Why are US corporate profits so high? Because wages are so low

January 24, 2014

U.S. businesses have never had it so good.

Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy.

The labor market, meanwhile, is still millions of jobs short of where it was before the global financial crisis first erupted over six years ago.

Coincidence?

Not in the slightest, according to Jan Hatzius, chief U.S. economist at Goldman Sachs:

“The strength (in profits) is directly related to the weakness in hourly wages, which are still growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment.

Companies have not been unable to raise prices much because of the economic recovery has been fragile. But they’ve still managed to boost profits beyond anything ever seen before because they’ve got away with employing as few workers as possible at as low a rate as possible.

Compare and contrast these two charts:

 

 

 

 

So, corporate profits are their highest ever and wage growth is near its lowest in half a century. But don’t expect the transfer of that cash from businesses to workers to start any time soon, says Hatzius:

“The bottom line is that the favorable environment for corporate profits should persist for some time yet, and the case for an acceleration in the near term is strong. Hourly labor costs would need to grow more than 4% to eat into margins on a systematic basis. Such a strong acceleration still seems to be at least a couple of years off.”

 

2 comments

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Correlation is not causation. Perhaps it’s an inverse relation with sunspots?

I’ve always been fascinated by the focus on wages and labor costs when that’s typically a very minor (< 10%) part of the cost equation.

Posted by Coderage | Report as abusive

IF a business focuses solely on GDP their business will collapse, it’s basically an pump and dump tactic. It hurts long term investors and long term board/staff. The experience isn’t immediate but it will happen. If a business wants to see a successful future it needs to pay it’s employees a ratio’d earning of the local store’s profit.

Posted by SpeedyVT | Report as abusive