Pethokoukis, Economics, U.S. Economy

Why are corporate profits not leading to more income growth and jobs?


I am always looking for evidence, whether data or anecdotal, about technological unemployment. If it were becoming more of a problem — whether the creative destruction generated by automation was becoming a net jobs loser or depressing wages or creating jobs that too many workers are unprepared for — one would expect to see headlines like this from The New York Times: “Recovery in U.S. Is Lifting Profits, but Not Adding Jobs.” Here’s the money ‘graph:

As a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966. In recent years, the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008 and 2009, said Dean Maki, chief United States economist at Barclays. Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation. “There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said.

Strangely, while the story mentions various factors, from offshoring to the sequester to the Fed, it does not mention technology as a factor driving productivity gains. One more thing: Do these statistics argue against corporate tax cuts? They do not, since workers and investors are the ones who pay the price for higher corporate tax rates and systems which encourages the inefficient deployment of capital. But the numbers certainly emphasize the need for education reform (so workers are prepared for higher-skilled jobs), health care reform (so income gains aren’t gobbled up by health inflation), and ideas such as universal 401k plans so worker incomes are less dependent on wages. And it should go without saying that faster economic growth would sure help.

10 thoughts on “Why are corporate profits not leading to more income growth and jobs?

  1. Let’s imagine that companies suddenly became less efficient — i.e. that they had to hire more people to achieve the same production. Prices of products would rise and profits would decline. How exactly would we in total be better off in that scenario? If we would, then shouldn’t we just get rid of the technology that makes companies more efficient? Issue everyone shovels and pencils?

  2. This is the chart you need, Jimmy P.

    It shows that labor employment, not capital, is being taken out to the woodshed and whipped. See that phase change at the start of the millennium.

  3. The US corporations lobbied decades ago to open up our economy to global competition..They claimed the US economy would prosper top to bottom,well the top part was correct,but the bottom is still waiting for their share of the pie(it ain’t coming).

    • So you’re pretty sure if we had built trade walls around the US to keep competition out, that we would be better off today?

      Meanwhile I’m pretty sure standards of living for almost everyone are higher today than they were decades ago.

      When “the pie” increases in size, do you get to maintain your “share” of it just because? Or do you have to increase your productivity at the same rate in order to maintain that share?

  4. The situation also argues for the government undoing much of the regulation that increases the cost of labor — OSHA, ADA, etc., ad infinitum. This should include especially those laws and questionable legal opinions that make hiring a person simply a gamble on getting sued.

  5. Or do you have to increase your productivity at the same rate in order to maintain that share?

    Are you out to lunch or do you just play one on the AEI blogosphere?

    Jimmy P’s personal income chart does not disaggregate wage compensation (income) from capital income (dividends + interest) and government transfer income (social security, medicare and welfare). And then he wanders wondering about employment income (jobs).

  6. Many of the ‘profits’ are not real. They are created by mark to model accounting and paint a picture that is very different from reality. Other profits are generated when people with bad credit histories are given access to loans used to purchase consumer goods. And the environment is one in which central banks are flooding the system with liquidity as they try to prop up economic activity. This simply leads to a lot of reckless and speculative activity even as the fundamentals are getting shakier. Why would anyone in a mature industry hire in such an environment?

  7. When companies make hiring decisions, they make them based on total cost of employing that person. They don’t look at what the person’s individual income would cost the company. Just like when they purchase equipment, they don’t just look at the price they pay to the equipment supplier, they look at the total cost of equipment.

    A more accurate measure would be the total employment cost to a company…..employment income, taxes, benefits, training costs, etc. My guess is that the change is not as pronounced when that measure is used.

    • It’s surely not just the cost of employing that is looked at but the cost:benefit. Given that profits are at record levels of national income, on the macro scale there can be very little benefit remaining in the current cycle in incurring further costs. Hence the need to reduce employment costs, not to mention barriers to investment, such as ZIRP, which prevents capital formation, therefore investment.

      We’re being screwed at both ends of the equation by disastrous macro-economic policy by both Washingtonian fiscal incontinence and the Fed.

  8. Suggested reading:

    The Modern Corporation and Private Property (1932-1963) Berle & Means

    The Good Society- Walter Lippmann

    The Evolution of Civilizations – Carroll Quigley

    Learn the function of the redeployment of surpluses (accretions, profits). Where is the control over such redeployment now vested (in mamgements?) and subject to what motivations.

    cf. Private Equity/the Public Held Enterprise (Fractional beneficial ownership- managerial control)

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