Corporate Profit Margins vs. Wages in One Disturbing Chart

Yves here. This brief post by Doug Short is even more important than it appears to be. We had an outburst of neoliberal orthodoxy in comments yesterday on a post that discussed how wealth of most households had fallen since 1987. Some readers assigned blame for stagnant average worker wages (which was a big contributor to the lack of growth in household wealth) to immigrants, particularly Mexicans and H1-B visa workers.

While immigration was no doubt an element, to give it the leading role is counterfactual. The argument made, explicitly, is “more workers leads to lower wages”. Ahem, there a a lot more variables than just the labor supply side. But even if you take a simple-minded point of view, women’s rising participation in the workforce, particularly given that women even now make 77% of what men make, would be a vastly bigger wage-rate depressor than Mexican workers. The number of working women rose by nearly 30 million between 1970 and 2010, considerably larger than any estimate of immigrant influx.*

The Doug Short chart below looks at corporate profit share versus labor share. This pinpoints the degree to which wage stagnation is the result of corporate managers and executives succeeding in cutting the pie to favor themselves (executive pay has become increasingly linked to stock prices, and relentless focus on short-term earnings, as well as stock buybacks, do wonders for earnings per share).

Short omits some key elements from his discussion. One is that until recently, a profit share of GDP of 6% was perceived to be a cyclical peak; no less than Warren Buffet deemed a higher level to be unsustainable. And in fact, we see an explosion of profit share from 6% to 10% of GDP in the runup to the crisis, roughly from 2003 to 2007. The “rescue the banks and financial markets” measures succeeded in bringing the profit share back to its pre-crisis levels, at the expense of workers.

Notice the inflection point in profit share is 1987, when Greenspan became Fed chairman. Correlation may not be causation, but the timing is almost exact.

But what about the years prior to 1987? We see falling labor share and rising profit share from the 1973 recession through 1979, then labor share and profit share falling through 1987. What is that about?

Interestingly, the chart shows that corporations did well in profit terms in the mid-1970s stagflation at the expense of workers. But they were perceived (correctly) as having their lunches increasingly eaten by Japanese and German manufacturers. Inflation kept rising, which hurt investment in plant and equipment (high interest rates make any long-term commitment look lousy). High inflation killed stock market valuations, which allowed corporate leaders to press an agenda of deregulation with the Carter Administration, which was desperate for any ideas to increase flagging growth levels.

In 1979, Volcker started pushing interest rates sky high. Banks and other financial players were hemorrhaging losses. Volcker was explicit privately that he wanted to break the bargaining power of labor. In Secrets of the Temple, William Greider reported that Volcker kept a notecard which tracked average pay in the construction industry. He wanted to see that fall before he was willing to let interest rates ease. The economy went into a sharp, nasty contraction, hence the reason for both falling profits and falling labor share.

But why did corporate profits continue to fall after the 1979-1982 recession was over? I’d hazard a big contributor was the rapid rise of the US dollar, which not only killed US exports, but also enabled foreign manufacturers to gain even more ground. If you look at auto imports to the US, the Japanese made tremendous headway after the dollar spike of the early 1980s.

By Doug Short, Advisor Perspectives. Cross posted from Wolf Street

Yesterday’s collection of Advisor Perspectives articles particularly caught my attention: Why Jeremy Grantham is Right about Corporate Profit Margins by Baijnath Ramraika and Prashant Trivedi. The article includes a number of fascinating graphs, the first of which is a snapshot of US Corporate Margins since 1947 calculated by dividing Corporate Profits after Tax by Gross National Product.

The article inspired me to produce a chart of the Profit-to-GNP ratio, but with an added and rather sobering overlay: Employee Compensation (wages and salaries), which I’ve likewise divided by GNP. Here it is.


If indeed corporate profits are mean reverting, a view supported by the authors of the Advisor Perspectives article, we see that this metric can spend many years at wide variance from the trend. Employee Compensation, however, has had a distinctly downward trend since its peak in 1970. The only conspicuous exception to the trend was the bubble period of “Irrational Exuberance,” as then Fed Chairman Alan Greenspan famously called it, that began in the mid-1990s.

* Note this is not meant to defend our immigration policies. But the idea that Obama might use an executive order to implement immigrant “reform” seems to be producing a lot of knee-jerk backlash. The crushing of labor bargaining power has been a much bigger, complex exercise. Undue focus on immigration has the convenient effect of getting the bottom 99% fighting among themselves rather than look hard at how the US version of capitalism has been redesigned in a very fundamental way against their interests.

And when it comes to wages, there are “Lies, Damn Lies, and Statistics.” Read… How to Obscure one of the Biggest Economic Problems in the US

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  1. diptherio

    Additional factors to declining labor share of income: computers–higher productivity means fewer workers are needed and the “robot revolution” started in earnest in the 1970s; financialization–the increased availability of unsecured credit to the average Jane/Joe (credit cards) along with the social pressures to make use of that credit allowed personal consumption to continue increasing, even though real wages were dropping.

    The second of these two is, I think, very important, because it allowed this picking of workers’ pockets to go on largely unnoticed by many people in our society. I remember as a kid, being taught that credit cards were “for emergencies.” By the time I was in college, I was being told I should use a credit card to build my credit history or “you won’t be able to buy a house.” A couple years after graduating, I heard that employers and landlords were using credit scores to rank job applicants and prospective tenants. Ford famously payed his workers enough to be able to purchase one of the rigs they were producing; nowadays, I don’t know anybody who buys a new vehicle outright–even folks making six-figure incomes! Every car commercial mentions the financing terms available (0% APR!…for six months) for a reason–car manufacturers are probably making as much money by loaning us the dough to buy their cars as they are on anything else.

    Financialization of the economy has allowed the corporate heads to reduce wages, while at the same time covering up the fact by keeping purchasing power on the rise…through the use of borrowed money. Borrowed from whom? Why, those same corporate heads, of course…they’ve got plenty of extra dought to loan us, now that we aren’t getting it in our wages.

    1. Banger

      Financialization is a tool of political control, ultimately. People are ranked according to credit scores so that those who haven’t “made it” are permanently shut off from legit work and are forced to work in the underground economy.

    2. Jim A

      To some extant, financialization is a symptom of Wall Street having more money than it can find productive use for. So lending it out for the purchase of ephemeral consumer goods becomes the norm.

      1. LifelongLib

        We essentially cut wages (via increased taxation) if they’re so high they cause inflation. Interesting that we don’t cut profits if they’re so high that there’s no productive use for them.

        1. dw

          if it was all increased taxation that caused lower wages, why hasnt the tax cuts from the 2000 increased wages? they didnt rise then either

  2. scott

    Financialization was able to expand from less than 10% of our economy to 40% by siphoning off all of the productivity gains of the PC and internet revolutions, and then fool us for 20 years into thinking de-industrialization was going to maintain our standard of living.

  3. Larry

    In regards to falling labor share and inflection points starting with Volker, I highly recommend reading Panitch and Gindin:

    They cover the history of how America strived after WWII to fashion the world into the near total neo-liberal economic system we endure everyday.

    And to Yves point, wages for workers are simply not coming back unless we take collective action to grab them back.

      1. Left in Wisconsin

        Americans, and modern humans in general, are averse to the “collective” until they aren’t. I’m with Polanyi: at some point the people turn to the government to save them from “death by economy.” Capitalists know this; that’s why they invest so much in denigrating government and TINA. Not that we are there yet.

      2. pgrommit

        “collective”, yep. In the 3 or so decades post-WW2, the strong middle class got that way mainly because of all those good-paying manufacturing UNION jobs that resulted in “spreading the wealth around”, which is now described as socialism.

      3. Vatch

        Yes, “collective” triggers unfortunate Pavlovian responses in many Americans. Perhaps phrases containing the word “team” such as “team work” and “team player” would be helpful in sports crazed America.

    1. PaulArt

      Thanks for the book link, I just bought it. One more book to add to my collection of what I call ‘the misery train of the Fat Cats in America’. This was a great article with some great links by Yves. Thanks Yves. Yesterday I followed another link in another article (forget which one it was) and it took me to this HBR article where the whole CEO gravy train of stock buybacks was exposed. I was quite shocked that HBR would have allowed something like that to be published. Lo and Behold I found a link in that very same article to another article which was a scintillating expose about financialization of the economy. All in all, good reading.

  4. weinerdog43

    Yves, thank you for mentioning “Secrets of the Temple”. I found it to be very enlightening. The war on labor, and by extension, ordinary people who work, has been a hallmark of neoliberal policies before they even had a name.

  5. Globus Pallidus XI

    Indeed the graph is disturbing. What caused the downwards trend of employee compensation starting roughly in the late 1970’s? Many things of course. But surely supply and demand had something to do with it. After WWII immigration was very low, and the laws against illegal immigrants were actually enforced, so the effect of illegal immigration on wages was negligible. A limited supply of labor was able to demand it’s piece of the pie. Starting around 1970 the elites moved to change this, and progressively opened the border to the overpopulated third world. It took a while for this forced population increase to pick up steam, but it really started to impact labor markets around 1980, and more ever since. Surely not a coincidence?

    Yes women entering the workforce had an impact. But post-1970 immigration has increased the population of the United States by about 80 million more than it would have been otherwise, and accelerating (it’s not the fraction of the population that is foreign born that matters – it’s the total increase due to a specific policy. See ‘demographic momentum’). These are not trivial numbers. And we are on course to have a half billion by 2040 and pass a billion by the end of the century. Not trivial numbers indeed.

    As to the idea that this downwards trend in wages can be fought by ‘organizing’, I beg to disagree. Nobody beats supply and demand.

    1. Left in Wisconsin

      1. What about demand generated by those 80 million? Any jobs there?
      2. Supply and demand has virtually no impact on wages outside the small number of occupations where full empoyment is guaranteed. Nowhere else does an individual worker have the power to bid up wages. And even in these occupations, there are many social and institutional considerations that tie workers to the jobs they have, and so reduce their bargaining power. On an economy-wide basis, in an economy without consistent full employment and in which the employer threat to terminate one’s work is par for the course, all the evidence says wages only increase via collective action/collective bargaining.

    2. scraping_by

      Supply and demand is a rule of thumb, not a law of physics. The compensation of CEOs has become astronomical, which means the supply should grow until it pushes the cost down. Not happening in the real world.

      Even if you posit some vanishingly rare skill CEOs supply to a corporation, which is dubious, market adjustments theoretically adapt to the skill pool and drive down the cost. Instead, the cost is always growing. Since free market theology doesn’t apply to C level executives, non-economic factors must be at work.

      Non-economic forces are at play at the hand skill level, too. World wide, the use of slave labor is a far more widespread and important than is modeled. Whether debt-slaves conned into working for minimal bed and board or prisoners in labor camps, they’re working to avoid being beaten or murdered. And most debt slaves are kept on the job by force, either force of law or the boss’s force of paid thugs. Physical violence is non-economic, but effective, method of determining labor costs.

      The abstraction of supply and demand doesn’t do justice to the real world of work.

  6. blucollarAl

    Under what conditions in a capitalist economy will an owner-employer pay a worker more than a subsistence level wage? First, when compelled by governmental “regulation” through enactment of laws mandating things like a minimum wage, a minimum level of benefits (social security, etc.), hours and conditions of employment (overtime, holiday pay, etc.). Second, when compelled by countervailing labor power whose exercise threatens the economic profitability of the business enterprise (union organization, picketing, boycotts, strikes). Third, when it is seen to be in the economic self-interest of the capitalists (attracting and retaining a skilled workforce, obtaining a sufficient return on investment in on-the-job training, etc.).

    The way to retain more of the profits and share less with labor (chart, especially 2000 to present) is to attack and destroy each of these three factors: 1. By weakening regulation through government capture and de facto coup by the wealthy (i.e., turn the republic into an oligarchy); 2. By destroying the countervailing power of labor through weakening labor law (see #1), and by segmenting blue collar and lower-middle class work into a hierarchy of privilege based on skill-levels, favored and non-favored ethnic/racial groupings, and the ideological rationalization of exclusion to ferment intra-class rivalry and hatred and thereby prevent labor solidarity, and by plant relocation, globalization of production, etc.; 3. By the globalization and financialiazation of capitalism itself, of the capitalist organization of the modes and means of production, the very structural basis of the system of production and accumulation, to eliminate as far as possible the reliance on (in contrast to the “need for”) American labor.

    Obviously labor continues to be required in the late-capitalist period, but as far as possible, labor must be turned into an entirely disposable commodity able to be manipulated and controlled entirely by the capitalist employer-owner. For example, corporations must cease to seek the bulk of their profits through “normal” manufacturing or other real-productive activities (the making of things and the provision of concrete human-directed services) and instead seek accumulation primarily in areas of financial manipulation and symbol-mongering, predatory borrowing-lending, acquisitions, equity trading, market-cornering and cartel-behaviors, and the like, leaving the actual making of things (and increasingly the provision of services) to “Third World” off-shore sites with whom the trans-national (nominally “American”) corporation has a complex and often opaque relationship.

    The result is the depression of wages of industrial/manufacturing workers and the loss of manufacturing jobs to offshore locations, increased inequality and poverty, the expansion of low-wage disposable “service” jobs and short-term temporary employment requiring little investment of human-education resources by the company, the weakening of labor protection. At the same time there is a rise of a much smaller number of so-called “knowledge positions”, symbol-manipulators, esoteric and highly intellectualized skills required by the new financialized and high-tech coroporations, and that command the kinds of salary deference that once was accorded (in far more limited but still significant ways) to white-collar workers in the older American companies that treasured long-serving and stable workforces that used to be needed to get the job done.
    All three factors were alive and well (or at least not yet terminally ill)in the period 1947 to circa 1980 when the chart clearly shows the remarkable strength of labor in its ability to obtain a significant share of profits. However, even in that period the seeds of change were already being sowed as I mentioned in my comment yesterday in response to the “household wealth” post. This transformation of late-stage capitalism into a system of “profiting without production” as the Marxist economist Costas Lapavistas calls it, has pulled the America of our youth right out from under those of us old enough to remember what it was like to grow up in a society of (compared to today) relative social and economic equality in which even many of the obvious hardships were, by being “shared” and being “known to be shared” by one’s friends, neighbors, peers, thereby less “hard”, and where the promise of stable and secure employment (at least for those of us “white” blue-collar ethnic minorities) made anticipating our futures a not unpleasant experience.

  7. Scot Griffin

    I don’t find the chart disturbing because it doesn’t show what people think it shows. The BEA calculates corporate profits for domestic companies on a worldwide basis, even though a substantial percentage of those profits are foreign (most likely a multiple of domestic profits). The GNP is a purely domestic number. Apples divided by oranges equals what? Wage data, too, is calculated on a worldwide basis, but it is a safe bet that the percentage of foreign wages is a fraction (not a multiple) of domestic wages. The chart could be made meaningful to the people v. profits debate if there were a way to normalize the wage and profits data, but for now it just shows the increasing importance of foreign markets to domestic companies and implies a greater investment in capital outside of the US than within it.

  8. MikeNY

    Grantham and co. believe in mean reversion of corporate profits and have implied that it could be the threat of social instability that forces it. I’m not sure that the market, left to its own devices, will force it (this seems to be the Fed’s and the MSM’s belief); I think globalization is too entrenched, and the pool of labor worldwide is too big, for that to work. I wonder if it will be local legislative changes for higher min wages and even — gasp! — a living wage that begins the reversion. The recent election results give me a little hope in that respect. But, given the high percentage of S&P corporate profits that now come from abroad, I wonder if corporate profits might not stay higher than historical average for a long period of time, even if they begin to be pressured in the US.

  9. Pete

    Globalization and outsourcing is the main reason. The labor is a lot cheaper outside the US, and the jobs have been outsourced. That’s the elephant in the room.

    1. washunate

      The issue is not the total amount of wages in the US, though. The issue is the distribution of wages within the US.

  10. steelhead23

    As ugly as that graph is, isn’t it only a part of the inequality puzzle? There is the issue of taxation. IIRC corporations pay fairly low taxes on profits and remit much of their profits to shareholders, that is, the 1%. Those dividends are, I believe, treated as capital gains, again subject to lower taxes. So, the middle class pays in the upper 20s percent of its income to constrain the money supply, while the wealthy, who have much more money and would be less impacted by taxation, pay less. Hence, an interesting graphic would compare the percent of income paid by the 1% in taxes, compared with what those with a median income pay through time. My guess is that graphic would be at least as ugly.

  11. washunate

    It looks like this particular chart is more a math problem than a wage problem?

    Without a clarification on what is meant by ’employee compensation’, that downward trend is probably just showing that public policy incentivizes high income people to define their income such that less is ’employee compensation’ (subject to normal income tax) and more is ‘something other than employee compensation’ (subject to a lower tax rate, such as qualified dividends and long-term capital gains). If ’employee compensation’ doesn’t include things like incentive stock options and carried interest, then it makes a lot of sense it would be going down over time as a percentage of GNP.

    1. Left in Wisconsin

      There are definitely high income earners who do not define their income as wages or compensation, but even so the evidence on wage data alone doesn’t support your argument – more wage income is in fact disproportionately accruing to the highest paid wage earners compared to all others.

      1. washunate

        Agreed. I think wage inequality – and its interrelation with our legal system – is one of the great taboos in leftist thought of the past couple decades. Many of the institutions that are supposed to be promoting the public good are at the heart of the problem, like our universities, hospitals, law enforcement, courts, and public pensions. The pensions are particularly guilty on the corporate profit front since they’re directly allocating resources in society, including accepting the false premise that we can get such high yields from stocks and bonds in the first place. But no one wants to decrease promises to highly compensated employees – think of the horror if police chiefs and prosecutors and academics and school superintendents and city managers and doctors only made twice the median wage – or make higher contributions today. So risk and can-kicking it is. Even with the can-kicking, corporate profits/GNP tried to revert in 2007-2009, but public policy drove it right back up. I think SEIU themselves acknowledge about 3 in 10 pensioners make more money in retirement than the median wage of workers who are actually working. One of my favorite quips about pension management is Portfolio Theory made us do it!

        But any way, over time, that increasing wage inequality is converted into savings (that’s what savings are – past labor) and this savings is stored in things that aren’t wages, to be returned in ways that aren’t wages, especially qualified dividends and long-term capital gains, so that the end recipient of the corporate profits pays less in taxes than they would if they were just paid wages directly. Since institutional investors go along for the ride (and indeed, many of the top individuals are beneficiaries themselves), there is no countervailing force in corporate governance. Everyone in a position of authority has the same incentives because the system itself is the problem.

        Public policy even subsidizes this in less direct ways, like the home mortgage interest deduction, the capital gains exclusion for profits on home sales, and the tax deductibility of qualified retirement and charitable contributions. Without these kinds of tax loopholes, final prices would be less, which would lower GNP relative to employee compensation.

        So I leave a detailed thought here because I don’t want you thinking I’m saying what’s happened with wages is irrelevant. Rather, I just think this particular comparison doesn’t illuminate much. A chart comparing employee compensation to the cumulative number of NFL games played wouldn’t look that much different, since passage of time itself is the main thing at play here of a multi-decade trend. Except for that interesting blip in the late 90s, when the percentage went back up momentarily. Perhaps that was the last gasp of trickle down economics?

        Or perhaps comp/GNP is related to cumulative USFG debt? That seems another loosely similar trend.

  12. c

    The article patently misses the tools of GATT and WTO to offshore manufacturing to China et al in a labor / regulatory arbitrage that expanded margins and fattened the pockets of management. I’ll be gone and you’ll be gone was the mantra for the managers and politicians who were and are bought to make it happen.

    You should also examine the chronic public underinvestment in all kinds of infrastructure that has contributed to lower economic growth and increased relative total factor costs for US producers.

    Financial debt slavery through a debt as money system is the nail in the coffin. Create money from nothing and control real assets and human beings via Federal law. Expand / contract and provide favorable access to money and credit to give added advantage to your sponsors.

    This is almost a perfect storm for the American worker. I doubt it was a coincidence. Treason?

  13. Steven Greenberg

    The law of supply and demand is nothing more than the fact that equilibrium is reached at the point where supply equals demand, where supply is a function of price and demand is a function of price. The law of supply and demand says nothing about the shape of these two functions (curves), so it really says nothing about where the meeting point must be.

    Government policy can have a huge impact on both of these curves. Labor unions have a huge impact on the supply curve for the supply of labor. Killing off the unions has a big impact. The flight to outsourcing is also related to government incentives to outsource and also the way “free trade” agreements are negotiated. The Republicans put strict controls as to what the executive branch is allowed to negotiate in trade agreements. Labor rights and environmental concerns are specifically prohibited from consideration. In the secret TPP that is being negotiated, leaks to the public have indicated that aggrieved corporations will be able to overturn any country’s laws or regulations that the company says hurts their business. You don’t see any such power given to labor.

    If automation lowers the demand curve for labor, then government can take actions to change that curve. The original reason for time and a half for overtime was an effort to change the demand curve. High marginal tax rates also change supply and demand curves. Special tax breaks work to change behavior because they change supply and demand curves. They don’t always change the behavior in desirable ways or ways that were even intended.

      1. Vatch

        12 million illegal immigrants is very likely correct. In 2000, the foreign born part of the U.S. population was about 31 million people, which could be the number that Randy is remembering. See:

        In 2010, the U.S. Census Bureau estimated the foreign born population to be about 40 million people. Needless to say, the majority of them are in the country legally, and millions are U.S. citizens. See:

        The Center for Immigration Studies estimated 10.5 million to 11.5 million illegal immigrants in 2011, so it is very plausible that the current population is 12 million.

  14. Demeter

    With the continual erosion of labor rights by state and federal governments and the outlawing of labor tactics by the legislatures and the courts, just about the only tool left to the common people is the boycott. This was proven by the Market Basket/Demoulas debacle this year.

    After all, you can’t FORCE people to buy your products…they can find a substitute or do without. And you can go out of business.

    The sooner we start, the sooner we get back to something like a balance of power and a government of, by and for the People. The backs of Corporations must be broken to re-institute the American promise.

    1. baldski

      Boycott? How about a general strike? 60 million workers stay home? Do you think that would wake up the oligarchs? It only took a couple of million to hit the streets in the 60’s to have the oligarchs shitting green apples and looking to Lewis Powell’s infamous memo to put control permanently in their hands. Powell’s memo succeeded beyond their wildest dreams. I think a couple million in the streets would have them soiling their drawers again.

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