How Important Are Wages in Today's Economy?

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by: Sudden Debt

Economists are forever trying to come up with theories to explain unemployment and wages. It is always a "hot" topic and the Bureau of Labor Statistics' (BLS) monthly release on the employment situation is arguably the statistic which can - and does - move markets most.

I won't go into the various economic theories on how wages, unemployment and inflation all come together to shape (or "clear"), the labor market. I have a more fundamental question, instead: How important are wages in today's economy, overall?

The following chart shows that wages and salaries as a percentage of GDP have been dropping steadily for 40 years, from a high of 54% of GDP in 1970 to a low of 43.5% this year. Simply put, working people are getting a smaller slice of the economic pie.

click to enlarge

You Can't Eat The Pie You Don't Have

Including other forms of compensation like pension and medical benefits does not alter the picture appreciably: Total compensation of employees went from 60% of GDP in 1970 to 54% this year.

This is as major of a transformation of the economy as it gets, but it is almost never discussed by academic economists who are forever trying to figure out how to model unemployment, or interest rates, or whatever econometric datum strikes their fancy. It's like pondering the price of candle oil while Rome burns. And they get Nobel prizes for it, too!

(Little known fact about the Nobel Prize for economics: It was not part of Alfred Nobel's will in 1895. It was instituted and funded much later, in 1969, by Sweden's central bank; it is formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Considering its provenance in the depths of Money Central, there's no way a more "radical" economist is going to ever get one of those.)

Anyway, what's going on with the people's slice of the pie?