Cambridge Journal of Economics (1987), 11,315-330

Labour's shares and profitability crisis inthe US: recent experience and post-wartrendsAndrew Henley*

1. IntroductionAs an attempt at linking together profitability, income distribution and economic crisis,the work of Weisskopf (1979) in this Journal represents a seminal contribution to theliterature. By decomposing the rate of profit into three component variables, Weisskopfassesses the importance of the three major Marxist variants of profitability crisis in thenon-financial corporate business (NFCB) sector of the United States economy sinceWorld War II. Over the period 1949-75 the rate of profit in the NFCB sector secularlydeclined on average by 1-2% per annum and this decline was attributable almost entirelyto a decline in the share of profits in income. Only in the 1960s, when the rate of profittrended upwards, is the contribution of the change in profit share less important.Weisskopf identifies this declining profit share as indicative of the rising strength of labour(RSL). He shows that labour pressure on profit share during each business upturn resultsin a premature peak in the rate of profit before the decline in real output. So the seculardecline in profit rate from cycle to cycle results from rising labour pressure on wage costsduring the late expansion phase of each cycle.

The second crisis variant focuses on declining capacity utilisation as an explanation forprofit rate decline, and is indicative of realisation failure (RP). The cyclical behaviour ofprofit rate is the result of the pro-cyclical movement of capacity utilisation in the earlyexpansion and contraction phases of each cycle, but Weisskopf finds no evidence that anysecular change in capacity utilisation contributes to the secular decline in profit rate. Thethird profitability crisis variant focusses on a declining capacity-capital ratio and is indi-cative of a rising organic composition of capital (ROC). It appears to make only a relativelysmall contribution to changes in the rate of profit.

In this paper we seek to examine more closely Weisskopf s contention that it is the RSLvariant, by placing pressure on profit share during the late expansion phase of each cycle,

'University of Kent at Canterbury. This paper is revised from a chapter of the author's doctoral thesis,'Empirical Studies on the Determination of the Functional Distribution of Income'. University of Warwick,June 1986. Comments on an earlier version are gratefully acknowledged from Keith Cowling, MalcolmSawyer, Ben Knight, and two anonymous referees. Remaining errors, are of course, the responsibility of theauthor.

0309-166X/87/040315+ 16 S03.00/0 1987 Academic Press Limited

316 A. Henley

-

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

\ ' ' ~ w %

~^As-^f v'~~*

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

\wsSS

CS

1 1 1 1 1 1 1

0-6O

050

0-40

0-3O

O20

0-10

' 0 1948 51 54 57~ 60 63 66V 69 72 75 78 81 84

YeorFig. 1. Labour shares in the NFCB sector. WS: Share of production worker wages in net income. SS: Share of

salaries m net income. CS: Share of supplemental benefits in net incomeSource: see Appendix

that produces the secular decline in profit rate. First, we question if his conclusions stillhold in the late 1970s and 1980s, in the context of the climate of severe recession and of therapid growth in the 'reserve army' in recent years. Secondly, we decompose his measure oflabour share into wages, salaries and supplemental benefit contributions (contributions topension schemes, health care schemes, and unemployment insurance) in order to assessthe importance of changes in each in explaining the pattern he observes. We then askwhether the changing pattern of these three components of labour share can be explainedby the structural development of US monopoly capitalism since World War II, and inparticular whether the Kaleckian idea that distribution can be explained by a changing'degree of monopoly' is applicable.

2. The declining importance of the RSL variant: 1975-82With the benefit of seven additional years since the publication of Weisskopf s paper, weare able to extend his quarterly data series for the US NFCB sector by the addition of twofurther business cycles covering the period 1975(1) to 1982(4). These two cycles tookplace within general national and global conditions of deepening recession and risingunemployment. The first new cycle (cycle VI, if we continue Weisskopf s numbering)covers the period 1975(1) to 1980(2) with a peak in real output in 1979(1). The secondadditional cycle (cycle VII) is from 1980(2) to 1982(4) with a peak in real output in 1981(3). This cycle is very short, being curtailed sharply by the Reagan fiscal expansion.1 Ithas no late expansion phase since profit rate and real output peak simultaneously in 1981(3), and its expansion phase is very weak. NFCB real output at the close of this cycle stoodat 654 billion 1972 dollars, somewhat below the level of real output at the close of theprevious cycle.

Table 1 summarises key results for the principal variables in WeisskopPs analysis forthe two additional cycles.2 The new trend results for the full period, now including theadditional data (column 2), show a marked change from the earlier secular growth rateaverages (column 1). Labour strength and realisation conditions now contribute in almostequal amounts to the downward trend in profit rate over the period 1949-82. The reasonfor this increase in the importance of falling capacity utilisation as an explanation forfalling profit rate can be seen from the cycle-to-cycle average growth rates for cycles V to

1 It does, however, conform to the NBER business cycle definition (see Weisskopf, 1979, footnote p. 350).

2 Full results are available from the author on request.

Labour's shares and profitability crisis 317VI and VI to VII (columns 3 and 4 of Table 1). In both cases labour strength conditionsactually improve, working against a profit rate decline. Within cycle VI, the pattern notedearlier by Weisskopf occurs: in phase B (the late expansion phase) a sharp worsening oflabour strength conditions, indicated by an almost 11 % per annum fall in profit share,precipitated the profit rate decline. The precarious state of effective demand in the USeconomy during the late 1970s and early 1980s is illustrated by the fact that at the end ofcycle VII capacity utilisation in the manufacturing sector had fallen to a record post-warlow of only 67-6%.' This decline comes about as a result of large falls during thecontraction phases (phases C) of cycles VI and VII. In addition, the early expansionphase (phase A) of cycle VII is so weak that during it realisation conditions worsen at anequivalent annual rate of nearly 3%. Furthermore, the behaviour of labour strengthconditions in cycle VII suggests that the fragile state of demand in the economy ensuredthat pressure from the supply side of the labour market was insufficient to precipitate theusual premature peak in profit rate. During cycle VII labour strength conditions improveconsiderably (working against a profit rate decline). In particular this improvement comesabout from a falling real labour share (adjusted for the underutilisation of overheadlabour)in Weisskopf s terminology weakening offensive labour strength.2

As in Weisskopf s earlier results, we find generally that changing conditions of theorganic composition of capital play a relatively small part in the explanation of the profitrate.

So to summarise, by extending Weisskopf s empirical analysis into the 1980s, we haveshown that his conclusions concerning the importance of rising labour stength in explain-ing the downward secular trend in the rate of profit are no longer so strong. As far as theperiod 1975-82 is concerned, realisation conditions play by far the largest part in explain-ing profit rate decline. Realisation conditions within the US economy steadily worsenedduring this period. On the other hand, and in contrast to Weisskopf s earlier conclusions,labour strength has fallen and ceteris paribus would have allowed the rate of profit toincrease, but in the context of the severe realisation crisis of the first two years of the 1980sprobably exacerbated the precarious state of effective demand in the economy, through itseffect on the level of consumer expenditure.

3. Decomposing labour's shareIn only going as far as decomposing income into profit and labour income Weisskopf sanalysis conceals a great deal of information concerning the behaviour of the differentcomponents of labour income and in particular the differences in the behaviour of wageand salary shares. Many political economists would regard the lumping together of wagesand salaries into 'wage share' as an over-simplification, since they may perform different

' Federal Reserve Bulletin (1984).2 In response to Munley's critique (Munley, 1981) Weisskopf makes alterations to his definitions of offens-

ive and defensive labour strength (Weisskopf, 1981) by removing the terms capturing the relative price ofwage goods and denning defensive labour strength as the smaller of the two terms measuring the rate ofgrowth of real wage share and the rate of growth of the price index capturing the terms of trade between theNFCB sector and the rest of the economy. For completeness, Table Al presents result using these amendeddefinitions. Offensive labour strength now only takes place if this index falls and then it is measured as theextent to which workers have defended themselves against adverse price changes by raising real wage share. Inthe period 1975 to 1982 only in phase VIB did this happenoffensive labour strength growth contributesnearly 11 percentage points of the annual fall in the rate of profit. In all other cases labour was not on theoffensive and lost ground defensively, since not only do relative prices move against them but real wage sharefell too. This is also the case in the cycle-to-cycle pattern between both cycles V and VI, and VI and VI I. Overthe whole period on average relative prices moved against labour but they were able to recover some, but notall of this lost ground, by the fact that the real wage rose.

318 A. Henleyroles in the process of production. Marx1 saw this distinction in terms of productive andunproductive labour'exploited' labour and the 'labour of exploiting'. To Kaleckiantheories (Kalecki, 1971; Cowling, 1982), where distribution is determined by the size ofthe mark-up on variable costs, the distinction is crucial since wages might be assumed tobe a component of variable costs whereas salaries may be largely invariant to the level ofoutput. Furthermore, it might well be argued that wage-earners and salary-earners seethemselves as distinctly different interest groups, the latter identifying themselves withthe entrepreneurial class, or as a separate managerial class and so opposed to wage-earnersin the distributional struggle (Zeitlin, 1974; Baran and Sweezy, 1966).

In this section Weisskopf s share of employee compensation in domestic income isdecomposed into three smaller shares: wage share, salary share and supplemental labour-cost share. This last component measures the share of employer contributions to federalold age and unemployment insurance programs and to voluntary health, unemploymentand pension schemes and stock purchase schemes.2

Figure 1 shows the behaviour of these shares for the NFCB sector in the post-warperiod. The share of production-worker wages falls from 57% of net income in 1948 to40% in 1983, while salary share in the same period rises from 17% to over 30%, and theshare of supplemental labour costs from 4% of net income to 14%. This would seem tosuggest that production workers as a group have lost out in distributional terms, to theadvantage of the salariat. However two qualifications must follow this. First, (see Table 2),production workers as a proportion of the total have steadily declined in the post-warperiod, from over 80% of total employment to around or below 70%. Second, we mustnote that some proportion of the rising share of pensions, health and unemploymentinsurance contributions would have offset the downward trend in production workers'payroll share.

Formally we can express the employee compensation share as:EC W S C n

= h H = 1 . . .Y Y Y Y Y (1)

where EC is total employee compensation, W is production worker wages, 5 is salaries, Cis supplemental labour cost, /7 profits and Y income. As in Weisskopf s analysis we cancontrol for the effect of the underu'tilisation of overhead labour, by assuming that actualsalaried employment is geared to an optimal level of capacity utilisation. So 'truly-required' salaried labour hours (L*) is given by:

L* = (W?X (2)where Ls is actual labour hours, cp is capacity utilisation and q> is optimal capacityutilisation (set by Weisskopf at 90%). So truly required salary share is:

S* sL* . sL,

where s is average hourly salary. Furthermore, since a proportion of the supplementallabour cost (C) is paid to salaried staff then that too must be adjusted for the underutilisation

1 For example Marx (1976) pp. 448-450, 1039-1048, Marx (1981) pp. 506-514 and also Moseley (1985).

' See US Department of Commerce, Census of Manufactures, 1982, vol. 2 (Industry Statistics), AppendixA, p. A-4. Supplemental labour costs does not include 'perks' such as employee catering facilities, employeepurchase discounts, in-plant medical services etc. owing to the difficulties of accounting for these.

The data available do not allow supplemental labour cost to be accurately divided into that cost paid onbehalf of wage earners and on behalf of salary earners.

Table 1. Rates of growth of key variables in Weisskopfs decomposition of the rate of profit, 19751982

ColumnRate of profitLabour strength conditions

(a) 'offensive' strength(b) 'defensive' strength

Realisation conditionsOrganic composition conditions(a) technical composition(b) value element

Secular fullperiod averages

1949-75

1-1-20- 1 1 3+ 109-2-22- 0 0 9+ 002+ 0-62-0-60

1949-82

2 1-62-0-79+ 0-72151-0-61-0-22+ 004-0-26

Between-cycleaverages

V-VI

3- 0 0 9+ 1-65+ 4-60-2-96-0-61- 1 1 1- 0 13-0-98

VI-VII

4-4-37+ 119+ 9-99-8-80-6-45+ 0-87-1-40+ 2-26

VIA

5+ 16-3+ 61

+ 141- 8 0

+ 11-3+ 0-3+ 20-1-7

Rates of growth within cycle phasesCycle VI

VIB

6- 6 2

-10-8-4-6-6-2+ 6-8-2-2-3-2+ 11

VIC

7-21-2-1-2

+ 18-2-19-4-20-5+ 0-5-3-4+ 3-9

CycleVIIA

8+ 15-7+ 14-9+ 20-3-5-4-2-7+ 3-5- 0 1+ 3-6

VIIVIIC

9-27-6+ 8-7

+ 12-3-3-6

-40-6+ 4-3+ 30+ 1-2

Notes: Cycle VI

Cycle VII

phase A 1975(1)-1977(2)phase B 1977(3)-1978(4)phase C 1979(1)-1980(1)phase A 1980(2)-1981(2)phase C 1981(3)-1982(4)

o

B*01

CP

nOBtoDD-O3CDSB3n3.(A*01

320 A. HenleyTable 2. Production and salaried workers m US manufacturing, 1947-1983

1947194919511953195519571959196119631965196719691971197319751977197919811983

1Production

workers(million)

11-9211 0212-5113-5012-9512-8412-2611-7812-23130613-9614-3612-87142312-5713-6914-5413-5412-20

2%oftotal

83-481-281-780-979-376-876-374-975-472-475-57 5 073-975-473-269-973-671-669-9

3% of trulyrequired

total

n.a.8 4 082-48 1 079-978-57 8 077-776-772-576-175-876-575-976-974-274-674-273-5

4Salaried

staff(million)

2-382-552-803193-383-783-803-954 0 04-994-544-794-554-644-615-905-225-385-26

5Truly required

salaried staff(million)

n.a.2 1 02-673 1 63-263-513 4 53-393-714-964-384-593-954-513-774-754-954-694-40

Notes: Column 3 = column 1 as a percentage of columns 1 + 5Column 5 = salaried staff x (capacity utilisation)/optimal capacity utilisation

Source: US Department of Commerce, Annual Survey of Manufactures, 1983

of overhead labour. Since we have no separate data on production worker and salaried staffsupplemental labour cost we assume that it is apportioned according to the proportion ofwages and salaries in the total payroll. So:

W \ ( S(+W +SJ \W+ SJ

where Cw and C, are waged and salaried staffs supplemental labour costs. So:

(4)

(5)where C* is truly required salaried staff supplemental labour cost. Therefore trulyrequired supplemental labour cost is:

C* = C.. + C*s.

So truly required employee compensation share is:EC* W S* C*

+ H 1Y Y Y Y

(6)

(7)

Finally, we can discriminate between defensive and offensive labour strength by separat-ing relative price changes from real share changes. We shall assume that wages, salariesand supplemental benefits can be converted into real terms by the same price index.

Labour's shares and profitability crisis 321Table 3. Rates of growth of labour shares: full ptnod and between cycles

Full Cyclesperiod I-II IIIII III-IV IV-V V-VI VI-VII

Real truly req.employee comp.share - 0 1 5 5 0-859 -0-386 -0-132 0184 -0-887 -1-842Real productionworkershare - 1 0 1 1 -0-351 -1-670 1-295 - 0 0 5 2 - 2 0 7 1 -2-401Real truly req.salaryshare 0-509 3192 1-560 1-453 -0-786 -0-484 - 1 4 7 2Real truly req.supplement lab.cost share 3157 4-430 3-524 2-617 3-683 3037 - 0 0 6 1

Source: see Appendix 2.

So: EC* Pw (W S* CY Y Y- ( 8 )

Pw is the price index of labour income goods, and Pr the output price index. The barsuperscript denotes a real value.

We now consider actual growth rates of the three component shares for the post-warperiods.1 Between-cycle average growth rates for employee compensation share and thethree component shares are presented in Table 3. An idea of the importance of the rates ofchange of ea' h share in explaining the rate of change of profit share can be gained byconsidering the levels of each real, truly required income share (Table 4).

Real truly required employee compensation share fell in four out of six of the cycle-to-cycle periodsparticularly between cycles II and III in the late 1950s, and between V andVI, and VI and VII from 1975 to 1982. However, during the long boom from the 1960s tothe early 1970s (cycles IV to V) when labour markets were generally 'tight', the trend is anupward one. This long decline in profit share has, of course, been much discussed in theliterature both in the United States context (Nordhaus, 1974; Boddy and Crotty, 1975)and elsewhere (Glyn and Sutcliffe, 1972). Both Boddy and Crotty (1975) and Glyn andSutcliffe (1972) attribute this profit squeeze to a rising labour strength crisis. Takinglabour share as a whole this may be true but by decomposing the aggregate share we seethat in fact both wage and salary shares decline between cycles IV and V, and that theupward trend in the aggregate share is accounted for by a rapidly increasing share of trulyrequired supplemental labour cost. Between cycles IV and V this share rose by nearly3-7o per annum on average (only in the early 1950s, between cycles I and II, was this rateexceeded when the level of the share was at a very low base).

Real production worker wage share shows a downward trend in each cycle-to-cycleperiodoverall, a downward post-war trend of l o per annum. The conclusion here is

1 The transformation of equation (8) into a growth accounting identity is possible but is not practicable since

a change in one of the three shares does not unambiguously imply a change in the same direction of employeecompensation share and hence a change in the opposite direction for profit share. Therefore we do not, asWeisskopf is able to do with his single aggregated labour share measure, translate these growth rates intocontributions to the growth rate of profit share using multipliers.

322 A. Henley

Table 4. Levels of actual and truly required labour shares at key points in each cycle (%)

Phase

1AIB1CO AZAZD2C"X Ajn3B3C4AAT}4lJACC A

3 D

DLAA HOD6C7 A/A7C

Date

1949 (4)1950 (4)1953 (2)1954 (2)1955 (2)1957 (1)1958 (2)1959 (2)1960 (1)1960 (4)1966 (1)1969 (2)1970 (4)1972 (4)1973 (3)1975 (1)1977 (3)1979 (1)1980 (2)1981 (3)1982 (4)

EC/y

79-474-179-681-377-380-283-878-580-182-777181-285-382-583-586-681-583-286083-587-4

W\Y

54-751 654-854-851051-852-448-449-150-143-247-745-447-448048-441-944345-943-639-1

S\Y

20-31 8 019-82 1 120-822-224-723-62 4 025-325-924-83 0 124-724-525-926-925-526-226-433-5

C/Y

4-44-65 15-55-56-26-76-5707-38 08-89-8

10-411012212-713-313-813-514-7

EC*/V

77-776-980-881 279-483-681-48 0 18 1 080-980-281 279-480-681 282-777-478-575-37 2 070-1

WjY

56-853-955-556-453054-754-250-450-951 644-648345047-347-249-240-942-442-139-535-2

S*/Y

16-618-320-219-320-822-520-723023-122-227-224-225-323-223-321-824-323-521120-823-1

C*jY

4-34-75-25-55-66-46-56-77 17-28-38-89 1

10-210-711712112-6121117118

Note: The first four columns show the levels of actual shares of employee compensation, wages, salaries,and supplemental labour costs respectively. The second four columns show the truly required real levels ofthese shares.

Source: see Appendix

very strong, that production workers as a group have consistently lost ground throughoutthe post-war period and have at no time been able to use offensive labour strength to tilt thedistribution of income in their favour. Data on the changes in the relative sizes of theproduction and salaried workforces offers some explanation for this (Table 2), although toappeal to the explanation of changing employment composition fails to tell us why thischange has taken place. Real truly required salary share shows an upward trend in the firstthree cycle-to-cycle periods, until the early 1960s, but after cycle III this trend toobecomes a downward one. This suggests that, although actual salary share has risensteadily through the post-war period (Fig. 1), mis rise can, after the peak in capacityutilisation in the early 1960s, be explained by the effect of falling levels of capacity utilis-ation and consequent underutilisation of overhead labour. Capitalists have found theiroverhead labour costs rising proportionate to other costs, as their overhead labour inputshave been geared to capacity output levels increasingly above actual production levels. Inthe last two cycle-to-cycle periods, from 1975 to 1982, production workers' real wageshare has fallen at an average rate of over 2% per annum, faster than at any other time since1949, but the trend of real truly required salary share, although falling, is at a slower rate.

Real truly required supplemental labour cost share, in contrast to the other two com-ponents, has shown consistent and relatively rapid growth throughout the post-warperiod, until the last cycle-to-cycle period (VI-VII). So although labour, and in particularproduction workers, have failed to maintain their real income shares, this has been in part

Labour's shares and profitability crisis 323made up by increasing non-wage benefits. These non-wage benefits essentially comprise'deferred' wages since workers receive this form of remuneration at some point in thefuture if or when they become ill, unemployed, or retired. In the case of the compulsoryportion of these payments the initial recipient is the federal government. However for thevoluntary schemes1 control is vested in private trustees. In the case of the largest com-ponent of these, pension schemes, a series of post-war legislation stemming from the 1947Taft-Hartley Act ensures that schemes are operated and controlled by the financial capitalsector, divorced from individual member ownership (Barber and Rifkin, 1978). Freemanand Medoff (1984) show that unionised establishments, ceteris paribus, have 30% higherfringe benefit expenditures, suggesting that where union organisation is strong andworkers are able to express preferences more effectively then those preferences areweighted towards fringe benefits. In the context of the US coal industry, Farber (1978)shows that union members value a dollar of fringe benefits almost 40% more than a dollarof pre-tax pay. An explanation for this may be found in the tax advantage to be gainedfrom payment in fringe benefits. So, although workers may have a preference for fringebenefits, this preference may be reinforced by the desires of capital. Pension schemes, inparticular, may promote worker-attachment and reduce wage-cost variability, especiallyif pension portability is restricted (Green, 1982; Becker, 1964). Finally, the massivereserves of funds now held by pension funds in the developed capitalist world provide anessential source of investment funds for capital in general (Minns, 1980; Barber and Rifkin1978).

Table 5 shows the rates of growth of real truly required employee compensation shareand the three components within each cycle phase. The average figures for each phaseshow that it is in phase B of each cycle that production workers can make real wage sharegains, but these gains disappear over the secular trend. So for production workers,Weisskopfs conclusion that it is in the late expansion phase between profit rate peak andreal output peak that tight labour market conditions allow real wage increases is sup-ported. This is strengthened by the fact that real truly required supplemental labour costshare, although rising on average in all phases of the cycles, rises fastest in phase B. We cannote that, because cycle VII has no phase B, production workers fare particularly badly inthe early 1980s. In the downturn of cycle VII their real wage share bears the distributionalbrunt of the 1982 recession by falling at an unprecedented 9% per annum. The sharpslump in the US economy engineered by the newly-elected Reagan administration after1980 seems to have brought about a sharp redistribution of income away from productionworkers towards salaried workers. Real salary share rose at over 8% per annum in phaseVIICand salary share here (Table 6) is adjusted for the utilisation effect so this cannotbe explained in terms of differential rates of adjustment between direct and overheadlabour inputs.

The cyclical pattern of real truly required salary share is quite different from that ofproduction wage share. Real salary share rises fastest during phase A of each cycle, levelsoff in phase B and declines in phase C. So the cyclical pattern of salary share conformsclosely to that of profit share, and contrasts with the clear inverse relationship betweenwage share and profit share. In the long business cycle of the 1960s (cycle IV) the directionof salary share changes corresponds precisely to the direction of profit rate and profit sharechanges (see Weisskopf 1979, Fig. 1, p. 349). Certainly during the 1960s, and to a lesserextent in other periods since 1949, when capitalists have done well so has the salariat.

' In the mid 1970s voluntary contributions comprised 75% of the total in unionised plants and 63% in non-unionised plants (Freeman and Medoff, 1984, Table 4.1, p. 63).

324 A. HenleyTable 5. Rates of growth of labour shares: intra-cycle analysis

Phase

1AIB1C2A2B2C3A3B3C4A4B4C5A5B5C6A6B6C7A7C

Av. for phases AAv. for phases BAv. for phases C

EC*/V

-0-9601-9650-450

- 2 1 6 92-929

- 2 1 6 6- 1 599

1-547- 0 1 2 8- 0 1 8 5

0-393-1-510

0-7920-8711-228

-2-6530-978

-3-306-3-649- 2 0 7 3- 1 0 9 4

1-390-1-118

W\Y

- 5 1 5 511231-577

- 6 1 5 11-802

-0-749-7-223

1-2561-893

-2-7672-407

-4-6772-513

-0-4452-772

-7-3172-418

-0-659- 5 1 4 5-9-211-3-768

1-716-1-545

S*\Y

9-5373-967

-4-2727-4234-415

-6-71310-6710-453

- 5 4563-901

-3-6352-953

-4-3330-676

-4-3024-359

-2-370-8-469- 1 1 5 0

8-3553-7620-297

-2-226

C*\Y

9-9663-50961202-7717-66710772-3527-3682-2652-8441-5502-6565-4297-2615-7301-3392-607

- 3 0 4 9-2-926

10832-89840112-269

Source: see Appendix 2

0-330-320-31

O300-290-280-27O260-250-240-23

* 0 M

**'

/VI I I

1950 1955 I960 1965Year

1970 1975 1980

Fig. 2. The degree of monopoly m US manufacturing, 194783 (value addedproduction wages J/valueof shipments

Moseley (1985) suggests that declining profit rate can be explained by the rising pro-portion of overhead labour, since proportionately less 'productive' labour is beingemployed to generate capitalist surplus. This may be correct in so far as this rising

Labour's shares and profitability crisis 325

proportion of overhead labour is indicative of the secular worsening of realisation con-ditions (especially since the post-war capacity utilisation peak in 1964), and so under-utilisation of overhead labour. However, if we control for this effect then we find thereexists a positive relationship between profit rate and the size of the truly required salariedworkforce (see Table 2). At a given level of utilisation of productive capacity the distri-butional balance is between on the one hand profits and salaries and on the other the wagesof direct production staff. This pattern is clearly consistent with the development ofmanagerialism, and is certainly suggestive of the need of large corporations to absorbrising profits into discretionary managerial expenditures (Baran and Sweezy, 1966;Cowling, 1982). It may also be indicative of continued growth in the army of adminis-trative and technical staff required to maintain and improve managerial control over theproduction process (Braverman, 1974).

4. Explaining the trend of wage shareHaving discovered that since World War II the trend of wage share has been markedlydifferent from the trend of salary share and from the trend of overall employee compen-sation share, the question of what determines that trend remains. In this section weexplore the applicability of the Kaleckian idea that wage share is determined by thestructural characteristics of final product markets within a monopoly capitalistic economy(Kalecki, 1971; Sawyer, 1985). At the level of manufacturing industry the 'degree ofmonopoly' theory states that final output pricing will be cost-determined through a fixedmark-up on direct costs. The size of this mark-up will be determined by a vector ofcharacteristics capturing conditions of market structure and conduct. So:

p = k.u (9)where k is the mark-up of price (p) on average direct costs (u). The essence of the theory isthat:

k=f(z) (10)where z is the vector of structural characteristics. Direct costs may be said to compriseproduction wages {W) and raw materials costs (At). We can therefore write:

n + O+W + M = k(W + M) (11)where /7 is profits and O overhead costs (fixed costs and overhead labour costs).Rearranging equation 11 we can obtain (see Sawyer, 1985, p. 277):

W 1Y 1 +(k- 1 ) 0 + 1)

where j = Mj W and Y is value added.' So for a given degree of monopoly any increases indirect costs will only influence distribution to the extent that the ratio j is affected, sincefinal product price will be marked up to reflect increased costs. Distribution will beaffected if the structural conditions determining the size of the mark-up change. The ideathat profitability is determined by conditions of industrial structure is one that has beenfundamental to orthodox industrial economics since Bain's pioneering work in the 1950s

' Value added is here equal to 17 + O + W and so conforms closely to our concept of income in the previousanalysis. When examining the composition of equation (12) over time we must note the caveat changes in thedegree of vertical integration will affect the ratio;.

326 A. Henley

(Bain, 1951), and has stood the test of rigorous and extensive empirical testing (Weiss,1974). The derivation of a formal link between profitability (measured by the price-costmargin) and market structure and oligopolistic interdependency is also well established(Cowling and Waterson, 1976; Waterson, 1984). Furthermore, a number of recent cross-sectional studies find evidence of a relationship between wage share and market structure.Cowling and Molho (1982), for a cross-section of UK MLH industries in 1968, find asignificant negative relationship between wage share and the five-firm concentration ratioand Herfindahl index. For United States manufacturing industry both Barbee (1974) for1967 and Henley (1987) for 1972 find strong evidence of a robust negative relationshipbetween wage share and the four-firm concentration ratio.

The literature on changing patterns of concentration in the post-war US economyprovides only sparse evidence to suggest that the secular decline in wage share can beexplained by rising concentration. White (1981) concludes that there is little evidence ofan upward trend in aggregate concentration. Scherer (1980) states that if any increase hasoccurred it has been at a pace of no more than 'glacial drift'. He also finds evidence of only aslowly rising trend of average market concentration. Shepherd (1982), examining sharesof national income generated by industries within different concentration bands, con-cludes that competition in the US economy increased significantly in the years between1939 and 1980. Most of the changes have occurred since 1958.

Concentration is only one aspect of monopoly power; for example, it cannot capturechanges in the pattern of collusion within oligopolistic industries. Furthermore, it mayonly bear an incomplete relationship to the welfare implications of monopolisation.Gordon (1985) examines post-war changes in performance measures of monopoly powerin the US, and finds, from examining Tobin's 'q' and the Lemer index, that monopolypower increased sharply from the end of World War II until the early 1970s. In the mid1970s it declined and he suggests that this was due to rising foreign competition.

Figure 2 shows the behaviour of the margin of revenue over direct costs (or 'degree ofmonopoly', and equivalent to k in equation 12)' for the post-war period. From 1947 until1971 the series shows a significant upward trend. The margin of shipments over directcosts as a percentage of shipments rises from 23-7% in 1947 to almost 33% in 1971. Table6 shows the behaviour of each of the three variables in equation 12. In the same periodproduction wage share falls from over 40% to 30% of value added, but the ratio ofmaterials bill to production wage bill (/) remains largely constant. After the peak in 1971,the degree of monopoly series falls, levelling off in the mid and late 1970s at around 31 %.It then starts to rise again in the 1980s. On the other hand, wage share continues to declinethroughout the 1970s and early 1980s, and the; ratio rises.

A number of possible explanations for the upward trend of the margin of revenue overdirect cost exist. Firstly, a secular trend towards higher average levels of verticalintegration at the establishment level would cause its value to rise. However, it seemsunlikely that this explanation could account for the sustained upward trend through the1950s and 1960s. A second explanation would be that firms have over time found them-selves bearing a greater proportion of costs as overheads. In this case the degree ofmonopoly as measured here will rise. Most of the changing composition of employmentfrom production to overhead staff, after allowing for the effect of changing capacityutilisation, occurred in the 1950s. Between 1947 and 1959 truly required salaried staff as a

1 Computed from the US Annual Survey ofManufactures (1983) as (value added production wages)/value

of shipments. Value of shipments data for 1947-1957 was obtained from US Department of Commerce,Manufacturers Shipments, Inventories and Orders (1963).

Labour's shares and profitability crisis 327Table 6. US manufacturing: wage share, the degree of monopoly and the ratio of wages to materials bill1947-1983

Averages

19471949-511952-541955-571958-601961-631964-661967-691970-721973-751976-781979-811982-82

Production workerwage share of

value added (%)

40-739-539-53 6 034-332-931 530-83 0 02 8 126-925-624-5

Degree ofmonopoly* (%)

23-723-924-827-528-83 0 031-332-332-731-431-23 1 132-2

Ratio of materialsbill to production

wage bill6

3-693-883-653693-723-743-743-663-784-544-975-445-51

"(Value added production wages)/Value of shipments.*1947-57 data computed as (Value of shipments Value added)/Production wages.Sources: Value of shipments 1947-57: US Department of Commerce: Manufacturers shipments, inventor-

ies and orders (1963). All other series: US Department of Commerce, Annual Survey of Manufactures 1983,Statistics for Industry Groups and Industries, Report 1983 (A5>1.

percentage of the truly required total rose from 15% to 25%. However, in the later 1960sand 1970s the change that did occur is largely explained by falling capacity utilisation,since truly required salaried staff as a percentage of the truly required total remains fairlyconstant. A third explanation is the Kaleckian idea that a rising revenue-direct costmargin is linked to rising monopoly power. This certainly seems to be the most plausibleexplanation in the 1960s. Although market concentration figures for the 1960s do not showa large increase, it seems likely that rising internationalisation of production and highlevels of conglomerate and horizontal merger activity during the 1960s resulted in aconcentration of market power both within and across markets, and in the monopsonisticpower of large corporations in factor markets.

After 1971 the impact of rising materials costs, the result of large increases in worldenergy prices, is captured dramatically by the increase in they ratio. At the same time, UScapital started to experience sharply rising levels of import penetration. The drop in therevenue-direct cost margin suggests that capitalists were unable wholly to pass increasedenergy costs on into final prices, and that increased foreign competition further reducedthe extent to which prices could be set above marginal costs. The trend of wage sharethroughout the 1970s remains downward. The data show a continued decline in produc-tion worker wage share in the early 1980s, and a sharp rise in the margin of revenue overdirect costs towards the pre-OPEC peak level (Fig. 2). The most plausible explanation forthis widening wedge between revenue and direct cost is in a declining strength of produc-tion labour argument, the result of sharper competition in labour markets in conditionsof unemployment and recession. Table 6 shows that in cycle VII real production wageshare fell, suggesting that in the early 1980s production workers were unable to securewage bargains to maintain real wage levels, or that employers were able to secure wage

328 A. Henleybargains to maintain real wage levels, or that employers were able to achieve a productivitybreakthrough.1 As discussed earlier, the data in Table 6 shows that the reduction in realproduction wage share in phase VIIC coincides with a sharp rise in real salary share. So theearly 1980s experience points to a rise in the revenue-direct cost margin resulting from adecline in production worker strength and redistribution towards the salariat, rather thanany independently observable increase in the monopoly power of American capital.

5. ConclusionIn his original paper Weisskopf (1979) concluded that the rising strength of labour variantreceived far more empirical support than other explanations of crisis. This paper hasbrought two qualifications to this conclusion. Firstly, with the addition of two subsequentcycles from 1975 to 1982 we have found that during these seven years all the seculardecline in the rate of profit is explained by a deterioriation in realisation conditions,indicative of the general conditions of recession experienced by the US economy at thetime . In fact this deterioration was so sharp that now over the full post-war period we findthat labour strength and realisation conditions now contribute in equal proportions to thepost-war decline in the rate of profit.

Secondly, our decomposition of labour share has shown that different components oflabour income have experienced markedly different secular and cyclical behaviour. Realproduction worker wage share has displayed a cyclical behaviour inversely related toprofit share around a consistent downward trend. In contrast, real salary share shows apro-cyclical behaviour, closely matched to that of profit share. Until the early 1960s itshows an upward trend, but after then, when adjusted for the effect of changing capacityutilisation on the utilisation of overhead labour, it starts to decline. Actual salary sharerises consistently throughout the post-war period. The share of supplemental labour costrises both secularly and within each phase of the cycle. We have explored a number ofexplanations for the different patterns of each of these three components. Firstly, it isapparent that the secular worsening of labour strength conditions identified by Weisskopfis largely explained by the increasing share of income devoted to 'deferred' wagespension, health and unemployment insurance contributions. Questions of whetherworkers have reluctantly or willingly accepted this growth in fringe benefits, and whetherthese payments are in addition to 'take-home' pay or comprise a second-best alternative tounattainable rising real wages, remains. However it does seem likely that this growthcoincides with the desires of capital. Secondly, the changing composition of employmentaway from production workers towards overhead staff is an important explanatory factor.However, the question remains of why, net of the effect of increasing underutilisation ofoverhead labour, this change has taken place. We tentatively suggest that it may beindicative of rising administrative and technical control over the production process, andmore generally of the growth of managerialism. Clearly this warrants further researchbeyond the scope of the present paper. Thirdly we have sought to identify the growth ofmonopoly power in the US economy, particularly in the 1960s, with die apparentupward movement of the margin of price over direct unit cost, as an explanatory factor fordeclining production wage share.

BibliographyBain, J. S. 1951. Relation of profit rate to industry concentration in American manufacturing

1936-1940, Quarterly Journal of Economics, vol. 65, pp. 293-3241 Mendis and Muellbauer (1983) find in the British context evidence for such a 'breakthrough' in producti-

vity, beyond normal cyclical variation, between 1980(1) and 1981 (1).

Labour's shares and profitability crisis 329Baran, P. A. and Sweezy, P. M. 1966. Monopoly Capital, New York, Monthly Review PressBarbee, W. C. 1974. 'An inquiry into the relationship between market concentration and labor's

share of value added', unpublished Ph.D. dissertation. Catholic University of AmericaBarber, R. and Rifkin, J. 1978. The North Will Rise Again: Pensions, Politics arid Power in the 198

Contribution of: RSLOffensive RSLDefensive RSL

121

121

4-44

4-44

330 A. HenleyAppendix 1: Table Al . Contributions of RSL with Weisskopf s amended definitions

FullCycle Cycle periodV-VI VI-VII 1949-82 VIA VIB VIC VIIA VIIC

-0-72 515 -7-55 4-96 19-71 800 -10-96

-0-72 515 3-41 4-96 19-71 800

Appendix 2: data sources and definitionsSection 2: The data series used in this section are extended from those used by Weisskopf and areextensively detailed in Weisskopf (1979), Appendix pp. 377-378.Section 3: Income, capacity utilisation and the price index series are as used by Weisskopf (1979).

EC: 'compensation of employees' in NFCB sector, current prices (source: NIPA, various issues).C: 'supplements to wages and salaries' in NFCB sector, current prices (source: NIPA, variousissues).

The difference between EC and C is 'wages and salaries' and this was apportioned to productionworker payroll (W) and salaries (5) using annual data on salary bill and production wage bill inmanufacturing industry (source ASM/COM, various annual issues). Quarterly data was linearlyinterpolated.

Labour hours series for production and salaried labour were computed from data in total labourhours in the NFCB sector, estimated from an index of total labour hours of all persons in non-financial corporations (1967= 100) multiplied by Gorman's estimate of actual labour hours in theNFCB sector for 1967 (see Weisskopf, 1979) (source MLR various issues). Total hours was appor-tioned between production and salaried staff using data on production worker man-hours andsalaried employment in manufacturing (assuming an average of 2000 hours a year for each salariedemployee), (source ASM/COM). Quarterly data was linearly interpolated from annual series.

AbbreviationsNIPA: National Income and Product Accounts, US Department of CommerceASM: Annual Survey of Manufactures, US Bureau of the CensusCOM: Census of Manufactures, US Bureau of the CensusMLR: Monthly Labor Review, US Department of Labor