What Fills The Gap As Wages Fall?

On Monday, I noted the falling labor share of GDP. This of course raises the question of what’s rising. “Profits” are of course one answer, but who actually gets the money? One window into this (via Jon Witt) is provided by the Congressional Budget Office’s classic 2008 letter to Senator Max Baucus “Historical Effective Tax Rates, 1979 to 2005: Supplement with Additional Data on Sources of Income and High-Income Households.”

Specifically, in order to calculate effective tax rates the CBO needs to look into what kind of income people are earning. Mostly, it’s wages. But wages have been falling as a share of the overall household income pie and this area chart from Matt Cameron helps us see what’s been growing:

In a somewhat surprising way, the decline of wages hasn’t led to a big increase in the share earned by capital. It’s true that capital gains rose from 3.6 percent of national income in 1979 to 6.9 percent in 2005, but this was largely offset by interest and dividends shrinking from 6 percent to 4 percent. On net, that’s capital (broadly defined) going from 9.6 to 10.9 — not nothing, but small compared to the overall shrinkage. Meanwhile, “proprietor’s income” — the money people earn from operating their own businesses — has slightly declined.

Bigger increases are in things like pensions (2.1 percent to 5.5 percent) and in-kind benefits (4.6 percent to 7.4 percent). The pensions thing is obviously an artifact of population aging, so it’s easy to understand. The rise in in-kind benefits presumably reflects the increase in health care spending, so we also have a good handle on that. But the more than doubling of “other business income” from 2.3 percent of total household income to 5.1 percent of total household income is a little harder to understand. This is defined by the CBO as “[p]artnership income, income from S corporations, and positive rental income.”


Clearly the background here is the explosion in high-end inequality in the United States during this period. But it’s interesting to note that even though we’ve both had an explosion in high-end inequality and a structural decline of wage income, it’s not the case that these two trends represent a structural shift in earnings away from workers and toward interest, dividends, and capital gains. Indeed, if you look specifically at the top 0.01 percent you see that over time they’ve come to rely less and less on capital gains and dividends:

The big action here is a steady increase in the super-rich’s reliance on wages and an explosion of the dread “other business income.” Now of course the overall incomes of the super-rich were growing strongly throughout this period, so it’s not like they didn’t see capital gains income grow. But the point is that even as the rich have gotten richer, they’ve become less dependent on capital income.