The middle class shrinkage explained in one graph

Paul Solman, the incomparable economics reporter for the PBS News Hour, recently arranged an interview with two top economic experts on declining middle class income that resulted in a revealing chart that reveals a lot.

Shayne

Jon Shayne, noted money manager, who has established a reputation for making spot-on stock picks, questioned British economist Andrew Smithers, who formerly ran an asset management business and now heads up his own consulting firm, Smithers & Co., in London.

Smithers research has relied upon data from the National Income and Product Accounts, or NIPA, which tracks income data for the U.S. Bureau of Economic Analysis of the Department of Commerce.

As a result, Smithers produced this chart:

What immediately strikes me is that employment costs as a percentage of business output is way down, yet the corporate world keeps pushing for layoffs, concessions and right-to-work laws.

Here’s a small portion of the interview:
JON SHAYNE: What do you think has caused labor's share to fall below its average to a new historical low, and capital's share to rise to the higher highest peak ever?

Smithers

ANDREW SMITHERS: The change in the way company managements are remunerated has been dramatic in this century. Salaries have ceased to be the main source of income to senior management, with bonuses and options taking over. There has been major change in management incentives and it should not cause surprise, though it evidently has to most economists, that management behavior has changed. The current incentives discourage investment and encourage high profit margins.

This is dangerous for companies'  long-term prospects as it increases their risk of losing market share and reduces their ability to reduce costs. It is very damaging for the economy, but it maximizes the income of managements. Senior management positions change frequently, so if management wish to get rich, they have to get rich quickly. I am not alone in this diagnosis. A recent report from the Federal Reserve Bank of New York comes to the same conclusion from a theoretical analysis as I have come from data analysis.