital and doctors when my firstborn was born, about $750.

  3. Chris:

    How does 401K play into these numbers? I shift a signifigant amount of my income into 401K (>10%) Is that 10% a wage or a benefit?