Capital, Labor and Lancaster

Capital, Labor and Lancaster

Published On: December 8, 2017

Written by: Ben Atwater and Matt Malick

Since the late 1970s, the share of income among the wealthiest has steadily increased, where today income inequality has reached levels not seen since the 1920s.  Simply put, capital is presently more valuable than labor and, therefore, capital thrives while labor stagnates.

In an entertaining piece of long-form journalism from Eater, Elizabeth Dunn explores the faltering middle class using the casual restaurant chain TGI Fridays as analogy and Lancaster, PA as backdrop. Whether you live in Lancaster or not, it’s a fun read.  Among the economic statistics that Dunn cites are:

  • “In 2016, Pew [Research Center] used United States census data to analyze income trends on a city-by-city basis; median household income in Lancaster [metro area] is $66,843 per year, slightly above the national average of $59,039.”
  • “In 2000, 64 percent of the metro area’s [20 miles on all sides of downtown] population classified as ‘middle income’ – those with incomes between two-thirds and double the median amount. As of 2014, that number decreased to 57 percent; Lancaster’s middle class is shrinking.”
  • “. . . a larger portion of the Lancaster metro area’s population has dropped into a lower income band (3.8 percent) than has moved into a higher one (3.2 percent) . . .”

Research from the Economic Policy Institute shows similar results:

  • “For the United States overall, the top 1 percent captured 85.1 percent of total income growth between 2009 and 2013. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent.”
  • “To be in the top 1 percent nationally, a family needs an income of $389,436.” Although the average income of the top 1 percent is $1,153,293, a far cry from the entry level number.

More analysis from the Urban Institute reinforces the trend:

  • “. . . the income of families near the top increased roughly 90% from 1963 to 2016, while income of families at the bottom rose less than 10%.”
  • “The richest now have 12 times the wealth of families in the middle of the income spectrum versus 6 times the wealth in 1963.”

Given this long-term trend, workers must also be savers, thereby diversifying their labor with a share of capital.  For many decades now, the most accessible avenue to pursue capital has been through the purchase of common stocks.

Stock investors have great allies among the upper crust of the 1 percent – corporate CEOs – who have enormous incentive to pursue decisions that boost the stock price of their companies.  According to the Economic Policy Institute, CEO pay was 30 times that of the average worker in 1978; it is now 276 times.  A good portion of total CEO compensation is stock-based.

A fine example of the triumph of capital over labor is S&P 500 profit margins.  Trailing four-quarter average operating profit margins were 5.4% in 1994 and now stand at 10.6% (with a clear long-term uptrend), according to Yardeni Research.  Operating margins include labor costs, but not taxes, so a cut in the corporate tax rate to 20% (or lower) would be an additional boon to capital.

Furthermore, corporate boards and CEOs have returned mountains of money to shareholders in recent years, helping to boost stock prices.  Total gross issuance of stock minus S&P 500 buybacks has been negative since early 2010.  A consistent rate of $200 billion to $500 billion each year over the last seven years has fallen into the hands of shareholders, while at the same time making the capital club yet more exclusive.  This is a huge windfall for shareholders.

The trend of capital over labor has certainly been a tailwind for investors.  With a long-term orientation, a disciplined approach and a tolerance for volatility, all signs point to a continued advantage for capital.


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