Income Distribution Does Matter. It’s Wrong Now and Stopping Growth.

When people think about “income distribution” there’s a tendency to think of it only in terms of what different people or households have available to spend.  In other words, we focus on the fairness or equity of whether some households should only have a small amount of money to live off of vs. others who get a large amount of money to live off of.  The debates then often deteriorate into whether or not the households put forth effort (“worked”) for their income and therefore “earned” it.

But there’s more to the issue of income distribution.  A household’s income is not just determined by how much “effort” it’s willing to make or how much “investment” it’s made in the past.  So a household’s income isn’t just how much you work and what education/qualifications you have.  The general level of wages matters too.  And that’s determined at the macro level by institutional arrangements in society.

The nature of production is that it requires both capital and labor.  The joint product is then sold.  This is called productivity.  Part of the income distribution question is “how is the value from joint productivity split up between payments to capital and payments to workers”.

In the U.S. during the Golden Era, the period of World War II until the mid-1970’s, the social contract and institutional arrangements were that the benefits of increased productivity were split evenly between both capital and labor.  Both benefitted.  Starting around 1980 that deal was cancelled.  The social contract has increasingly moved to all gains from improved productivity going to capital and none to labor.  As a result, labor’s share of national income has consistently declined.  The Great Recession was a major blow.  It’s this change in the social contract that is the root source of the frustration and pain felt by so many households.

Garth Brazelton at Economics Revival explains why this matters now.  He explains why we are still in a recession, or at least why the 90% or so of us that work for  a living as opposed to living off of interest and profits are still in recession:

Who cares about double-dip. We never left. Why? because you can’t get out of a recession without consumers/labor income growth. While productivity has grown over the last few years, labor’s share of national income continues to plummet. This implies that others (capitalists / profit-makers) are ‘out of their recession’ but consumers and laborers are not.

The BLS has a nice publication here.

Ordinarily a low cyclical labor share isn’t necessarily a problem because firms can use profits to invest in new business ventures a eventually lower the unemployment rate and provide more compensation in a recovery. The problem here of course is that firms are too busy paying off past debts from poor decisions made a decade ago, or two skittish to do anything substantial with their profits at the moment. So that, in combination with the low labor share of income is like a double-whammy for consumers and laborers who see the haves continue to have and the have-nots continuing to have nothing.