Capital average is over

Peter Orszag reports:

During roughly the same period, the return on invested capital — that is, how much profit is generated for each dollar of investment — also grew more unequal between companies. While the typical return was roughly constant, at about 10 percent, returns became more dispersed over time.

In particular, from 1965 to 1967, only 1 percent of non-financial firms earned returns of 50 percent or more, but from 2005 to 2007, 14 percent did. In other words, 50 years ago, one out of 100 firms earned 50 percent returns. More recently, one out of seven did.

These data suggest three things: First, the typical return to capital hasn’t changed much, which is what you would expect, given that the capital-output ratio excluding land and housing has been stable.

Second, from company to company, that return has become much more unequal, as has productivity. Some of this inequality between companies in returns and productivity tends to spill over into wages. And this is precisely what we’ve seen. It explains more of the rise in overall earnings inequality than does the increased gaps between the pay of higher earners and rank-and-file workers within a given company.

The full article is here.


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