Labor Chips Away at Capital
Rising corporate profits and stagnant wages have been an enduring feature of this economic expansion. Not anymore.
The narratives that influence our economy have a great deal of momentum. Giant, irreversible, tectonic shifts are transforming the landscape: urbanization, globalization, information technology, the decline of print media, mobile technology, workers losing ground against companies. The momentum behind them seems so vast and powerful that a change of course is unlikely.
But fatalism isn’t a substitute for analysis. And even the biggest and most-enduring trends can reverse, or get, um, disrupted. And we may be finally seeing that when it comes to corporate profits and wages.
The salient feature of the U.S. expansion, which began in July 2009, was that the fruits of growth have been unevenly distributed between capital and labor, between companies and employees. After the financial crisis, companies moved swiftly and relentlessly to reduce labor costs, find new markets, and improve productivity. And so profits bounced back impressively.
On an economy-wide basis, after-tax corporate profits grew from an annualized rate of US$671 billion in the third quarter of 2008 to $1.77 trillion in the fourth quarter of 2014. (The data can be seen here.) That’s significant, especially when you consider that corporate profits more than doubled in six years as the economy grew slowly.
Profits rose in part because companies were both effective and ruthless when it came to holding down labor costs. Thanks to a host of big, long-standing trends — the decline of labor unions, slack in the labor markets, the threat of outsourcing — a smaller percentage of company revenues was paid out as wages, leaving a larger share as profits. And so after-tax corporate profits rose from about 4.6 percent of gross domestic product in the third quarter of 2008 to about 10 percent of GDP in 2014. (The data can be seen here.) In many quarters during this expansion, that proportion has reached record highs. Meanwhile, median income in the U.S. in 2014 was below its 2008 level.
This trend — higher corporate profits and lower worker income — too, seemed unstoppable. Until recently. And that’s because political, social, and economic factors are now beginning to exert force in the opposite direction.
Unions certainly have not seen any significant resurgence. (Only 6.7 percent of private-sector workers are unionized, according to the Bureau of Labor Statistics.) But workers have benefited from other forms of pressure on employers. Although the federal minimum wage hasn’t budged since 2009, several large states and cities have passed laws in the last few years that have mandated higher hourly pay. Many large companies, including Aetna and Walmart, sensing the social and political pressure for higher wages, have imposed higher minimum wages themselves.
At the same time, there has been a slow-building but significant shift in the labor market. The U.S. economy is now in the midst of its longest stretch of job growth in modern economic history. It has added payroll jobs for 71 straight months, and has added nearly 15 million jobs since February 2010. Meanwhile, companies say they want to hire many more workers. As we’ve noted, the number of job openings in the U.S. has soared; at the end of July, there were more than 5.6 million vacant positions to be filled.
That means it has become a real challenge for companies to retain existing workers and hire new ones — employers today have to offer people higher salaries to walk across the field, or to come off the sidelines. And if they have to boost pay to fill open positions, they may find themselves having to increase pay for the people who already work there. To a large degree, the laws of supply and demand, which worked in companies’ favor between 2009 and 2014, is now working against them.
In aggregate, corporate America’s top line is growing more slowly than its wage bill.
The result is that an extraordinarily powerful trend is showing signs of reversing. Many analysts were shocked earlier this month when the U.S. Census Bureau reported that median household income in the U.S. actually rose by 5.2 percent in 2015, after several years of falling or, at best, being flat. The trend is detectable elsewhere. According to the Bureau of Labor Statistics, in August average hourly earnings were up 2.4 percent from the year before. That’s muted, but it’s the best such growth we’ve seen in years.
That’s good news for workers. But it’s a challenge that this is happening in an environment of intense competition and overall slow growth. In aggregate, corporate America’s top line is growing more slowly than its wage bill. And so corporate profits are…shrinking. In 2015, they fell from 2014, and in the second quarter of 2015, they were off nearly 5 percent from the second quarter of 2014 (pdf). Among the companies in the S&P 500, profits in the second quarter of 2016 were off about 3.7 percent from the year before, representing the fifth straight quarter of income declines.
Not every megatrend lasts forever.