Corporations are saving more and paying less

July 27, 2012

The University of Chicago's Loukas Karabarbounis and Brent Neiman have an interesting new working paper documenting how corporations have used their money from 1975 to 2007. The short version: corporations started saving more of their income, and paying less of it out in wages:


Source: Karabarbounis & Neiman

The authors find that the share of corporate income going to wages declined by 5 percent over those three decades. Interestingly, they found the phenomenon occurred worldwide, with similar patterns in the United States, Germany, Japan and China:


Source: Karabarbounis & Neiman

The authors note that this finding flies in the face of conventional economic models, under which the share of corporate income going to wages stays constant. They find that the phenomenon is pretty well explained by lower prices on investments -- that is, saving got cheaper over the period in question and, as a consequence, corporations threw more of their money that way.

The findings also add context to the current problem of corporations hoarding cash rather than spending it in ways that would aid the recovery. Karabarbounis and Neiman suggest that this behavior is nothing new, and is in fact 30 years in the making.

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