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Saturday, April 01, 2006

Capital Gets the Cookies, Labor Gets the Crumbs

Daniel Gross notes the contrast between the rapid growth in corporate profits and the stagnation of wages and attributes it to two factors caused by globalization. First, the enlarged supply of labor brought about by globalization eroding the bargaining power of workers in wage negotiations. Second, for many large corporations, profits do not come from a single country and this has made it less likely that corporate profits will be reinvested in the U.S. For this part, I've added a couple of graphs from another NY Times story showing stock market performance around the world:

Invest Globally, Stagnate Locally, by Daniel Gross, Economic View, NY Times: In the United States and Europe, there has been a curious disconnect in recent years between the performance of the corporate sector and the performance of the overall economy. For example, median incomes for American workers have barely budged since 2000, while corporate profits have nearly doubled. In Germany, wages have fallen in real terms in the last two years, while earnings for the companies in the DAX 30 index have more than doubled. And in Germany and much of the rest of Europe, the overall pace of economic growth has remained sluggish.

"All in all, the widespread prosperity of companies does not lead to prosperity for domestic economies or wage earners in Germany, France or Japan," wrote Patrick Artus, chief economist of IXIS, the Paris bank, in a recent report.

In theory, corporate profits and wages shouldn't be a zero-sum game. Rising corporate profits are supposed to stimulate [labor]... demand, which in turns tends to push up wages. But that process has broken down, at least within national borders, thanks to two related trends that stem largely from globalization.

It's a truism in the large developed economies that capital is strong and labor is weak. ... Companies have been able to keep a larger share of the cash they generate, rather than pay it out in wages, in part "because the labor market recovery has been weak," said J. Bradford DeLong... Professor DeLong notes that while unemployment is low, other measures of labor-market health, from hours worked to the employment-to-population ratio, show it to be less than robust. ... "Capital has mobility ...," said Stephen King, chief economist at HSBC in London. "German companies are able to tell workers that they can either accept reduced pay, or see the company close factories and reopen new ones in Poland or India." ...

Thanks to globalization and the opening of new markets, Mr. King said, "it's increasingly difficult to argue that companies themselves are attached to a country." ... The trend of corporate cosmopolitanism is most pronounced in Europe. In a report published last November, Mr. Artus of IXIS found that for the members of the German index, the DAX 30, about 53 percent of employment and 34 percent of sales were in Germany; for the companies in the CAC 40, the French index, 43 percent of employees and 35.5 percent of sales were in France.

The trend is less pronounced in the United States. Standard & Poor's estimates that the companies in the S.& P. 500 derive about 60 percent of their sales at home... But for some of the largest companies, like McDonald's, the domestic market counts for only one-third of revenue.

More important, Mr. Young said, a disproportionate share of the revenue growth is coming from overseas, which means that domestic companies may be less likely to hire and invest in the United States as sales and profits grow. ...Given these trends, the combination of rapidly rising corporate profits and stagnant or falling real wages seems less paradoxical. But some economists are wondering how much longer these trends can continue.

"When you have labor shares shrinking relative to capital shares, you tend to get a rise in economic nationalism, which is a democratic response to some of the effects of globalization," Mr. King said. In other words, the arguments over Chinese imports, cross-border mergers and investments by companies from the Middle East in America's infrastructure could just be the beginning.

Not everyone would agree that wages are being held down by a weak labor market. For example, see David Altig at macroblog here and here for an argument about whether we are at full employment given recent trends in labor force participation rates. 

I'm not sure there's any real difference in the two positions. If we think of globalization as making labor supply curves more elastic (i.e. relatively flatter because there are more substitutes for labor inputs), then it would be possible for increases in labor demand to have very little impact on wages even while moving closer to full domestic employment.

    Posted by on Saturday, April 1, 2006 at 12:10 PM in Economics, Income Distribution | Permalink  TrackBack (3)  Comments (19)

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