Comparing US GDP to the sum of standard measures of payments to labour and imputations of payments to capital results in a large and volatile residual term. Using US data, this column argues that this ‘factorless income’ does not entirely reflect economic profits or unmeasured investment flows. Instead, it likely emerges due to a gap between the cost of capital that firms actually face and the Treasury yields typically used to calculate capital rental rates. These results are important for policy and for understanding historical macroeconomic trends.
An economy’s income reflects payments to labour, rental payments to capital, and economic profits that emerge when prices exceed average production costs. In practice, it is very difficult to differentiate between these three categories. Labour compensation reflects more than just wages, and it is difficult to measure the value of benefits, stock options, and other transfers of value to compensate for workers’ time. Capital rental payments are generally implicit rather than explicit because firms typically own rather than rent their factories, machines, and brands. For this reason, economists and statisticians typically impute payments to capital using a user cost formula as in Hall and Jorgenson (1967). Finally, economic profits are hard to measure since data on average costs are rare.
