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Why are US corporate profits so high? Because wages are so low
- nabla9 13y agoWage's share of GDP have been in decline in all OECD countries since mid 70's. U.S. is just leading the way.
- nevocus 13y agoIs there causality really going on with both trends? Maybe the US stopped being a great place to invest and hire people...
- skrowl 13y agoIf wages in the US were low, they wouldn't be outsourcing labor to other countries. Reuters must not have realized how many things have "Made in China" stamped on them.
- jusben1369 13y agoYou do realize that a lot of manufacturing jobs are returning to the US and this is one of the driving factors (along with wage appreciation in China).
- streetnigga 13y agoYes I am sure that they never figured other nations exist and that the US imports from them when making this article.
- rschmitty 13y agoIf there was ever a time when someone should yell "Stop the presses!"
- slurry 13y agoMy local supermarket has low prices, and yet sometimes I get things at Costco. Prices are relative. US wages are low relative to historical US wages and wages in comparable countries, yet they are high relative to China et al. There is no contradiction. Otherwise, no country's wages could ever be considered low as long as they were higher than the Central African Republic's. In addition, many jobs cannot be outsourced.
- dkuntz2 13y agoAnd those things don't count as part of the US' GDP. And only count as part of the GNP if they're owned by a US company.
- NoPiece 13y agoThe value of imported goods are subtracted from GDP, but their sales price is added to GDP.
- thrownaway2424 13y agoWhat's particularly disturbing is the sheer greed being shown in pursuit of these profits. There was a recent article about an auto plant in Michigan that went through near-bankruptcy but is now making a $2bn/year profit. The profit was attributed in part to $50m/year in reduced wages that were extracted from the union in exchange for not closing the plant. Those concessions represented over one third of the wages but only 2.5% of the resulting profits. That's just disgusting. They should have kept the wages steady and enjoyed their more-than-sufficient 1.95bn/year in profits.
- PythonicAlpha 13y agoIn all industry, the trend goes one way: The wages of working people (including white-collar, I hope, that is the right word) have to go down, and the earnings from investments (pure money makes money business) have to climb. There are only very few exceptions: One are lawyers, as mentioned in an other thread, and the other are people that work in the investment business (investment bankers, traders, ...). The reason for the second exception is obvious: their work is needed to make even more money from the money and every trick is played, to have the smartest, best guys getting the job done ... and get it done better and better. Problem is: The whole thing breaks our society. Middle classes are already melting massively in many countries. The possessions of the worlds are concentrating in the hands of very few people more and more. Those people make our laws! The other people become poorer, even in the situation that the overall worlds possessions expand massively. The countries are already so much in dept, that many of them can not pay even the interest. Even the US is so much in dept, that there seems to be no possibility to get ever rid of it. Nobody seems to realize, that while we are talking, investment companies are roaming the world for land, for houses, for companies to buy them, exploit them and throw it away when not needed (and not useful) any more. The wealth of the world gets accumulated in the hand of investment companies and the super-rich. By rising the value of pure money investments, the value of human labor (to a more and more extend even high-paid and high-value labor) is degrading.
- eru 13y ago> In all industry, the trend goes one way: [...] If that was true, wouldn't we have had to have a mythical past of zero earnings from investments and 100% of revenue going to labour?
- lotyrin 13y agoEarly foraging societies maybe? (Before agriculture or systemized bartering, let alone economic specialization or capitalism.)
- MarkPNeyer 13y agothat's kind of how it was. there were no earnings from investments when there was no investment; when everybody was working it was workers who took all of the gains because there was nobody else involved.
- hudibras 13y agoBefore the inevitable globalization, free trade, and we-should-get-rid of-the-minimum-wage arguments erupt, please keep in mind that the article is talking about, and the second chart (the wage one) is showing, average annual changes by percentage. So this applies to ALL jobs (including yours, Dear Reader) not just the usual suspects of manufacturing and low-skill jobs. So ask yourself: how much has my pay gone up in the past year? How about in the last 5 years?
- dnautics 13y agobut it's gone up right? Why hasn't that been enough? Last year as a (relatively poor) postdoc, I made 40k/year. But if my grandfather had made 40k at age 31 he'd have been a happy camper. remember, macroeconomics says that because of the phillips curve, inflation is a way to goose employment (because of sticky wages) in other words, the purpose of the policy of inflation is to screw laborers out of the real value of their labor.
- tostitos1979 13y agoI don't understand your argument. 40K in today's purchasing power buys you 1/20 of a house in San Jose. It is about real wages not nominal wages. And I think for many people in the middle class, we might be earning less than our parents did in their 20s and 30s (in real wage terms). Addendum: what's more ... if someone in your pervious generation had a PhD, they likely would be able to get tenured jobs at Universities. That is a bit harder these days.
- dnautics 13y agothat's exactly my argument. These are all consequences of policies, not economics.... And, while research science may be a odd case, I am definitely making less than my dad did at my age.
- gaius 13y agoIn what year was your grandfather 31?
- bsamuels 13y agoSo just off the bat reading the title, I was expecting numeric evidence for a very numerically based claim. The data the article provides does not support the author's claim, to say it nicely. For one to claim there's an association between wages dropping and corporate profit increasing, you'd need an area graph over time of corporate expenditures with with worker wages and other common expenses listed. Neither of the graphs included support his claim, as there's a multitude of other variables that could explain their trends. The second claim the author makes is that this is occurring specifically for US companies. There is no data at all cited for this claim. I wish people would at least "try" when publishing articles with a political motive. All this article will do is reinforce the belief that wages need to rise for people who already believe it.
- GolfyMcG 13y agoThis is too logical for the internet. Someone might draw an objective insight from what you're suggesting.
- zurn 13y agoLooks like it's just summarizing what the Chief Economist at Goldman Sachs thinks. There is lots of other reporting about it on the news. Do you have a theory on what political motive GS might be pushing? Promoting worker wages with made up arguments and unfairly criticising corporate profits doesn't seem to fit their agenda.
- afterburner 13y agoIf they're long term enough thinkers, maybe they realize this trend doesn't have a happy ending.
- venomsnake 13y agoThey had a Ford moment? Final realization that if there is no one to buy stuff the whole financial industry is doomed? Got scared of 6th year of depression?
- VLM 13y agoWhat is the macroeconomic effect of workers 401K stock investment plans? Stock transactions. You get to skim a little off the top both at purchase and sale. Back in the old days when more people were working, on average having higher income, they'd skim more commissions. There is an interesting secondary effect of small retail players having been net purchasers of stock via retirement plans, which is to push the market up. You can rely on the fed lowering interest rates to push the market up until rates hit zero, you know, like now, then that stops. Hmm what happens to stock prices when more baby boomers are selling than millennials are buying... Maybe their only hope is to get as many people contributing to retirement funds as possible to at least reduce the blow. Stocks are fundamentally kinda like real estate in that sellers can stamp their feet and pout and demand whatever rate of return they like, but in the long run, the median sales price is going to be whatever the median dude can afford, and "the market" doesn't care what the sellers "need" it only cares what the buyers median income is, which has been falling for a couple decades depending on who cooks your numbers. In the long run, not just next quarter, GS badly needs a lot more workers contributing to 401K and other retirement options. Maybe they're too heavily leveraged up to survive not having more workers to transactionally skim off of.
- kirkbackus 13y agoThe second graph seems to truncate the first 15 years. I wonder if the data exists, or if it didn't actually support the author's point. Also, I think the author oversimplifies this issue. I just don't see the connection where the direct cause of large corporate profits is low wages. Are the wages adjusted for inflation?
- thrush 13y agoI don't agree with this article (wages may be low, but that's exactly why corporate profits are so high). I think the internet and new technology has helped companies expand their profits at incredibly low cost. Consider the recent article about Stripe joining The Billion Dollar Club [1]. It's an absurd fact that such a small and new company can become so successful in so little time. If that is the effect that tech is having on small companies, imagine what effect it is having on large companies. The internet is like steroids for business. [1] http://online.wsj.com/news/articles/SB10001424052702304632204579337043662898228?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304632204579337043662898228.html http://online.wsj.com/news/articles/SB1000142405270230463220...
- dclowd9901 13y agoSo, we've done the environmentally-conscientious boycotts. We've done the healthy food boycotts. You know where I'm going with this... Is there anywhere we can find out whether a company provides its employees meaningful wages and benefits (in relation to its corporate earnings)? Also, if anyone's knowledgeable on this, is it generally more beneficial to just buy from privately-owned companies (vs. publicly traded)? I would love to start buying exclusively from co-ops.
- ctchocula 13y agoEmployees give inside info on their wages and benefits on glassdoor.com and indeed.com. The latter seems to have extensive forums for most companies [1]. [1] http://www.indeed.com/forum/cmp http://www.indeed.com/forum/cmp
- curun1r 13y agoI'm not sure about corporate earnings, but there are a bunch of lists on the internet that compare average worker compensation with CEO compensation and CEO compensation usually correlates pretty well with company profits. Here's one such list: http://go.bloomberg.com/multimedia/ceo-pay-ratio/ http://go.bloomberg.com/multimedia/ceo-pay-ratio/
- dclowd9901 13y agoThis is exactly what I was looking for. Thank you!
- jobu 13y agoIs there any way for an average working schmuck like myself to capture some of these windfall corporate profits? Invest in stocks with sizable dividends?
- yetanotherphd 13y agoNo, there is no way. The information contained in this news report will have been incorporated into the stock price of all the companies long ago.
- dclowd9901 13y agoThe returns are so paltry as to be laughable. Five percent a year? Yeah, enjoy that retirement. If you really want to take advantage, start a business. Guess what? There's some cheap fucking labor out there, and you can easily undercut a dinosaur. Share profits with your employees and advertise it. Try to get ahead of a movement that is almost surely coming in favor of companies that treat their employees well.
- hkmurakami 13y agoUnfortunately, the firms that tend to enable this for employees tend to be limited to partnerships (Law Firms, etc)
- gametheoretic 13y agoAre you... asking if there is such a thing as a money tree? Plenty (>90% ?) of people will tell you otherwise, but there's a case to be made that "investment" in public stock is essentially a game of reverse-routlette (i.e., not lose-lose-lose-lose-WIN but the other way around). What does the "anti-DOW" (most horrific deaths rather than strongest surviving) look like?
- marvin 13y agoYou could have invested right after the financial crisis like me and others did. We have made more than a 3x return since then. This is in fact a direct result of the observations in the article. But stock market investment, over the long haul, does give better returns than any other form of savings.
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- InclinedPlane 13y agoOh, so NOW correlation is causation. Great, I'll go correct my notes so I don't forget, it's always so confusing. There's one thing lacking here, and that is, of course, a causal link. It would be nice if they went down the line and compared employee wages relative to corporate profits on a per company basis. It might be that there are different things at play here. There's a lot of data missing from this incredibly shallow analysis. Not that I dispute the results, but the argument isn't well backed by the data. Edit: as a side note I think a lot of problems with employment in the developed world today are due to extremely outdated labor laws that prove to be more damaging than helpful. The expectation of the entire system is that workers will be locked into employment at a particular company for life, will work 40hr/wk on average week in week out, and will rise in pay incrementally over their career. Those assumptions result in worker benefits being tied to employers. They're why the government can get away with hiding half the tax rate of the payroll tax from workers behind the "employer contribution". They're partly why savings rates have fallen so badly over the past few decades. And so on. A lot of which is ultimately to the detriment of the individual worker. If workers were more independent and more mobile, able to self-employ more easily, and so on then they'd tend to have much higher wages on average, I'd wager. The current system doesn't reward independence, it punishes it, but independence is precisely how workers gain an upper hand once they've built up a considerable amount of experience.
- brc 13y agoThe thinking tends to imply that somewhere, workers wages are being set by a central committee, who is more interested in profits than wages. Such thinking is wrong. I agree that there may be some cause that makes profits go higher and wages go lower, or they could be totally unrelated. But the driver of wages is competition for hiring people. It's no surprise that in a time of relatively higher employment, there has been little or no wages growth. What is surprising is that corporate profits have expanded. But then, if you have a monetary regime where printing money (QE) is designed to re-inflate the capital of financial institutions via devaluing the currency, then it's not surprising that profits go up for those with first bite at the new-money. Is that the cause? I doubt it. But can someone hold down employee wages for the sole purpose of increasing their profits? No. Solve unemployment, and you will solve stagnant wages growth.
- nickff 13y agoCould the correlation be due to "the dreaded third thing"?[1] (a common cause) Perhaps large corporations are now deriving a large portion of their income and profits from government-derived sources, and relationships between executives and government officials or regulators; if this is true, there is no reason to give raises to employees, as the low-level workers are relatively unimportant. [1]http://www.econtalk.org/archives/2013/10/oster_on_pregna.html http://www.econtalk.org/archives/2013/10/oster_on_pregna.htm...
- mariano54 13y agoI had to comment on this due to the large amount of misinformation in this thread. Many people think that companies should be kind, and pay more than the market wage for their workers. This is false and unreasonable. Companies try to minimize their costs, including wages. Now if in some industry, some company is making huge profit margins, and paying low wages, what is the cause, and what is the solution? In economics, profits go down until they reach 0 or close to 0. Why? because if there are huge profit margins, more firms come in, to compete. Therefore in all industries, profits go down to a lower level. Now why doesn't this happen in practice? The answer is artificial barriers to entry. Political agreements and regulations benefiting the big companies. So what is needed here is an easier path for new companies (Which are people after all). This will always ensure that profit margins stay low, and wages approach the true market rate. The solution is not donation. Why would a company pay 9 dollars to a worker who is willing to work for 8? Why aren't YOU donating money to poor people in Africa? The answer is not minimum wage either. This distorts markets. If you want to alleviate poverty, in a more economically reasonable way, do it though universal income.
- erichocean 13y agoYour intuition is correct, but unfortunately, it doesn't actually work that way, because on a per-employee basis, big business is ~4x more efficient. That is, for every $1 in revenue an SMB brings in, big business brings in $4. (These numbers are averages, but the basic relationship holds across industries.) I personally do not see how SMBs can compete when they are paying 4x more for labor. The reason big business is so efficient is IT investment, and the problem with IT investment is that you need to be big in order to really take advantage of it. The amount of improvement SMBs get for a proportional amount of investment is low. You have to spend a lot to get anything, really, and SMBs just can't afford that. So, to recap: big business profits stay high because SMBs actually can't force prices downward, due to the huge imbalance in labor costs between SMBs and big business. If we could get the same IT advantage to SMBs at a cost that is proportional to their revenue, then the dynamic you expect to be occurring would, in fact, happen.
- adharmad 13y ago
- allochthon 13y agoCompanies have been unable to raise prices much because of the economic recovery has been fragile. Perhaps related to a lack of disposable income and consumer confidence? The concentration of wealth is starting to become genuinely worrisome from a societal perspective. There must be some sort of tipping point where real life crosses into dystopia, but I don't know quite what it would look like and what the longterm implications would be. The US political process is already buckling under the unseemly influence of contributions from a small number of donors. At what point are you awoken from your sleep and then realize that things really are going to be bad? What does "bad" look like, beyond what we're already seeing, such as long-time residents being priced out of San Francisco?
- phamilton 13y agoSo another angle on this that I've heard is one of increased efficiency. The economic downturn forced a lot of companies to get more done with less. Once the revenue picks up again, the business realizes that they didn't need all those extra resources in the first place. That could mean they hire fewer employees. It could mean they hire less skilled employees. Admittedly speculation, I just wanted to throw it out there as an additional explanation.
- tunesmith 13y agoThat's where my thought was going too. If profits are high while unemployment is also high, then it can't be that employers are far less socially responsible than they used to be. They were never that charitable about hiring workers to begin with. It must just be that they don't really need the workers.
- wavesounds 13y agoIsn't this really a problem of corporate/investment taxes so low (and full of loopholes) and taxes on everyone else so high? For the average person once you add up federal income tax, state income tax, social security, medicare, medical, sales tax, gas tax and all the other government fees we end up paying its like 50% of your income going to the government. We could essentially double most of the countries pay overnight which would have a stimulating effect on the economy as a whole creating more consumers for more products and thus more jobs and more returns on investments.
- gmac 13y agoBy eliminating all personal taxes? Yeah, easy win ... Unless you like crimes to be punished, fires to be put out, kids to be educated, people not to be dying of poverty, and oh, a couple of other things.
- ahomescu1 13y agoA lot of those are currently funded (in the US) from local taxes: property and sales tax (at least that's how it is where I live, in a California county). School, police and fire departments are locally-funded. Getting rid of income taxes would not impact these. (EDIT: the GP was proposing abolition of all personal taxes, but the one that comes up the most in discussions is the personal income tax; we could just eliminate that one).
- mikeyouse 13y agoFor the record, ~10% of California's K-12 budget comes from Federal funds, $5.5 Billion in 2009.[1] The Feds pay hundreds of millions per year in grants to local Police forces[2] and similarly large amounts to firefighters.[3] [1] - http://www.cbp.org/pdfs/2009/090202_SFF_HowSchoolsGetTheirMoney.pdf http://www.cbp.org/pdfs/2009/090202_SFF_HowSchoolsGetTheirMo... [2] - http://www.cops.usdoj.gov/Default.asp?Item=2367 http://www.cops.usdoj.gov/Default.asp?Item=2367 [3] - http://www.fema.gov/welcome-assistance-firefighters-grant-program http://www.fema.gov/welcome-assistance-firefighters-grant-pr...
- ozgung 13y agoThis reminds me of the Marx's theory of Surplus Value, which implies that "profit" equals the "stolen" labor. http://en.wikipedia.org/wiki/Surplus_value http://en.wikipedia.org/wiki/Surplus_value
- eli_gottlieb 13y agoThis resembles Marx's theory of Surplus Value. This is evidence for Marx's theory of Surplus Value.
- marcosdumay 13y agoI still doubt the theory, but yes, it's valid evidence. Just don't jump onver a conclusion too fast, because it's still evidence for substitution of production factors (that leads to competition between them), an idea almost completely opost to the labor theory of value. (Did I already tell you that I hate economics?)
- vidarh 13y agoIt is also explicitly another prediction Marx made about capitalism: That the most successful (read: surviving) companies eventually by necessity will start to squeeze wages as the barriers to further expansion increases (that is, the population and disposable income does not grow fast enough to provide sufficient increases in profit) - those who don't will be unable to compete with those who do. Marx believed that the end-stage of capitalism would be when increasingly profit comes by driving wages back down instead of expanding the overall market, and that the result will be a reversal of the gains made by the working classes at the same time as increased production, resulting in increased poverty and overproduction as the working classes can eventually afford fewer products.
- limejuice 13y ago"But they’ve still managed to boost profits beyond anything ever seen before because they’ve got away with employing as few workers as possible at as low a rate as possible." I think there are other factors. 1. US effective corporate tax rate has been declining as corporations have found ways to keep profits in offshore tax havens. This is a huge contributor. See for example this article about AAPL whose effective tax rate is 14% which is much lower than the US nominal corporate tax rate of 35%. http://www.bloomberg.com/news/2013-05-23/apple-tax-rate-ignores-profit-shifting-offshore.html http://www.bloomberg.com/news/2013-05-23/apple-tax-rate-igno... 2. Outsourcing to lower cost centers. This is also contributing to lower US wages; If a company can move the work to India, Brazil, China, etc. at a much cheaper cost, they will do that. This has been going on for decades, but advancements in telecommunications and internet has made outsourcing to far away locations more efficient and cost effective over the past 10-15 years. 3. Federal reserve keeping short term rates at 0% and manipulating other fixed income rates with the QE program, e.g. buying $100BLN worth of MBS and US treasuries every month. This had the effect of creating record-low interest rates for corporate and junk bonds. This lowers interest costs for companies and also increases business demand because more companies are able to borrow $$ than otherwise. Some of the revenues and profits are increased just because corporate and public debt has increased abnormally.
- tsotha 13y agoIt's almost like importing a million legal immigrants and another million illegals every year has some downward effect on wages.
- ergoproxy 13y agoQuite simply, "productivity" is the sum of all real goods and services produced in the economy, while "wages" are simply the share of that produce brought home by the workers who produce it. The difference is profit. If productivity increases (as it has since the 1950s) and wages flatline (as they have since the 1970s), then the result must be rising profits. You can see this graphed in the brief "The wedges between productivity and median compensation growth" at http://www.epi.org/publication/ib330-productivity-vs-compensation/ http://www.epi.org/publication/ib330-productivity-vs-compens... The question left unanswered in this article is why are wages in the US falling relative to productivity? Since wages are the "price" of labor, and prices are set by supply-and-demand, falling wages imply either (1) an increasing labor supply or (2) a shrinking demand for labor (or both). So here are some specific reasons for stagnating US wages: INCREASING LABOR SUPPLY - Slave labor, prison labor and child labor in countries like China. - Immigration from Latin America after NAFTA. - Liberated women entering the paid US labor force starting in the 70s. DECREASING DEMAND FOR LABOR - New labor-saving technology, computers and robots that work faster, better and cheaper than humans. - Financialization: Investors can make more money from asset bubbles in housing, bonds, and dollars than they can from labor. -- ZIRP: With real interest rates heading to zero (or less), why should I continue to pay high interest on the money I borrowed a decade ago to build this US factory? Liquidate the factory, fire the workers, and relocate somewhere cheaper; or better: simply use the money to buy bonds and bet on falling interest rates. -- High housing prices: An employer needs to pay his workers subsistence wages, which means enough to buy a place to live, but with housing prices so high, this is impossible. Better to bet on the housing bubble than buy labor.
- praptak 13y ago> Financialization: Investors can make more money from asset bubbles in housing, bonds, and dollars than they can from labor There is some dark humor in the fact that it was the laboring folks whose pockets got drained by the housing bubble.
- eru 13y ago> INCREASING LABOR SUPPLY - Slave labor, prison labor and child labor in countries like China. China had enough farmers moving into industry. Slave, prison and child labour may happen, but they are not particularly efficient and so don't make much of a dent in overall figures.
- yummyfajitas 13y agoI've graphed employee compensation and business profits on the same graph. Not seeing much correlation. Compensation mostly goes up. Business profits go up and down. http://research.stlouisfed.org/fredgraph.png?g=rnM http://research.stlouisfed.org/fredgraph.png?g=rnM I don't get it.
- digitalengineer 13y agoCould it be pensions? After bankruptcy they can dump those expensive plans. (Like the city of Detroid and other states already did).
- yummyfajitas 13y agoNowadays you are only allowed to underfund government pensions (USPS excluded). Private sector pensions must be fully funded - i.e., if an employee has vested a pension with an actuarial value of $20k, the company must put $20k into a separate fund to pay for it. (Some old pension plans are grandfathered to escape this, however.)
- malka 13y agoExcept that $20K today may not have the same value as $20K in 30 years.
- erichocean 13y agoSo, lobby the government to enact a law that adds X newly-printed dollars to each pension each year based on the government's own inflation calculation. Then the value of the pension each year would stay the same, and even better, the pension would not need to invest in risky assets. (If you want, mandate that the pension invest in T-bills, and then cover the difference.) This kind of approach involves no new taxes, and there's absolutely no reason to "borrow" the money from the Federal Reserve either, or future generations, or the general public via T-bills. Literally, you just need to change the amount of money each pension "has" on the books. The banks are regulated, and they'd be forced to except the updated balances by law.
- jokoon 13y agoIf this goes on too long, it might get bad. Manhattan will become a closed island where you won't be able to go onto until you live there because there will be too many protesting attempts. Easy to do with all those bridges. People will start to assault people in suits. You will either swallow the blue pill and join a select club of salesmen, or die with your dreams. I don't like to have those ideas and I hope they're stupid, but right now I would not be surprised to see terrorist groups that try to attack individuals who have some sort of a public, very long shadow, like Dick Cheney or the Koch Brothers. Any important kind of people who blatlanty shows their disrespect for poor people in general and their unhidden narrow minded view of the world. Right now I'm not suprised to see so many conspiration theories, people are pissed and they want to burn witches, and I'm sure you can find some. It's bad, but I don't see any political future that is trying to make things a little better. At least during the cold war, the US had to be better than the communists and prove how markets are liberating. Now it just seems communism had good ideas and that capitalism is going to slowly fail.
- ahomescu1 13y agoWhat I feel is missing from their analysis is a breakdown of corporate profits per employee, along with some hard figures, e.g., how much profit these companies make per capita. It might or might not be enough to make a dent (for example, $100 million split among 100k employees only comes to around $1000/year for each of them).
- sgarg26 13y agoIf wages are low, does that somewhat signify that many of the corporation's business functions are staffed with skilled workforce that is in oversupply?