Private Pay Shrinks to Lowest Level

Private pays share of personal income has shrunk to its lowest historical level.

Private wages. A record-low 41.9% of the nation’s personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.

The article also points out that the trend is not sustainable.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. “This is really important,” Grimes says.

And the trend is not something we can lay at either party’s feet. The trend has been declining for private industry’s share of personal income since at least the 1970s and has gone on during while Democrats and Republicans have been in either the White House or in control of one or more chambers of Congress.

The comment by Paul van de Water is a bit misleading,

The shift in income shows that the federal government’s stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

“It’s the system working as it should,” Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.

While it is true that after a recession the ratio of private industry does tend to go up, it never goes back up to the level prior to the recession. Take for example when Reagan came into the White House. At that time the ratio stood at 47.8% for private industry. In 1989 first quarter when he left the ratio was at 46.3%, even looking at the last quarter of 1988 it was only 47%. The highest it ever got was 47.9% in the second quarter of 1981 just before a recession. During what many Republicans point to as a long and strong economic expansion private industry’s share of personal income never again regained its historic high under Reagan.

When Clinton entered office in the first quarter of 1993 private industry’s share was 43.9% most likely due to the recent recession and that the employment situation took longer than expected to turn around. Despite starting at this low water mark, when Clinton left office in the first quarter of 2001 private industry’s share was 47.2% or about 0.4% below the high during Clinton’s tenure of 47.6% which was still below the 47.9% high point back in the second quarter of 1981. Once Bush got into office things only got worse as private industries share went from 47.2% down to 43%. Even as the economy grew from late 2001 through 2008 private industry’s share shrank with it typically being in the high 44.5% to 45.5% range.

FILED UNDER: Bureaucracy, Economics and Business, Government
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Alex Knapp says:

    Are these figures adjusted for the relative age of the population? More retirees = fewer wages and more social security/pension/401K checks, right?

  2. Steve says:

    Are these figures adjusted for the relative age of the population? More retirees = fewer wages and more social security/pension/401K checks, right?

    Does it matter? The payouts to retirees, etc. are not adjusted. Moreover, it is a percentage, rather than an absolute figure, so again, I am not sure why an adjustment would change the analysis here.

  3. Alex Knapp says:

    Steve,

    If a lower number of people are working because more people are retired, then you would expect private wages as a percentage of personal income to decrease, as well.

  4. Alex,

    Doesn’t really matter as the situation is still unsustainable.

  5. john personna says:

    Future growth (GDP and wages) matter if you hold some hope we might grow out of … at least some of the problem. If 2000-2005 vintage “jobless recovery” are a model for our future, it’s a double-whammy.

    Why were the 2000’s jobless? Globalization, or demographics even then?

  6. john personna says:

    (Remember Steve, big spenders probably think of the revenue shortfall as “temporary.”)

  7. superdestroyer says:

    Welcome to the future of the coming one party state. The Democrats live for big government, big spending, and redistribution. The problem is that as redistribution increases, the economy will shrink. Image what the picture will look like in 30 years when the U.S. is 50% Hispanic. Brazil and Mexico today is the U.S. tomorrow.

  8. Gerry W. says:

    This will be a long winded comment, but I don’t know how else to explain this. I also have a hard time putting in url’s or websites to back up my case with this new format. To type 20 or 30 characters for a url is impossible. So I may mention to google, and that may work for reference.

    I worked and retired from a factory. That factory will close up in the next year. In the 70’s we peaked at 1300 people. It is now less than 100. Our main competitor in recent years has been the Japanese. We tried everything to compete short of lowering wages. We did robots and got rid of people, we tried first in-first out inventory in which you move people from line to line at the will of management. This is very upsetting to the people on the floor. And we have tried lean management. In which you cut out trivial parts of a job, change the job description and eventually do the work of two or three people. In the end, manufacturing was set up in Mexico and that is where it will end. And one more problem is the internet. The internet is both good and bad. But now companies use it to replace the human resource dept.

    Consolidation hit another plant of 500 in town, and they closed up. You can google: Who broke America’s job machine?

    On a political level, LBJ had his war on poverty “The Great Society” and that created inflation and more welfare. Paul Volcker got rid of inflation and we enjoyed over 20 years of non-inflationary growth. But during this time and especially now, globalization has been ignored by all presidents. We had the collapse of communism and other countries (namely China) opened up. So what has happened is that we have a flood of cheap labor. And I would say it is about 2 billion people. And this is going to put pressure on all middle class wages across industrialized countries.

    Bill Clinton signed various free trade agreements but with the backing of those on Wall Street and republicans. I don’t know what they are thinking with free trade when it is one sided, or maybe I do know. I think both political parties are sincere to make a better life for us, but their ideologies always fail. And that brings us to Bush who glorified ideology. He based the economy on (trickle down) tax cuts and ignored deficits and debt and like most presidents the pressure of globalization.

    We as a country are doing too many things. We can’t be all things to all people. And by being in Iraq, means that we have to ignore what is going on at home. Or at least, our money flows out of the country.

    So, to sum up all these things. We enjoyed a middle class life when we supplied the world in the 60’s and 70’s. Eventually the world opened up. We got lazy. We are doing too much and not paying attention to the world and its effect on the middle class. We have had terrible policy by both parties. We have some 2 billion cheap laborers in the world, we have Mexico to our south, and products from other countries. So, some of the rules in economics have changed. Putting more money in the hands of the people to buy or do what they want has changed a little bit. Half the products we buy come from other countries. There is no guarantee that a product that is introduced to society, that it will be made here.

    So the pressure is on. Even Target stores has cut back on pay of 8000 people. And part of this is due to Wal Mart. My wife worked at a big box store and they told her manager who worked over 20 years to have a cut in pay or lose his job. He took the cut in pay. There was no other place to go to. And that presents another problem, like, there is no upward movement, especially in smaller towns.

    So I have suggested in the past that we need to invest in our country (energy independence, etc.) to create jobs. And these are jobs that won’t go overseas. We need to invest in our people (and that is mandatory vocational training.) And to invest in our future (as we have not kept up with the federal research grants to our universities) so that preliminary science can go on and that is patented out to create new jobs and materials.

    Donald Trump has suggested a tax on incoming goods from cheap labor countries.

    The bottom line is that we have to do something. Ideology and just tax cuts, or just wishing and hoping that things will get better is a recipe for disaster. We don’t want big government or dreamed up jobs. We have seen the big military, we have spent on war. But in the end, you still have to invest in your country and have a good infrastructure.

  9. steve says:

    I would like to see the full numbers here. Do you have a better link? What percentage is from investment income? We know that income for most people has ben stagnant. The top 0.1% has been where we have had growth, and much of their income is investment based. That would be important to sort out for the long term trend. The short term change during a recession is predictable with so many people out of work. In that regard, they have just told us the sky is blue.

    Steve

  10. john personna says:

    I bought a computer cable recently. I needed an HDMI to DVI one. I knew they’d be $15 to $25 at local stores. Currently the cheapest way to shop for things like that is to go to eBay, look for “buy it now” and “free shipping.” So I got a perfectly good cable (using it now) for $3.45, delivered. From China. That kind of blew my mind, but then I thought about how that changes the American labor picture. The only American to touch that cable was the mailman. Wild.

  11. Rebecca Burlingame says:

    I had the incredible luck on the final of my recent English Comp class, of defending capitalism. Most people would not think of capitalism as a fragile bird, but this is the way I described it. And your numbers scared me. While I had understood this at a gut level for a number of years, I certainly did not expect to be reading these arguments so soon. I do not want capitalism to go away. It frees us to be ourselves and people just have not figured that out yet. If only people could understand that our newfound free time needs to be separated from money in specific ways, people could once again value their own skills and abilities. Thanks for some sobering statistics.

  12. john personna says:

    I think the question Rebecca, is whether we are ready for an “austerity program” or if we think such strong medicine is only for other people.

  13. Only capitalism is predicated on a free people making free choices for what they decide to be own interest, and as such it is the most moral choice of economic options for those who believe liberty is paramount. The arguments that it isn’t perfect convienently ingore that nothing else is either, and that everything else produces worse results, empirically as well as theoretically.

  14. john personna says:

    The problem there Charles is that “capitalism” and “free markets” are not exactly the same thing.

    It has been argued that free markets killed capitalism (literally a world driven by “owners”) and moved us to a world of broadly held public companies, diffuse ownership and responsibility, and “managerial” decision making.

    Beyond that … I don’t get what you are saying.

  15. Rebecca Burlingame says:

    To John – potential solutions of most any kind will indeed seem like austerity in the beginning – only with time will resources be utilized in ways that additional wealth can be conceived outside the place where loans begin.

    I do not so much see that free markets have killed capitalism as that they have ‘killed” the use of money for ever growing segments of the population, which ties in directly to lower private pay, over time. People may well have to adapt to the world where Main Street won’t look the same as before. Some monopolies are going to continue, but that does not mean something economically vital at local levels is impossible to recreate.

  16. john personna says:

    Maybe I’m just being pedantic, but maybe not. How many true capitalists do we have today? Bill Gates is retired, and Steve Jobs is a minority owner. Most big companies, the Exxons, the IBMs, are owned so broadly that hired managers hold sway.

    Arguably the investment banks went nuts when they stopped being partnerships (capitalist) and became public (managerial).

  17. pete says:

    john, are you off your meds? What the hell do you call a small business entrepreneuer? A capitalist LITE?

  18. john personna says:

    Entrepreneurs are a huge part of our system. I think I just heard that 40% of our GDP comes from companies founded since 1980. But. I’m distinguishing from Carl Marx’s foes, the old capitalists who were rich “owners” who opposed oppressed “workers.”

    The rise of venture capital funds, run by fund managers, are another change from 19th century capitalism.

    I don’t like “capitalist” because it hides those changes … unless you are just using it as another way to spell “free market” … something it did not originally mean.

  19. john personna says:

    Heh, wikipedia sez: “There is however no consensus on the definition of capitalism, nor how it should be used as an analytical category”

    So just take the above as my definition.

  20. Jim says:

    Remember ? ” Spread the Wealth Around”
    Once all of us our on the public dole who will pay ?
    The private sector ( producers of goods and services) is paying for an ever growing percentage of non-productive people – Look at Greece to see how that is working out !
    Stimulus ? 1.6 bil out of 2.3 bil for windmills went to overseas production !
    We have been getting the shaft and we’ll crash sooner or later .
    Good long term planning – send the jobs to China , Borrow from China to buy more things from China . milllions of Chinese start buying cars , we run out of Oil , We go to War !
    READ the new book “Cornered ” about the monopolies we no longer break up.
    Reinstate “Glass-Steagall act ”
    Stop buying at the big boxes , support the local hardware store , BUY American made ,
    VOTE EVERY Polititian out of office – before its to late.