HIS economic recovery is distinctly unkind to workers.
Output is clearly rising, and, normally, that would feed into both corporate profits and labor income. But while profits have shot up as a percentage of national income, reaching their highest level since the mid-1960's, labor's share is shrinking. Not since World War II has the distribution been so lopsided in the aftermath of a recession.
Profits, it turns out, never stopped rising as a share of national income all through the 2001 recession and the months afterward of weak economic growth. That did not change even as the recovery kicked in strongly last summer and hiring resumed. New data from the Bureau of Economic Analysis erases all doubt on this point.
The reasons for labor's poor showing are not hard to spot. The employment rolls are still smaller, by 2.4 million jobs, than they were at the recession's start in March 2001. Those who are employed are also feeling the squeeze, particularly the 85 million people who hold office or factory jobs below the rank of supervisor or manager. Their average hourly wage, $15.46, is up only 3 cents since July, according to the Bureau of Labor Statistics. That wage is rising at an annual rate of less than 2 percent, barely enough to keep up with inflation, mild as it now is.
"We have never seen in the 40 years that we have this hourly wage survey, wage growth that has been this slow,'' said Dean Baker, an economist at the Center for Economic and Policy Research.
That is unfortunate. Workers, after all, are also the nation's consumers. We are counting on their spending to turn the recovery into a first-class expansion. They must do that against the dead weight of reluctant hiring and miserly raises. The workers themselves are helpless to change this. For a generation, we have permitted labor's bargaining power to deteriorate. Successive administrations - Republican and Democratic - have abetted the deterioration. Only in vigorous booms, like that of the late 1990's, have workers been in enough demand to give them bargaining power.
The productivity saga highlights the deterioration. From the end of World War II until the late 1960's, productivity rose at a handsome pace. As the output of goods and services increased for each hour worked, the additional revenue flowed steadily into corporate profits and labor income. Then, as the productivity growth rate slowed, profits took the first hit, falling as low as 25 percent of total national income in the early 70's, according to a net profit measure constructed from government data by Edward N. Wolff, a New York University economist. His measure includes not only standard net income, but also profit from self-employment, rent and interest.
While profits' share of national income declined, labor's share held up. Its bargaining power in the 1970's, and even into the 80's, was still strong enough to sustain wage gains. The alternative - outsourcing abroad or substituting foreign merchandise for domestic products - was just beginning to materialize. We all know how weak labor soon became. Globalization, deregulation, declining union membership, a stagnant minimum wage and incessant layoffs took their toll. And as labor weakened, the profit share of national income recovered.
THE consequences are hitting home. When the productivity growth rate revived in the mid-1990's and accelerated in recent years, many forecasters thought that the revenue from rising output per worker would again be channeled to labor as well as to profits. But the productivity improvement came in a strange way. Rather than increasing output per worker, many companies maintained existing output and raised the productivity growth rate by getting rid of workers. Labor had grown too weak to prevent many companies from pocketing virtually all the gains from productivity - or, as Mr. Wolff put it, "Labor is a forgotten part of this economy.''
His measure shows that pretax profits skyrocketed in the third quarter, to nearly 30 percent of national income, at an annual rate, from 27 percent in the first quarter of 2001. And this despite the rising costs of health insurance, pensions and exercised stock options, all counted as labor income.
The gorging on profits strains the recovery. Forecasters count on consumer spending to keep the expansion going. So far, consumers have performed admirably, drawing on mortgage refinancing, tax rebates and heavy borrowing at low interest rates to pay their bills. Once these resources run out - and they are running out - rising labor income must fill the gap.
Unless the supply-siders are right. They hold to the view that robust business spending on capital goods can lead the way, generating consumer spending in its wake. This recovery, more than others in recent decades, is testing that doubtful thesis.