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accessed January 2008.




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Licensed to:
Chapter 2 29
The Economy: Myth and Reality



Federal, state, and local governments employed about 22 million people but, contrary
to another popular misconception, few of these civil servants work for the federal govern-
ment. Federal civilian employment is about 2.7 million”about 10 percent lower than it
was in the 1980s. (The armed forces employ about another 1.4 million men and women
in uniform.) State and local governments provide about 19.5 million jobs”or about
seven times the number of federal government jobs. In addition to the jobs categorized
in Figure 8, approximately 2 million Americans work on farms and over 10 million are
self-employed.
As Figure 9 shows, all industrialized countries have become “service economies” in
recent decades. To a considerable degree, this shift to services reflects the arrival of the
“Information Age.” Activities related to computers, to research, to the transmission of
information by teaching and publication, and other information-related activities are pro-
viding many of the new jobs. This means that, in the rich economies, workers who moved
out of manufacturing jobs into the service sectors have not gone predominantly into low-
skill jobs such as dishwashing or housecleaning. Many found employment in service jobs
in which education and experience provide a great advantage. At the same time, techno-
logical change has made it possible to produce more and more manufactured products
using fewer and fewer workers. Such labor-saving innovation in manufacturing has
allowed a considerable share of the labor force to move out of goods-producing jobs and
into services.


F I GU R E 9
The Growing Share of Service Sector Jobs, 1967 versus 2005
SOURCE: Organization for Economic Cooperation and Development, Quarterly
Labour Force Statistics, various issues; and Labour Force Statistics, 1985“2005,




90
1967
78.6
2005
80 76.5
76
75.3
73.9
Service Sector Jobs as a Percent




67.6
67.6
70 64.8
64.6
of the Total Labor Force




58.7 58.9
60
50.8
48.8
50 45.1 44.8
42.8
40 38.3 36.2
30
http://www.sourceoecd.org.




20

10
0
Italy Spain Germany Japan France Canada Sweden United United
Kingdom States




The American Workforce: What It Earns
Altogether, these workers™ wages account for over 70 percent of the income that the pro-
duction process generates. That figures up to an average hourly wage of over $17”plus
fringe benefits like health insurance and pensions, which can contribute an additional 30
to 40 percent for some workers. Because the average workweek is about 34 hours long, a
typical weekly paycheck in the United States is about $600 before taxes (but excluding the
value of benefits). That is hardly a princely sum, and most college graduates can expect to
earn substantially more.3 But it is typical of average wage rates in a rich country like the
United States.


These days, male college graduates typically earn almost 80 percent more than men with only high school
3

diplomas, and female college grads almost 75 percent more than high-school-educated women. Source: The State
of Working America, 2006/2007, Economic Policy Institute, http://www.epinet.org, accessed December 2006.




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Part 1
30 Getting Acquainted with Economics



Wages throughout northern Europe are similar. Indeed, workers in a number of other
industrial countries now receive higher compensation than American workers do”a big
change from the situation a few decades ago. According to the U.S. Bureau of Labor Sta-
tistics, in 2006 workers in U.S. manufacturing industries made less than those in many Eu-
ropean countries (see Figure 10). However, U.S. compensation levels still remain above
those in Japan, Italy, and many other countries.



FIGURE 10 45




SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Division of Foreign Labor
41.04
Average Hourly
40
Compensation Rates in
35.34 36.35
Manufacturing, 2006
(at purchasing power parities)




33.73 34.21
35

28.71 29.00 29.60
30
U.S. Dollars




24.40
25

20

15

10

5




Statistics, http://www.bls.gov.
0
Japan


Italy


Canada

United
States

France


Sweden


Netherlands


Belgium


Germany
Capital and Its Earnings
The rest of national income (after deducting the small sliver of income that goes to the
owners of land and natural resources) mainly accrues to the owners of capital”the ma-
chines and buildings that make up the nation™s industrial plant.
The total market value of these business assets”a tough number to estimate”is
believed to be in the neighborhood of $30 trillion. Because that capital earns an average
rate of return of about 10 percent before taxes, total earnings of capital”including cor-
porate profits, interest, and all the rest”come to about $3 trillion.
Public opinion polls routinely show that Americans have a distorted view of the
level of business profits in our society. The man and woman on the street believe that
corporate profits after tax account for about 30 percent of the price of a typical product
(see the box “Public Opinion on Profits” on the next page). The right number is closer
to 8 percent.


THE OUTPUTS: WHAT DOES AMERICA PRODUCE?
What does all this labor and capital produce? Consumer spending accounts for about
70 percent of GDP. And what an amazing variety of goods and services it buys. American
households spend roughly 60 percent of their budgets on services, with housing com-
manding the largest share. They also spend about $140 billion annually on their telephone
bills, over $35 billion on airline tickets, and $90 billion on dentists. The other 40 percent of
American budgets goes for goods”ranging from about $375 billion per year on motor
vehicles to almost $60 billion on shoes.




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Chapter 2 31
The Economy: Myth and Reality




Public Opinion on Profits
Most Americans think corporate profits are much higher
than they actually are. One public opinion poll years




Profit per dollar of sales (percentage)
35
32%
ago found that the average citizen thought that corpo-
rate profits after taxes amounted to 32 percent of sales 30
26%
for the typical manufacturing company. The actual
25
profit rate at the time was closer to 4 percent!* Interest-
ingly, when a previous poll asked how much profit was 20
“reasonable,” the response was 26 cents on every dollar
of sales”more than six times as large as profits actually 15
were.
10
* This poll was conducted in 1986. Corporate profit rates increased consider-
3.8%
5
ably in the 1990s and 2000s.

0
What people think What people Actual corporate
is a “reasonable” estimate corporate profit
corporate profit profit is
SOURCE: “Public Attitudes toward Corporate Profits,” Public Opinion
Index (Princeton, NJ: Opinion Research Corporation, June 1986).




This leaves about 30 percent of GDP for all nonconsumption uses. That includes govern-
ment services (buying such things as airplanes, guns, and the services of soldiers, teachers,
and bureaucrats), business purchases of machinery and industrial structures, and con-
sumer purchases of new houses.


THE CENTRAL ROLE OF BUSINESS FIRMS
Calvin Coolidge once said that “the business of America is business.” Although this

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