Profits and Wages

Profits up, wages in dispute:

US groups boost share of economic pie, by Christopher Swann and Francesco Guerrera, Financial Times (Free): US companies have increased their share of the economic pie at a faster rate over the past five years than at any time since the second world war.

Recent government figures show that profits from current production as a share of national income have risen from 7 per cent in mid-2001 to 12.2 per cent at the start of this year. This rate of growth is unprecedented since collection of these figures began in 1947. ...

Workers Are Filing More Lawsuits Against Employers Over Wages, by Kris Maher, WSJ: Workers are filing more lawsuits against employers they accuse of violating fair-wage laws that govern overtime and minimum pay, with an increasing number seeking to combine the claims with large groups of their fellow employees as well. ...

In some cases, lawyers argue that employers are trying to squeeze labor costs by limiting overtime and classifying more workers, including janitors or equipment installers, as independent contractors, who aren't covered by federal and state wage laws. Some experts also say lax government enforcement of wage rules has prompted workers to pursue litigation. ...

Comments

[anne]

Warren Buffett in late 1999, when arguing that stock prices made little sense, wrote that corporate profits were limited to about 7%; John Bogle agreed. I have watched the change and been startled, though the change is understandable and goes along with what we will increasingly find has been a concentration of income and wealth. Changes in profits and concentration have been implied in policy changes, fiscal and administrative, and are quite worrying.

[anne]

Interestingly for all the gain in profit, for all the gain in corporate saving, domestic investment has been remarkably subdued. Because price earning ratios were being adjusted down from ridiculous levels, there has been a minimal return for the S&P stock index since 2000. Oh, but returns to lead executives have been so so so....

[camille roy]

Obviously this is related to globalization.

The global workforce has doubled, lessening the ability of domestic workers to obtain pay raises that parallel the productivity increases.

Investment is flowing overseas.

The fact that corporations are headquartered here, and extract profits from an overburdened and underpaid American citizen, should not be misconstrued: these are not American companies, but the corporate equivalent of mercenaries, out for themselves with no concern for any community anywhere.

[save_the_rustbelt]

The IRS can (and should) get involved on the independent contractor issues, it is really tough to qualify ICs when the are really employees.

[Betsy L. Angert]

Dear Mark . . .

I am impressed that workers are taking action. The idea of genuine protest seems to have gone by the wayside, in some respects. I am curious; are any winning their cases?

It is only the giving that makes us what [who] we are. - Ian Anderson. Jethro Tull . . . Betsy
Betsy L. Angert Be-Think

[cm]

save_the_rustbelt: What I know from various at the very least fishy labor situations and the people perticipating in them on the "receiving" side, shares the general theme that the labor market is not favorable, and people have to, or think they have to, make concessions to get paid work, and those concessions include compromising on pay, benefits, other T&C's, and the legality of arrangements. In the absence of plentiful opportunity and a "world" that is often smaller than meets the eye, making a stink about abuses is often not helpful towards future opportunities (where similar abuses may be part of the picture as well).

[lonesome moderate]

Anne--I hadn't heard about domestic investment being subdued. Is there a source for that info on the web?

Let's see: corporate profits are up strongly, but most companies apparently don't want to use those profits to try to grow their business, and for the most part aren't willing to give raises to hang on to their workers (this squares with anecodtal info I've heard from friends here in Silicon Valley). And Global Insight has looked at the big picture and said that “It is unlikely that this is sustainable for much longer.”

It sounds to me like the folks at Global Insight are being, er, discreet. What they are saying is essentially code for "these profit numbers are fake. In the current regulatory climate you can still legally fake profit numbers, but only for a few quarters. The real numbers will have to start coming out at the end of this quarter or next".

Are there any stats available that track overall trends in insider trading? That seems to be the only real measure of short-term profitability available to the public.

[spencer]

The break in the tight relationship between nominal gdp growth and after tax profits growth seems to have occured in the mid-1980.

From 1957 to 1984 nominal gdp and profits both experienced roughly 8% growth rates. But since the
mid-1980s nominal gdp growth has slowed to some 5%-6%
while profits growth has increased to some 10%-11%.
In the 1990s what we saw was a slowing of nominal gdp growth while profits continued to grow at about the same 8% of the earlier era. But since 2002 profits growth has accelerated to some 20%. At first it could have just been a normal very strong cyclical rebound in earnings -- nothing particularly unusual. But over the last two years profits have continued to grow while nominal gdp growth has been stable at 5.5%.

At its simplist this implies that virtually all the recent strong growth in productivity has gone to profits rather then labor. But why? Maybe it is the sharp shift in profits growth to energy and raw materials -- areas with extremely high fixed costs and very low variable (labor) costs. I do not know, but it is a strange development.

If you look at the share of gdp going to profits and to employee compensation you get an almost perfect inverse correlation.

[cm]

lonesome: Are you saying when somebody gives their notice and indicates they will reconsider when getting a raise, their employers will let them go?

The anecdotal evidence *I* have is that for those many who are not taken care of by a proactive boss/organization, presenting an offer is the only sure (and typically successful) way to "negotiate" a raise (and by appearances even having the value of their contribution considered the first time). Unless their manager is secretly glad to get rid of them without having to go through the firing process. (I know of a few such cases as well.)

Then there are those job descriptions which are rightly or wrongly considered to be "stateless" and backed with enough readily available supply. Most engineering and "knowledge" type jobs do not fit that description.

[johnchx]

I took a look at the NIPA table myself, and put together a few possibly interesting numbers.

From 2001Q1 to 2006Q1, compensation of employees fell from 66.2% of national income to 63.8%, or 2.4 percentage points. Corporate profits rose from 8.7% to 13.9%, or 5.2 points. The difference is made up by declines in proprietors income (basically small business and farms, 0.1 points), rental income (1.1 points) and net interest (1.6 points).

Also interesting is a historical comparison: the current 63.8% share of income was only reached in 1968Q4. Throughout the 50's and most of the 60's, labor received a lower share of national income than it does today. The non-wage component of labor income (pension, health care, social security) has increased substantially over that period, however.

I don't have any immediate policy conclusions...just food for thought.

[lonesome moderate]

All I have are anecdotes, but the anecdotes I hear indicate that this currently works only for people who are preposterously underpaid. By this I mean primarily younger people who are on their first or second employer, and whose value to the company has obviously gone up by a huge amount since their hiring. In other words there's no rising tide that would lift all boats.

[johnchx]

lonesome moderate wrote: "What they are saying is essentially code for 'these profit numbers are fake.'"

There's probably some truth to that, but the NIPA figures are less likely to be influenced by aggressive accounting. In fact, one of the indicators of "soft" profit figures being reported by corporations during the bubble was the strange divergence between the growth in income statement profits and the NIPA figures for total corporate profits.

[anne]

Lonesome, hopefully I can easily find sources in the office for what I find fair economic growth and productivity, high profits, high savings, but relatively subdued investment. Joseph Stiglitz has noted this a number of times, Brad DeLong as well.

Insider sales and purchaes records are routinely compiled and sold by advisory groups, the press has the data after, but my sense is that only purchases are even moderately telling.

[anne]

Be careful with each definition and make sure to have a "reasonable" sense of what is happening. The real median wage has declined for 5 years, but employee earnings have increased for there have been fine gains in already large upper management earnings but ordinary wage earners have made scant gains. What appears to be happening is rising and high profits, astonishing rewards for top management, limited gains below with gains least for lower paid workers....

[Emmanuel]

This is how I make sense of things:

Point 1: Household spending post-recession has been healthy;
Point 2: A lot of spending has occured without commensurate increases in compensation;
Hence, Point 3: Income redistribution is happening from households to capital owners (see FT article).

Sounds very Marxist, doesn't it? Exploitation as a matter of appropriation of surplus labor, yada, yada, yada. I must say, it's a very disturbing trend that can lead to social disorder if not remedied soon. Call it the Exxon-Mobilization of America. Viva la revolucion?!

[Richard]

I'd be curious to see this broken down by industry. In the original FT article it states

. . . profit growth by manufacturing companies, often seen as one of the weakest sectors, has outstripped the rest of the economy.

Does some of this represent the more automated use of robotic technology in factories, or is this just the outsourcing oversees / assembly in the U.S. story all over again. What are the industries which have not done as well? Is their a regional or urban / rural breakout to the successes?

[camile roy]

"Interestingly for all the gain in profit, for all the gain in corporate saving, domestic investment has been remarkably subdued." (anne)

I think what has happened is that the drive offshore has resulted in lower costs, hence increased profits. Meanwhile, corporations have become reluctant to invest domestically because the future is Asia.

They are happy to sell to us for as long the home equity loan lasts, they just don't want to invest in us.

[lonesome moderate]

There's probably some truth to that, but the NIPA figures are less likely to be influenced by aggressive accounting. In fact, one of the indicators of "soft" profit figures being reported by corporations during the bubble was the strange divergence between the growth in income statement profits and the NIPA figures for total corporate profits.

johnch - good point, thanks for bringing that up, it had slipped my mind. However, my understanding of the NIPA figures is that the most authoritative ones come from the Bureau of Economic Analysis (BEA) of the Department of Commerce. They release a "first July" report for the previous calendar year that is based largely on the financial statements of public companies. Then they release a "second July" report the year after, and a "third July report" the year after that.

What this seems to mean in practice is that, in the short term, we don't have any broader estimates for profitability other than the company's own financial statements. So we won't have a good idea of the integrity of the overall profit numbers for 2005 until the second July number in July 2007, perhaps a little earlier as we start seeing preliminary estimates. By the way, this is from http://www.newyorkfed.org/research/current_issues/ci10-3.pdf

If anyone knows of any reliable numbers that come out earlier than this, I'd love to hear about it.

[Dirk van Dijk]

I would point out, that while not perfect, the reported profits numbers will be more realistic this year than they have been in the past. This is because of rule 123-R is being fully implemented this year. Companies must now treat the millions they pay their exec's in the form of stock options as an expense. For many firms, especially in Tech and Bio tech, these are very large adjustments. However despite the change, the median firm in the S&P 500 has a consnsus year over year growth rate expectation of 11.6% for 2006, with a further 12.1% growth expected for 2007. In terms of total net income, the expected growth rate for S&P 500 earnings is 12.7% for this year and 9.1% for next year. The median number implictly weights all firms in the 500 equally, while the total net income number is more weighted to the Exxon's and Wal-Marts of the world. If the "profits aren't real" and will start to fall apart in the next few quarters, one would expect to see the analysts who follow these companies starting to cut their numbers. This has not been the case at all recently. Estimate increases have far exceeded estimate cuts in recent weeks, by a margin of almost 3 to 2. There is no evidence from the earnings expectations data that the profits picture is about to fall apart. However the expected growth rates and estimate revisions have been much stronger in the Industrial, Basic Materials and Energy groups than they have been for the consumer or health care groups.