This development is all the more remarkable in that only a relatively small portion is related to the earnings of major stock corporations. For a large part we are talking about the earnings of the small and medium-sized enterprises which characterize the German corporate scene.
2007 earnings with tempered momentum
The improved earnings picture has been helped by the marked wage restraint of recent years. The wage ratio – the share of employee compensation in national income – has fallen from 72.2 % in 2000 to 66.2 % in 2006. This shift in income distribution often comes under fire – firstly, because the factor labor is supposedly not adequately rewarded and secondly because it is said to put a dampener on demand.
However, in this context it needs to be established that an improvement in earnings is an important pre-condition for an investment upswing and rising investment forms the basis for more jobs. Once companies start boosting employment, the experience from previous cycles indicates that business and labor earnings gradually move more into line. Have we reached the point in the economic cycle at which this is the case? Will 2007 see both rising labor incomes and corporate earnings? Based on the current economic picture, this Working Paper endeavors to address this question.