Last week we opened our exploration of investing and the economy by learning why we need to be investing.
We discussed the loss of pensions and the threats to social security. We learned about how inflation eats into our savings to rob us of our spending power. We explored the power of compound interest.
These are all important reasons to invest. But there are others, as well.
We are in a new economy that treats us much differently than it treated our parents. The rules of the game are changing.
Investments are becoming more valuable, while work is becoming less so.
The Decline of Labor
British economist Arthur Bowley found in the 1920s that the share of income going to labor remained relatively constant since at least 1911. As productivity increased businesses made more money. As businesses made more money, their employees’ wages rose in the same proportion.
This rule was reaffirmed for Americans by Paul Samuelson in the 1960s and remained true until the 1970s.
The following graph shows the share of income going to labor in the United States from 1947 to 2016:
Under Bowley’s Law, we would expect to see a lot of short term movement, but long term stability. That may look something like the section from 1947 to 1970. There are some ups and downs, but the center is pretty consistent.
From 1970 to around 1995 we see a gradual trend downward. This is a period where the amount that we pay workers is falling, but not sharply.
There is a brief recovery from 1995 to 2000 before we immediately fall of a cliff.
We are now at a point where labor’s share is nowhere near its historical range. This means that we are paying much less for work than we used to.
That last chart may lead you to wonder why you haven’t seen salaries drop drastically during your lifetime.
Remember the explanation for Bowley’s Law: As productivity increased businesses made more money. As businesses made more money, their employees’ wages rose in the same proportion.
What we see now is that productivity is increased, businesses are making more money, and salaries are staying the same year over year. This means that workers are being paid the same for doing more work.
Worker productivity has skyrocketed. Workers today are twice as productive as workers 30 years ago. And yet, their salaries have barely moved.
We’re now dealing with a system that pays workers 50% of what they’re worth historically.
Prior to 1970, workers were rewarded for their increasing productivity. When workers were more productive, they made more money. The lines on the graph match up almost exactly.
Since then, worker compensation has been completely divorced from productivity. Workers are being far more productive, but are not seeing any corresponding raise. Even the slight raise that does appear in this graph is largely illusory. “Compensation” on this graph includes health care benefits. As the cost of health care rises drastically, workers are seeing their “compensation” increase without seeing any more money in their paycheck.
The Rise of Profits
The rest of the Bowley’s Law explanation is still true, though. The increased productivity of the workers is leading companies to make a lot more money. The difference is that instead of sharing the fruits of that productivity with their workers, companies are pocketing record profits.
The economy is growing. Companies are growing. Profits are growing.
Wages are not.
If you want to get a piece of the growing economy, you need to be investing.
Taxes and Buybacks
As an example, the tax plan that Republicans passed last year was billed as a way to give companies money so that they would spend it on their employees and expanding their businesses.
America’s corporations were given a massive windfall of unexpected cash. Instead of spending it on expanding their business or paying their employees, they are buying back stock, sending share prices up. More than $700 billion in the first 6 months of the tax cut have been given to the shareholders. Wages are actually down over during that same time period.
If you want to benefit from the tax cuts, you need to be an investor, not a worker.
This is not a new problem, either. Ever since stock buybacks were legalized during the Reagan Administration, companies have gradually put a larger and larger percentage of their profits into buying back stock. Instead of increasing wages, expanding their businesses, or investing in research and development, companies are boosting their share prices. And there’s no sign of this trend slowing down.
I’ve written some variation of the following sentiment many times here and on Twitter: These are signs of a broken economy that desperately needs to be fixed so that it works for everyone. Until it is fixed, though, we need to be investing so that we aren’t left behind.
Join the Conversation!
Have you seen a decline in the value of work? What changes do you see in the new economy? What steps are you taking to adjust? Let us know in the comments!