By Michael Mandel Who really gained from the productivity revolution? By many measures, the U.S economy has just completed seven years of terrific performance. In particular, since 1997, output per hour in the private sector has risen at a 3.3% annual rate, vs. a 1.5% annual rate over the previous 25 years. Output per worker across the whole economy rose at a 2.2% rate, the fastest in 40 years.
This productivity acceleration means the economy is somewhere between 9% and 13% bigger today than it would have been otherwise. That translates into $1 trillion to $1.5 trillion extra production in 2004 -- hardly chicken feed.
Yet no one seems happy. American workers are feeling squeezed, with real wages barely rising. Corporations are crying poor mouth as well, pointing to intensifying competition from overseas as a big reason why they have to keep cutting expenses. And to top it all off there doesn't seem to be enough money to maintain government services on either the federal or state levels.
REASON TO GRIPE. Let's call this column "the search for the missing money." If an extra $1 trillion or $1.5 trillion in income is out there, who's getting it? My investigative tool of choice will be the government's national income and product accounts, which supposedly track every dollar earned in the economy.
It turns out that both workers and corporations have some reason to complain. In 2004, wage and salary payments as a share of national income fell to their lowest level on record -- and the government's numbers stretch back to 1929, the beginning of the Great Depression. Less than 46% of national income is going to wages and salaries today, down from more than 47% in 1997, and almost 49% in 2000. The total economic pie may be bigger, but workers are getting a smaller share of it.
What's going on, though, is not the typical story about rapacious corporations and abused workers. Corporate profits in 2004 were 8.5% of national income. That's not bad, about half a percentage point above their long-term average of 8%. However, they're still below their 1997 level of 9.2%.
HEALTHY HEALTH CARE. Now the mystery deepens. If both workers and corporations are getting a smaller share of the pie, who's getting a bigger one? One set of winners seem to be the self-employed. According to government estimates, the share of national income going to "proprietors" rose from 7% in 1997 to 7.7% in 2004. The most recent numbers are subject to revision as the feds tote up the results from 2004 tax returns, many of which have yet to be processed. However, it's clear that a rising share of taxpayers are reporting self-employment income.
The other part of the economy that's getting a much bigger share is -- surprise, surprise -- the health-care sector. According to the government's numbers, from 1997 to 2003 (the last year for which data are available), the share of income going to private health insurance rose from 3% to 3.9%. That's almost enough to account for the entire decline in the wage and salary share. Businesses are taking the money that they would have paid out directly to employees and shifting it to health-care spending.
In many ways, President George Bush's tax cuts have had the effect of compensating workers and companies for their smaller slices. The category of "personal taxes," which includes both federal and state income taxes, fell from 11.3% of national income in 1997 to 8.9% in 2004, the lowest level since 1967. The share of the economy going to corporate income taxes fell from 2.9% to 2.2% of national income. Without these tax cuts, the screams of pain would have been much louder.
However, given the enormous budget deficits, it's hard to imagine that Congress will be passing any more big tax cuts anytime soon. The job market is strengthening, and workers are going to want to regain some of their share of the pie, and corporations won't want to give any of their's up. The fight over the fruits of productivity growth is about to become more ferocious. Mandel is BusinessWeek's chief economist