Unveiling Economic Realities: A Nostalgic Misconception or a Steady State?

Examining the persistence of income distribution from the 1940s to the present.

This was the question posed by a poster published by the National Association of Manufacturers in the early 1940s. The answer, according to the same poster (and backed up by federal statistics), was that 81% of America’s national income went to employees, including the self-employed; 17% went to investors; and only 2% went to management.

This broad distribution of wealth, the poster suggested, was a point of national pride: “There’s no way like the American Way.”

If nothing else, the fact that a business advocacy organization felt the need to justify America’s distribution of income eight decades ago shows that the debate over economic inequality did not start with Bernie Sanders. But for Americans of younger generations, including those laboring under the vicissitudes of the current economy, it is tempting to ask: is life worse today? Were the 1940s a lost golden age of relative equality and shared prosperity?

This is a complicated question, in part because inequality is so difficult to measure. Pew Research Center data from 2020, for instance, suggests that the income gap between the top and bottom tenth of the population has increased by 39% since 1980, and America’s GINI coefficient – a common metric of inequality – is higher than that of most other developed nations.

However, a 2016 report by James Sherk at the Heritage Foundation casts doubt on much of the conventional wisdom about rising income inequality. According to its findings, the proportion of income taken home by workers has changed little since 1948 – only a few years after the National Association of Manufacturers published its poster.

As the Heritage report points out, many measures of inequality are based on gross domestic income, or GDI. GDI is the total income earned in the United States over a year, a similar (although not entirely identical) metric to gross domestic product. However, GDI leaves out some important factors, including depreciation of capital.

Annual depreciation expenses for businesses have nearly doubled since 1948, in large part due to the increasing reliance on computers and software – which, unlike more traditional assets such as buildings, must be replaced every few years. This is an inevitable cost of doing business in the 21st century, and one which gross domestic income leaves out, making business owners seem like they are earning more than they actually are.

A second, related issue is the question of self-employment. Workers who are self-employed do not neatly fall into either labor or capital, which is why they can be included in either category, or both. This was touched on by the National Association of Manufacturers poster, which classified self-employment income as part of the 81% of wealth which went to employees.

Classification changes, Sherk writes, are partly responsible for the perception that labor’s share of income has decreased. In particular, the Bureau of Labor Statistics changed its methodology in 2001, classifying more self-employment income as capital than it previously had. This led to a significant shift on paper, without any actual shift in the economy.

When these factors are taken into account, Sherk writes, the percentage of national income taken home by labor has not changed significantly since the 1940s. This is in spite of the many seismic shifts that have occurred in the economy since then.

A 2023 analysis by economist Erica York came to similar conclusions, writing that “labor and capital shares are now remarkably close to their long-run averages,” and have changed only marginally since the 1920s. In addition to depreciation, York cites as a confounding variable certain taxes which are misleadingly classified as capital income.

A couple of further caveats are in order when discussing this issue. First, Americans in all income brackets have access to technologies that would have been unthinkable in the 1940s. When talking about inequality, it is important to not overlook the equally important question of absolute prosperity. (After all, is it worse to be rich in a society where some people are far richer than you, or poor in a society where the wealthiest are only slightly richer than you?) Second, labor and capital are not necessarily in conflict, as conventional wisdom might imply: when one prospers, typically, so does the other.

Americans today are faced with great economic woes, which stem from a variety of causes. But while it may be tempting to look back at the midcentury U.S. economy with eyes of nostalgia – and while that nostalgia might even be justified in some areas – we can rest assured that we are not being shortchanged by capital, and that the broad distribution of national income that characterized our economy in decades past still holds largely true today.