INCOME DISTRIBUTION - FUNCTIONAL DISTRIBUTION by Jesse Burkhead The increased quantity and quality of national income statistics which have become available within the past few years make possible a re-examination of significant relationships within the U.S. economy. The present study represents an examination of one such relationship—labor and property shares in the national income. For this purpose the detailed accounts prepared by the National Income Division of the Department of Commerce have been utilized for the years 1929-1950. The conclusions for this period are then compared with the Kuznets data for the years 1919-1929.
The present study is intended to serve two purposes: First, it will examine the common generalization that wages and salaries are a stable proportion of national income. This generalization turns out to be valid only in relation to a particular set of national income concepts. When other concepts are employed it appears that labor shares in national income are not stable, but shift significantly from year to year and over a period of years. . . .
Second, this study will investigate changes in labor and property shares in the last three decades, but with particular reference to the decade of the Forties. That is, attention will be centered on the behavior of labor and property shares under inflationary conditions. The data show a general pattern: increases in economic activity are associated with a reduction in labor shares of total income; decreases in economic activity are associated with an increase in labor shares of total income; inflationary conditions appear to accentuate the decline in labor shares which is associated with increases in activity.
• • • • • As the level of economic activity increases, labor shares tend to decline. As the level of economic activity decreases, labor shares tend to increase. The only marked exception to this pattern is the case of World War II, when, as economic activity increased, labor shares also increased.
It would appear that there are a number of factors which contribute to this inverse relationship between labor shares and changes in economic activity.
As economic activity increases, property incomes can be expected to gain in relation to labor incomes by what may be called the capacity effect. As the output of firms increases beyond the break-even point, there is a concomitant increase in the volume of profits. The traditional spreading of overhead, with correspondingly lower unit labor costs, produces a larger return to property per unit of output as output increases. The growth in the relative shares of property income recipients is certainly not without limit; this limit is associated with a disproportionate increase in marginal costs.
Where increases in economic activity are accompanied by inflationary conditions two additional factors will tend to increase the share of property income in relation to labor income. These may be termed the lag effect and the compounding effect. For present purposes the term inflation will be used to describe a condition in which demand for final product is increasing with the prices of goods and services generally rising, but with some prices rising more rapidly than others. That is, inflation is both an aggregative and a differential phenomenon.
The lag effect, which tends to increase property shares, is a corollary of the differential impact of price rises. A rising rate of effective demand confronts an output of goods and services which is increasing less rapidly than the increase in demand. The market for final product receives the full brunt of the higher demand; the increased demand for labor is secondary. The seller of commodities becomes the immediate beneficiary of the rising prices. Entrepreneurial shares increase and the increase raises the shares of property income in the total. The lag effect is not independent of the capacity effect. Increases in price for final product will raise the break-even point and broaden the range of profitable operation.