“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“A full-throated defense of economic dynamism.” - The Wall Street Journal
AI Summary.Federal Reserve Bank of New York researchers estimate that about 26% of a uniform tariff passes through into non-oil consumer goods prices over twelve months, with roughly 64% of that effect coming directly from higher import prices and the rest through domestic producers' input costs and markups. Pass-through into import prices is nearly immediate, while domestic price responses build gradually.
Mary Amiti,Sebastian Heise and David WeinsteinFederal Reserve Bank of New York
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FRBNY estimates that a uniform 10% tariff raised consumer-goods prices 2.6% after 12 months: 1.7pp directly via imported final goods, and 0.9pp mainly via higher imported-input costs for domestically produced goods, with the latter effect building over 9–12 months.
How much of a tariff reaches consumer prices within a year?
Core argument: Amiti, Heise, and Weinstein estimate that a uniform tariff passes through to non-oil consumer goods prices at roughly 26 percent over twelve months, with a 10 percent tariff raising prices 2.6 percentage points, 1.7 points of it via the direct import channel.
Tariff pass-through into U.S. import prices is nearly complete. Instrumenting realized duty rates with statutory tariffs to account for endogenous sourcing and exemptions, tariff pass-through into consumer-goods import prices is about 90.5%; a 10% increase in the duty rate raises import prices about 9.1%. At twelve months, a uniform 10% tariff raises consumer-goods prices 2.639%: 1.694pp through the direct channel, 0.770pp through marginal costs, and 0.175pp through strategic complementarity. Import-price pass-through is essentially immediate, while domestic prices adjust gradually; the contribution of the two indirect channels roughly doubles between six and twelve months, with much of the overall adjustment occurring within nine to twelve months. For the actual 2025–26 tariffs, the direct channel accounts for about 70% of the estimated effect; the marginal-cost channel accounts for about 22%, with strategic complementarity accounting for the remainder. Because the regressions include date fixed effects, the tariff contribution is identified relative to less-exposed goods and should be read as illustrative rather than as the absolute contribution to aggregate goods CPI.
Takeaways by Macro Roundup® AI
Amiti, Heise, and Weinstein estimate that a uniform tariff passes through to non-oil consumer goods prices at roughly 26 percent over twelve months, with a 10 percent tariff raising prices 2.6 percentage points, 1.7 points of it via the direct import channel.
The two indirect channels — marginal costs from imported inputs (0.77 percentage points) and strategic complementarity in domestic markups (0.17 points) — account for 36 percent of the total effect and roughly double between six and twelve months after tariff implementation.
Applied to the actual 2025–26 tariff schedule, the authors estimate the cumulative tariff contribution to goods CPI reached about 2.9 percentage points by February 2026, with import-price pass-through near 90 percent and retail pass-through of 0.56.
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The State of U.S. Tariffs July 24, 2026— The average statutory US tariff rate stands at 11.1% and, under current law including scheduled increases, is projected to reach 11.8% by year-end. The authors estimate current-law tariffs will raise consumer prices by about 0.7% and generate roughly $1.9tn over ten years, with revenue somewhat lower after accounting for tariffs' negative effect on economic output.
Who Is Paying for the 2025 U.S. Tariffs?— The authors estimate that 94% of U.S. tariff costs were borne domestically over the first eight months of 2025, with a 10% tariff associated with only a 0.6 percentage point decline in foreign export prices. Pass-through into U.S. import prices later declined to 86%, shifting more of the burden to foreign exporters.
Demand-Driven Inflation— Demand and supply curves estimated from pre-pandemic data imply relatively flat demand curves in the US and euro area, so adverse supply shifts would produce large output losses but comparatively little inflation. The authors argue explaining the observed combination of high inflation and output requires outward demand shifts, including accommodative monetary policy alongside fiscal expansion.
AI Summary.Incorporating tariffs into the standard cost-of-capital framework, researchers estimate US tariffs raised the economy-wide marginal effective tax rate on new investment by 4.2 percentage points to 17.0%, with equipment hit hardest at 26.1 percentage points. That increase offsets the 3.5 percentage point reduction from the One Big Beautiful Bill Act.
Kyle Pomerleau, Thomas Brosy, Robert McClelland and John WongAmerican Enterprise Institute
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The IEEPA tariffs through January 2026 raised equipment’s user cost of capital 9%, from 17.7% to 19.3%. With depreciation unchanged, the required pre-tax net return rose 1.6pp, 4.3% to 5.9%, a tax at purchase that expensing cannot eliminate.
Do tariffs raise the effective tax rate on new investment?
Core argument: Tariffs in force before the February 20, 2026 Supreme Court ruling in Learning Resources v. Trump raised the economy-wide marginal effective tax rate on new US investment by 4.2 points, from 12.8 percent to 17.0 percent, and the cost of capital by 2.7 percent, the AEI authors estimate.
The standard Hall-Jorgenson user cost of capital framework defines the minimum gross required return on an additional unit of capital. The service price of capital (SS) is the minimum pretax gross return required on a new investment; the minimum pretax net return (ρrho) equals SS minus economic depreciation. Consider imported equipment requiring a 25% gross return: 20% to cover depreciation and 5% shareholders’ demanded return. A 10% tariff raises the cost of capital to 27.5%. [Thus the minimum pretax net return—the hurdle rate—rises from 5% to 7.5%]. For equipment, tariffs raise the cost of capital 9%, from 17.7% to 19.3%: 86% of the burden is direct, 14% indirect. 100% bonus depreciation reduced the equipment METR from 19.1% to 4.1%; tariffs raised it to 30.3%, more than offsetting the tax cut.
Takeaways by Macro Roundup® AI
Tariffs in force before the February 20, 2026 Supreme Court ruling in Learning Resources v. Trump raised the economy-wide marginal effective tax rate on new US investment by 4.2 points, from 12.8 percent to 17.0 percent, and the cost of capital by 2.7 percent, the AEI authors estimate.
Equipment bore the largest estimated burden, with its marginal effective tax rate rising 26.1 points from 4.1 percent to 30.3 percent and its cost of capital up 9.0 percent, while mainframes and PCs saw a 26.6 percent cost-of-capital increase.
The estimated 4.2 point tariff-driven increase in the marginal effective tax rate offset the One Big Beautiful Bill Act’s 3.5 point reduction, leaving a net 0.8 point rise economy-wide and an 11.1 point net increase for equipment.
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Blunt Tariffs Undermine Efforts To Reshore High-Tech Manufacturing— Computer and electronic products manufacturers import 37% of their intermediate inputs and capital equipment, chemical manufacturers 33%, and transportation equipment manufacturers 27%. Broad tariffs may push some sourcing domestically over time, but many inputs will simply cost more, making American manufacturers less competitive globally.
Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States— The authors find that the combined effect of U.S.-China trade war import tariffs, retaliatory tariffs, and farm subsidies on employment in exposed U.S. locations was at best a wash and possibly mildly negative, while residents of tariff-protected areas became less likely to identify as Democrats and more likely to vote Republican.
Tariffs are Dumb Enough to (Almost) Work— A universal 15% tariff on imported goods could raise roughly $300–$400bn annually, a fraction of what a value-added tax would generate but real revenue given U.S. imports of about $4tn. The author argues tariffs are a poorly designed form of consumption tax that could build political groundwork for replacing them with a more efficient value-added tax.
AI Summary.The gap between French and German 10-year government bond yields has widened at a pace matched only during the euro zone sovereign debt crisis. France and the UK have less room than the US to close deficits with tax increases, as tax revenues equal 43.9% of GDP in France and 35.3% in the UK versus 25.2% in the US.
John AuthersBloomberg
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The spread between 10-year French OATs and German Bunds has widened at a pace seen only during the eurozone sovereign-debt crisis. John Authers warns that France “satisfies all the classic conditions for a major debt crisis.”
Do high tax burdens limit France and the UK's deficit options?
Core argument: The spread of 10-year French OATs over German Bunds has risen at a pace matched only during the worst days of the euro-zone sovereign debt crisis in 2011 and 2012, fueling talk of a second crisis centered in Paris.
Only in the worst days of the euro zone’s sovereign debt crisis, in 2011 and 2012, has the [spread of 10-Year French OATS over German Bunds] risen so fast. Talk of a second euro-zone crisis, this time with an epicenter in Paris, is growing, and it’s easy to see why. Why is this more of a problem for France and the UK? Beyond their deficits, they also shoulder much higher tax burdens than the US. Tax revenues are 25.2% of GDP in the US, the lowest of the major developed economies - but 35.3% in the UK and 43.9% in France. It’s hard to imagine after decades of tax-cutting, but a US politician could deal with the deficit fairly easily with a tax hike. It’s not clear that option is open to French lawmakers, even if they could somehow persuade voters to go along with them. The populist politicians of left and right, who currently look well placed in next year’s presidential elections, are in any case unlikely to try.
Takeaways by Macro Roundup® AI
The spread of 10-year French OATs over German Bunds has risen at a pace matched only during the worst days of the euro-zone sovereign debt crisis in 2011 and 2012, fueling talk of a second crisis centered in Paris.
Tax revenues equal 25.2% of GDP in the US, the lowest among major developed economies, versus 35.3% in the UK and 43.9% in France, leaving American politicians more room to close the deficit with a tax hike.
Populist politicians of left and right, currently well placed for France’s presidential election, are unlikely to attempt tax increases to address the deficit.
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French PM to Freeze Emmanuel Macron’s Pension Reform Until 2027— France's prime minister said he would suspend the plan to raise the retirement age to 64 until the next presidential election, while asking parties to agree on other savings. He outlined a €30bn package of spending cuts and tax rises to cut the deficit to 4.7% of national output from 5.4%.
Soaring Bond Yields, Gaping Deficits and Towering Debts: What Could Go Wrong?— An analysis of 22 rich countries estimates that if each refinanced its entire debt at current five-year bond yields, Britain would need the largest primary surplus to stabilize its debt-to-GDP ratio, about 1.5%, followed by Italy at 1.4%, France at 1.2% and America at 1%.
Global Debt Report 2026— Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.
AI Summary.The authors find no statistically significant evidence that $190bn in federal emergency K-12 school aid mitigated pandemic learning loss or raised district spending. Districts qualifying for additional funds saw local revenues fall by $907 per pupil over three years, about 8% of pre-pandemic average, roughly 80% from property taxes.
Jeffrey Clemens, Philip Hoxie and Stan VeugerNational Bureau of Economic Research
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Exploiting a discontinuity in K-12 public school districts’ qualification for Covid emergency funding (ESSR), Clemens et al find that the funds did not mitigate learning loss. To a large extent, local districts used them to lower property taxes.
Do federal emergency education grants reduce student learning loss?
Core argument: Districts crossing the 5% poverty cutoff for additional ESSER funds saw local revenues fall an estimated $907 per pupil over three years, about 8% of the pre-COVID average.
Emergency funding for K-12 public schools was an important component of recession spending packages during COVID, involving $190 billion in additional expenditure. We see no evidence that ESSER funds helped to mitigate learning loss, at least in the short run. We find no statistically significant evidence that districts increased expenditures in SY 2021 or SY 2022. We do find evidence that districts that qualified for additional ESSER funds had statistically significant reductions in local revenues that were in excess of their ESSER funds. This pass-through of federal funds may partially explain why ESSER had minimal impacts on learning loss for districts around the 5% poverty threshold. Our estimates suggest that over the three years, crossing the qualification cutoff for additional ESSER funds is associated with a $907 per pupil decrease in local revenues, or about 8% of the pre-COVID average. We show the decline in local revenues as an event study in Figure 3, which includes a flat pre-COVID trend in local revenues per pupil across the qualification threshold. In Table 5,Column 5 [], we can see that about 80% of the revenue decline came from decreases in revenues from property taxes, [which fell] by $718 per pupil across the 3 years. The findings apply specifically to districts in the neighborhood of the 5% poverty threshold for qualifying for additional ESSER funds.
Takeaways by Macro Roundup® AI
Districts crossing the 5% poverty cutoff for additional ESSER funds saw local revenues fall an estimated $907 per pupil over three years, about 8% of the pre-COVID average.
About 80% of that local revenue decline came from property taxes, which fell by $718 per pupil across the three years.
The authors find no evidence that ESSER emergency K-12 funding, totaling $190 billion, mitigated learning loss in the short run, and no statistically significant increase in district expenditures in SY 2021 or SY 2022.
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Aid for Incumbents: The Electoral Consequences of COVID-19 Relief— Using congressional representation as an instrument — an extra senator or representative per million residents predicts roughly $1,000 more aid per capita — the authors estimate that federal pandemic relief strongly predicts incumbent performance in state-wide elections.
What Do States Do with Fiscal Windfalls? Evidence from the Pandemic— The authors estimate that for every $1,000 per capita of federal pandemic aid committed to state and local governments, state revenues and expenditures each rose by roughly the same amount, with $379 going to general government spending and $72 to pension contributions. They find no statistically significant increases in healthcare, education, or infrastructure spending.
AI Summary.Modeling U.S. venture-backed startups, the authors estimate that taxing capital gains as they accrue rather than at sale would cut founders' average ownership at exit by about 25% while raising the share of entrepreneurs with positive payoffs from roughly 16% to nearly 47%. Less risk-averse founders prefer taxation at sale.
Eduardo Azevedo, Florian Scheuer, Kent Smetters and Min YangNational Bureau of Economic Research
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~84% of venture backed founders end with zero exit value, while the top 2% capture ~80% of total exit value. Accrual-based taxation would reduce mean founder ownership stakes at exit by ~25%, but with fully refundable tax credits, raise the share of founders with >0 payoffs to ~47%.
How does taxing unrealized capital gains affect startup founders?
Core argument: The authors estimate that average founder shares at exit fall about 25% under accrual-based capital gains taxation relative to realization-based taxation, as advance taxation forces additional share sales before exit.
This paper examines how taxing unrealized capital gains affects entrepreneurship, combining a dynamic career-choice model with new evidence on all U.S. venture capital backed startups. Figure 1a plots a histogram of the positive company exit values. The distribution spans several orders of magnitude and is relatively similar to a lognormal, but with a right skew and fatter right tail. A stylized model highlights a key trade-off: accrual-based capital gains taxes dilute successful founders by forcing additional share sales before exit, a well known concern, yet they also provide insurance through tax credits to founders whose ventures fail, an aspect often overlooked. Quantitatively, advance taxation substantially reduces founders' ownership at exit: average founder shares fall about 25% under accrual-based taxation relative to realization based taxation. At the same time, accrual taxation increases the fraction of entrepreneurs with positive payoffs from around 16% to nearly 47%. Embedding these outcomes in a career-choice framework shows that the insurance value of accrual taxation partly offsets dilution costs: less risk-averse founders favor realization-based taxes, while more risk averse ones prefer accrual-based taxes. The strength of this insurance channel depends on the highly skewed distribution of entrepreneurial payoffs and the design of loss provisions under accrual-based taxation.
Takeaways by Macro Roundup® AI
The authors estimate that average founder shares at exit fall about 25% under accrual-based capital gains taxation relative to realization-based taxation, as advance taxation forces additional share sales before exit.
Accrual-based taxation raises the fraction of entrepreneurs with positive payoffs from around 16% to nearly 47%, providing insurance through tax credits to founders whose ventures fail.
In the authors' career-choice framework, less risk-averse founders favor realization-based taxes while more risk-averse founders prefer accrual-based taxes, with the insurance channel's strength depending on the skewed payoff distribution and loss-provision design.
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Killer Incentives: Status Competition and Pilot Performance during World War II— Analysis of over 5,000 German World War II fighter pilots finds that public peer recognition was associated with higher victory scores among skilled pilots without higher mortality, while average pilots gained little in victories but died at higher rates. The authors conclude status-based awards can have uneven effects in high-risk settings.
One Hundred Years in the U.S. Stock Markets— Over a century, U.S. publicly traded stocks generated roughly $91tn in shareholder wealth enhancement, with returns strongly positively skewed and dominated by a relatively small number of high-performing firms. Because most possible outcomes fall below the mean in a skewed distribution, the authors argue financial planning should focus on median outcomes or the full distribution.
Never Enough: Dynamic Status Incentives in Organizations— Data on over 5,000 German fighter pilots show performance rose markedly as pilots approached the eligibility threshold for each medal in a tiered awards ladder and slumped immediately after receiving it, with the effect repeating at each successive rung. The authors estimate the ladder added 3,000–5,000 aerial victories, 5–10% of the total.
AI Summary.As labor force participation falls, a shrinking group of workers generates the income, taxes, and innovation supporting a growing number of non-workers, leaving the economy more fragile because labor shocks are concentrated among fewer participants. Labor scarcity raises the return on automation, robotics, and software, making growth depend on productivity rather than participation.
Paul KedroskyApplied Complexity
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Overall LFP is at a 50-year low. Kedrosky warns, “As fewer adults work or seek work, a larger fraction of voters experience the economy mostly as consumers, retirees, or rentiers, not as workers…[which] changes incentives around….taxation and redistribution.”
How does falling labor force participation reshape growth and fragility?
Core argument: Falling labor force participation leaves a shrinking core of workers generating the income, taxes, and innovation that support a growing number of non-workers, and makes the economy more fragile because labor shocks are concentrated among fewer participants.
As fewer adults work or seek work, a larger fraction of voters experience the economy mostly as consumers, retirees, or rentiers, not as workers. That changes political incentives around wages, immigration, AI, taxation, and redistribution. The economy becomes increasingly dependent on a shrinking core. A shrinking group of workers generates the income, taxes, and innovation that support a growing number of non-workers. The economy becomes more fragile because labor shocks are concentrated among fewer participants. Capital must increasingly substitute for labor. Labor scarcity raises the return on automation, AI, robotics, and software. The AI bet becomes as much about compensating for workers' absence as simple replacement. Growth increasingly depends on productivity, on not participation. Any [productivity] miss will be much more consequential than in the past, given that labor no longer picks up the slack.
Takeaways by Macro Roundup® AI
Falling labor force participation leaves a shrinking core of workers generating the income, taxes, and innovation that support a growing number of non-workers, and makes the economy more fragile because labor shocks are concentrated among fewer participants.
As more voters experience the economy as consumers, retirees, or rentiers rather than workers, political incentives shift around wages, immigration, AI, taxation, and redistribution.
Labor scarcity raises the return on automation, AI, robotics, and software, making the AI bet as much about compensating for workers' absence as replacing them, with growth depending on productivity rather than participation and any productivity miss more consequential than in the past.
Related Articles:
Baby Busts and Growth Booms: Demographic Change and the Macroeconomy— A 1pp lower birth rate 20 years earlier is associated with 22 log points higher output per worker 20 years later and 29 log points higher after 40 years, about 0.73pp faster annual growth. The authors find lower birth rates are also associated with more labor-saving patents, larger high-tech shares, and higher productivity growth.
Have We Entered an Era of High Productivity Growth?— Labor productivity has grown solidly while the San Francisco Federal Reserve's total factor productivity index, which adjusts for the equipment and technology workers use, has grown modestly, suggesting gains so far reflect better tools rather than broader advances. A regime-switching model puts the probability of a high-productivity regime at 57% using labor productivity and 21% using total factor productivity.
The Budget and Economic Outlook: 2026 to 2036— The Congressional Budget Office projects the federal deficit will grow from $1.9tn (5.8% of GDP) to $3.1tn (6.7%) over a decade, above the 3.8% averaged over the past 50 years, with rising net interest costs driving much of the increase. Federal debt held by the public is projected to rise from 101% to 120% of GDP.
AI Summary.Europe consumes AI products like ChatGPT without capturing the capital gains, payroll taxes on high-paid engineers, or agglomeration effects, because the tax base accrues where high-value production occurs rather than where products are consumed. The author argues Europe's welfare commitments were implicitly backed by expected future growth that is no longer anticipated.
Hanno LustigThe Two Cents
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Lustig argues that Krugman is wrong to dismiss concerns about slower European growth relative to the US based on welfare measures: “Europe’s social model is not financed out of consumer surplus; it is financed out of taxable income and taxable profits.”
Does consuming AI without producing it erode Europe's tax base?
Core argument: Europe consumes ChatGPT but collects none of the capital gains, payroll taxes on million-dollar AI engineers, or agglomeration effects, because the tax base migrates to where high-value production occurs rather than where products are consumed.
Europe consumes ChatGPT; it does not collect the capital gains, the payroll taxes on million-dollar AI engineers, or the agglomeration effects. The worst possible combination for a welfare state: contented consumers committed to the status quo, eroding public finances. The tax base migrates to where the high-value production takes place, not where the products are ultimately consumed. All this insurance that European states are committed to providing was implicitly backed by the promise of future growth. And that growth is no longer expected to materialize, but the promises remain. The problem is not simply that Europeans chose a different point on the efficiency-equity frontier. Their choices have shifted the frontier itself inward over time, leaving future generations of Europeans with a trade-off that is much worse.
Takeaways by Macro Roundup® AI
Europe consumes ChatGPT but collects none of the capital gains, payroll taxes on million-dollar AI engineers, or agglomeration effects, because the tax base migrates to where high-value production occurs rather than where products are consumed.
Europe's welfare-state insurance was implicitly backed by a promise of future growth that is no longer expected to materialize, while the promises themselves remain in place.
European choices have shifted the efficiency-equity frontier itself inward over time, leaving future generations with a worse trade-off rather than merely a different point on the same frontier.
Related Articles:
European vs. U.S. Economic Performance: An Update— Productivity growth from 2000-2019 was higher in the US than in western Europe, but almost half the gap disappears when information and communications technology is excluded, even though tech was 9.2% of US output versus 5.4% in the EU. The author estimates this difference in industrial mix accounts for roughly 40% of the overall productivity growth gap.
The Future of European Competitiveness – A Competitiveness Strategy for Europe— A European Union competitiveness report attributes the EU's labour productivity growth gap with the US largely to weaker activity in information and communications technology and large-scale digital services; excluding main ICT sectors, EU productivity was broadly at par with the US from 2000-2019. It estimates Europe's investment share must rise about 5 percentage points of GDP.
European Stagnation Is Real— Comparing the United States, France, and Germany at current purchasing power parity prices shows the European economies roughly constant relative to America since 2000, but current-price measures miss output gains in sectors where prices fall, such as software. The author argues constant-price comparisons, the standard approach for growth over time, reveal greater European stagnation.
AI Summary.The authors estimate that about $200bn of “missing” labor compensation would account for roughly a third of the fall in the labor share since the late 1970s, which workers owning a bit above 10% of corporate profits through stock compensation would cover. Spread across the 4.2m top-decile public company employees, that implies about $40,000 in additional pay each.
Owen Zidar and Eric ZwickThe Everywhere Millionaire
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Zidar & Zwick suggest about one‑third of the post‑1970s drop in labor’s share is due to stock‑based pay to workers, in addition to the one‑third they already attribute to pass‑through income. That leaves only around one‑third for genuine shifts in technology, power, etc.
Does stock compensation explain part of the falling labor share?
Core argument: The authors report 2017 employee compensation of $7.2 trillion against corporate value added of $12.2 trillion after adjusting for the rise of pass-throughs, with unadjusted corporate profits, which exclude partnership profits, at $1.7 trillion.
In our data for 2017, after adjustments for the rise of pass-throughs, we report employee compensation of $7.2 trillion and corporate value added of $12.2 trillion. The unadjusted corporate profits number (which excludes partnership profits) is $1.7 trillion. If we could find around $200 billion of “missing” labor compensation, that would account for about a third of the fall in the labor share since the late 1970s. Thus, if workers owned a bit above 10% of those corporate profits via stock compensation, then that would cover the difference. Distributing this amount across the top 10% of public company employees, of which there are 4.2 million, this ownership would imply an additional $40,000 or so in pay. The aggregate numbers are thus quite plausible in terms of how much pay might have shifted to corporate profits serving as tax-preferred payments to high earners.
Takeaways by Macro Roundup® AI
The authors report 2017 employee compensation of $7.2 trillion against corporate value added of $12.2 trillion after adjusting for the rise of pass-throughs, with unadjusted corporate profits, which exclude partnership profits, at $1.7 trillion.
The authors estimate that roughly $200 billion of "missing" labor compensation would account for about a third of the fall in the labor share since the late 1970s, a sum covered if workers owned somewhat above 10% of corporate profits via stock compensation.
Spread across the 4.2 million employees in the top 10% of public company workforces, that amount would imply about $40,000 in additional pay each, which the authors consider plausible as pay shifted into corporate profits serving as tax-preferred payments to high earners.
Related Articles:
Why the Labor Share Keeps Falling: Taxes!— The measured corporate labor share fell from 63% in 1978 to 58% in 2017, but the authors estimate that tax-driven reclassification of wages as S corporation profit and the shift of high-labor-share firms into partnerships account for about 1.6 percentage points, roughly a third of the decline.
Human Capitalists— Equity-based pay has grown to nearly 45% of total compensation for high-skilled workers, and counting it reduces the measured decline in labor share since the 1980s by over 60% while turning the high-skilled labor share decline into an increase of almost 1%. Such workers own 7% of public companies, earning over $85bn annually in equity compensation.
Capitalists in the Twenty-First Century— Most income at the top of the US distribution is non-wage income, primarily profits from closely-held, mid-market firms in skill-intensive industries owned by working-age individuals. The authors find private business profit falls by three-quarters after an owner retires or dies prematurely, indicating most top earners are "working rich" deriving income from human capital.
