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

http://blogs.reuters.com/macroscope/2014/01/24/why-are-us-corporate-profits-so-high-because-wages-are-so-low/

by d4vlx • 12 years ago

185 233 12 years ago

blogs.reuters.com

skrowl• 12 years ago

If wages in the US were low, they wouldn't be outsourcing labor to other countries. Reuters must not have realized how many things have "Made in China" stamped on them.

streetnigga• 12 years ago

Yes I am sure that they never figured other nations exist and that the US imports from them when making this article.

rschmitty• 12 years ago

If there was ever a time when someone should yell "Stop the presses!"

slurry• 12 years ago

My local supermarket has low prices, and yet sometimes I get things at Costco. Prices are relative. US wages are low relative to historical US wages and wages in comparable countries, yet they are high relative to China et al. There is no contradiction. Otherwise, no country's wages could ever be considered low as long as they were higher than the Central African Republic's.

In addition, many jobs cannot be outsourced.

dkuntz2• 12 years ago

And those things don't count as part of the US' GDP. And only count as part of the GNP if they're owned by a US company.

NoPiece• 12 years ago

The value of imported goods are subtracted from GDP, but their sales price is added to GDP.

jusben1369• 12 years ago

You do realize that a lot of manufacturing jobs are returning to the US and this is one of the driving factors (along with wage appreciation in China).

thrownaway2424• 12 years ago

What's particularly disturbing is the sheer greed being shown in pursuit of these profits. There was a recent article about an auto plant in Michigan that went through near-bankruptcy but is now making a $2bn/year profit. The profit was attributed in part to $50m/year in reduced wages that were extracted from the union in exchange for not closing the plant. Those concessions represented over one third of the wages but only 2.5% of the resulting profits. That's just disgusting. They should have kept the wages steady and enjoyed their more-than-sufficient 1.95bn/year in profits.

mh-2• 12 years ago

link?

GolfyMcG2• 12 years ago

I second this.

aheilbut• 12 years ago

http://www.nytimes.com/2013/07/16/business/last-car-plant-br...

kiba• 12 years ago

What is considered "sufficient" profit, anyway?

pekk• 12 years ago

Suppose that no amount is sufficient. That means every business is a failure to fill an infinitely large stomach.

hueving• 12 years ago

The people in control of the company have a legal duty not to waste shareholder money. Giving everyone a raise without a good reason would get them in hot water.

There would need to be a fact-based reason to give that raise out to the entire workforce. For example, workers would need to be leaving for better jobs, or the workers would have to go on strike.

aestra2• 12 years ago

The goal of the business is to "grow," make more money than you did last year. That's a measure of "success."

michalu3• 12 years ago

Disturbing is that apparently some people would prefer to see this "one of last plants in Detroit" bankrupt a all employees and their jobless, rather then tripling workforce in what is now most distressed place in US with 16% unemployment.

http://www.nytimes.com/2013/07/16/business/last-car-plant-br...

Apparently these (pre tax) profits don't end up in somebody's pocket as you imagine but are reinvested in giving more people jobs and growing the plant.

eru15• 12 years ago

The bigger plant is still in the investors' pockets. (No moral judgement implied.)

tsotha3• 12 years ago

I don't find this disgusting at all. Some years car companies make billions, some years they lose billions. How much money has this plant made, on average, over the last 20 years?

hessenwolf• 12 years ago

Devil's advocate here... the higher than average profit margins have resulted at a time when the cost of capital is much higher. The market has seen a huge move away from risky assets, into dull stuff like bonds and non-productive assets like gold (and, go on, bitcoin).

Hence, the required return in order for companies to access funding has been much, much higher, forcing them to aim for higher than normal profit margins. So, really, they are justing paying back their higher costs of borrowing. (equity is a form of borrowing, in a sense)

Now, why is the cost of capital so bloody high with TARP and QE and all that quatsch? Answer: Because banks are cs and investors are short-termist r*ards.

eru15• 12 years ago

Are private equity companies making a killing, then?

EpicEng• 12 years ago

This is entirely anecdotal, but I grew up in the Midwest and know many people who spent their lives working in automotive factories. I wish these people the best, and I'm glad that they are doing well, but many of them are making $25+ / hour installing doors and seat belts (and the '+' here has a high ceiling).

This is a job that any able bodied person can do, but they make that living, for better or worse, because of their unions. If I were funding these plants I wouldn't want to pay those wages either.

As a reasonable person I have to admit that this sort of work is simply is not worth that pay, regardless of what my personal feelings toward my friends and their families are. These are not skilled positions.

mattmanser2• 12 years ago

So what?

This is the thing I don't get, why shouldn't the employees of the company, no matter how skilled, share in the good times? They certainly pay in the bad times.

As companies have become ever more callous and unions ever weaker all the money has moved to the owner side. It's not simply just about "I won this factory, therefore I get all the money", as I think we're going to find out in the next 20 years, that kind of thinking leads to major civil unrest and we will probably see the replacement to unions forming in the next decade or so.

laichzeit02• 12 years ago

It's a tightrope because when it becomes cheaper to automate whatever job they were doing manually, then they make $0 per hour.

That's the case in South Africa with farm workers and their unions driving up the minimum wage. There is 25% unemployment nationally and they are clamoring for more money. The farmers just go "well at this price point, I might as well just buy some more machines and get rid of these people".

Machines have no unions.

aestra2• 12 years ago

Ok, so what exactly is a proper pay for installing seat belts and doors?

Is a job not being "skilled" mean the person doing it must live in poverty?

yummyfajitas10• 12 years ago

Business income is volatile. The business made a $2B profit in one particular year, whereas in other years they made losses that nearly destroyed them. Somehow I suspect when the business took losses, the employees did not return their wages.

Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside.

valisystem• 12 years ago

Business income is volatile.

Yet, a very few concentrates a bigger share every year.

andyjohnson0• 12 years ago

"Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside."

Can you justify that? It seems like one of those statements that is designed to appear correct without provoking concious analysis. Kind of like "truithiness" [1]. Isn't there rather a lot of evidence that properly implemented profit sharing results in more motivated, productive employees?

[1] http://en.wikipedia.org/wiki/Truthiness

pjc50• 12 years ago

Employees _do_ share the downside, when job cuts are made.

vidarh2• 12 years ago

These people did share in the downside: They cut extremely substantial wage cuts. Now they are not sharing in the upside.

Guess why many of these unions play hardball?

teh_klev• 12 years ago

Surely businesses and the people who run them (i.e. board level) should have a moral and fiscal responsibility to bank cash to cover for the lean years rather than splashing out their profits on shareholders and senior board members.

Most employees (other than trying to be more productive) have no control over what decisions business owners make (such that they roller coaster between profit and losses year by year) so why should they share the downside? It's not as if they get the same magnitudes of rewards as board level staff do to allow them to buffer themselves financially for downturns.

VexXtreme2• 12 years ago

Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside.

This is an incredibly dishonest statement. Employees DO indeed share the downside of business income volatility by being forced to take pay cuts when their company is going through a rough patch. I see it all the time and I've had it happen to me.

Why are we pretending this is not the case?

jbooth3• 12 years ago

There's a graph out there, or several, showing annual real median income plotted against productivity gains. Income has lagged in the aggregate, significantly. It's also lagged when plotted against GDP. Both since the early 80s.

Volatility's a red herring. Look at the 3-decade trendline.

nkoren• 12 years ago

Employees routinely share in the downside risk by losing their jobs.

ArbitraryLimits• 12 years ago

Isn't this case the exact opposite of what's being claimed in the article? I.e. you're saying wages don't really affect total profits one way or another.

vinceguidry• 12 years ago

That sounds like an abject failure of union leadership.

mathattack• 12 years ago

Those concessions represented over one third of the wages but only 2.5% of the resulting profits

This doesn't seem to make sense. It's a VERY rare industry that has labor costs as little as 7.5% of profits. Very few are even as low as 7.5% of revenues, and those are high automation businesses. (Think software, not automotives)

All that said, this article quotes "After tax" profits. Given how much tax avoidance is happening at big companies, I think it would be interesting to see pre-tax profits too. How much of this is coming from tax loopholes, in addition to squeezing workers?

nabla92• 12 years ago

Wage's share of GDP have been in decline in all OECD countries since mid 70's. U.S. is just leading the way.

nevocus• 12 years ago

Is there causality really going on with both trends? Maybe the US stopped being a great place to invest and hire people...

PythonicAlpha3• 12 years ago

In all industry, the trend goes one way: The wages of working people (including white-collar, I hope, that is the right word) have to go down, and the earnings from investments (pure money makes money business) have to climb.

There are only very few exceptions: One are lawyers, as mentioned in an other thread, and the other are people that work in the investment business (investment bankers, traders, ...). The reason for the second exception is obvious: their work is needed to make even more money from the money and every trick is played, to have the smartest, best guys getting the job done ... and get it done better and better.

Problem is: The whole thing breaks our society. Middle classes are already melting massively in many countries. The possessions of the worlds are concentrating in the hands of very few people more and more. Those people make our laws! The other people become poorer, even in the situation that the overall worlds possessions expand massively. The countries are already so much in dept, that many of them can not pay even the interest. Even the US is so much in dept, that there seems to be no possibility to get ever rid of it.

Nobody seems to realize, that while we are talking, investment companies are roaming the world for land, for houses, for companies to buy them, exploit them and throw it away when not needed (and not useful) any more. The wealth of the world gets accumulated in the hand of investment companies and the super-rich.

By rising the value of pure money investments, the value of human labor (to a more and more extend even high-paid and high-value labor) is degrading.

eru15• 12 years ago

In all industry, the trend goes one way: [...]

If that was true, wouldn't we have had to have a mythical past of zero earnings from investments and 100% of revenue going to labour?

lotyrin• 12 years ago

Early foraging societies maybe? (Before agriculture or systemized bartering, let alone economic specialization or capitalism.)

MarkPNeyer• 12 years ago

that's kind of how it was. there were no earnings from investments when there was no investment; when everybody was working it was workers who took all of the gains because there was nobody else involved.

millzlane• 12 years ago

"Those people" are definitely the problem. All for money and power. It's pure greed. They infiltrate our governments, they corrupt our politicians, they sway popular opinion with their ads and their social media trickery. The own the new stations, and the radio stations. The money is all that drives it. I wanted to say so much more but couldn't articulate my comment well enough. The problem is just like you explain but 10X worst than anyone can see. Those people are a cancer and it will only end with a collapse. Greed with be the fall of human kind.

madaxe_again• 12 years ago

"Those people" are "you people" are "us people".

The problem is not that of some vested, grounded elite who rule from high. The problem is not that we have some variety of malevolent overclass or illuminati pulling the strings. The problem is rather that of a culture of greed, which creates and perpetuates the "high" and the "low". By this I do not mean the capitalist system in general, rather the current neo-liberal brand of laissez-faire capitalism to the point of negligence. Hayek was vociferous on the topic of adequate regulation being essential to the sustenance and perpetuation of a liberal democracy - and adequate regulation we do not have - nor can we, with our current sociopolitical frameworks coupled with a furious pace of change. The last time technological progress so outpaced cultural and economic development, we called it the industrial revolution - and the disruption and change in life for most of man was, frankly, mindboggling - never mind the ensuing bloody transition into industrialised society, which still drags on.

As long as we continue to crank the same handle on the same sausage machine, the same sausages will continue to come out. You cannot simply remove the elite and expect magic to happen, for that power vacuum will be filled by successive elites, and the labour vacuum will be filled by successive underclasses, until the whole thing comes crashing down due to resource exhaustion and Malthus's revenge. We reside in the same sausage-machine as the Romans resided in, and inherited from the Greeks, from the Hittites and friends, from Sumeria - c.f. Baudrillard & Dick on "The Empire Never Ended". Plus ça change, plus c'est la même chose...

Bloody revolution will simply replace one elite with another, and maintain the status quo, with a few new twists but no real change. Forceful change by the populace (i.e. revolution, but not necessarily bloody) will also be very difficult to enact at this stage, partially as we've allowed our governments and domestic armies (law enforcement) to become sufficiently militarised that any opposition would likely be quashed, and partially as we've allowed ourselves to become so sedated and mollycoddled by our Brave New World that only a minority even perceive that there is something amiss.

Our only option is systemic change which comes from within. This can only happen at the volition of those in power, who will be unwilling to give up their own vested interests. Selling future elites down the river, however, is something our governments have done before and will almost certainly do again.

Humanity requires a sufficiently large gun to be put to the head of every man, woman and child on this great greasy ball of rock, in order that we might change. That gun may well be here already, in the form of our friend "climatic alteration" ("climate change" is just too polluted a phrase now, just as "global warming" became over a decade ago). We may be faced to change our oil-dependent economies, beyond the superficial relocating of where and how we fetch that oil. We may be faced to change our attitudes to what comprises wealth, and decouple such from consumption of resources. We're still stuck in the "that fat dude must be rich" neolithic mindset. Our own survival instincts are currently working against us. We must make them work for us.

Then again, we may not succeed, and we may all end up very extinct.... which isn't the end of the world. Just of us.

atmosx2• 12 years ago

Well history is repeating herself, if middle class disappears, revolution comes guns go out, everybody gets killed we have a third (French?) revolution and so on...

digitalengineer3• 12 years ago

Except this time they're ready for the masses.

vellum2• 12 years ago

There are only very few exceptions: One are lawyers

The lawyers don't think so.

http://www.americanbar.org/news/abanews/aba-news-archives/20...

"The predicament of so many students and so many recent graduates who may never procure the employment they anticipated when they enrolled in their law schools is a compelling reality that should be heeded by all who are involved in our system of legal education

http://blogs.wsj.com/law/2013/09/18/associate-salaries-essen...

overall slack demand for legal services by deep-pocketed corporate clients has confidence slipping among law firm leaders

PythonicAlpha3• 12 years ago

Maybe I should have clarified: Patent lawyers ;)

I think, there is just a difference between high earning lawyers and those that are not. It is difficult to get into a position, where the high rates are earned. But I think, it is at least more likely, that you can earn real big money as lawyer (without starting an own company) than as a programmer.

hudibras• 12 years ago

Before the inevitable globalization, free trade, and we-should-get-rid of-the-minimum-wage arguments erupt, please keep in mind that the article is talking about, and the second chart (the wage one) is showing, average annual changes by percentage. So this applies to ALL jobs (including yours, Dear Reader) not just the usual suspects of manufacturing and low-skill jobs.

So ask yourself: how much has my pay gone up in the past year? How about in the last 5 years?

dnautics3• 12 years ago

but it's gone up right? Why hasn't that been enough? Last year as a (relatively poor) postdoc, I made 40k/year. But if my grandfather had made 40k at age 31 he'd have been a happy camper.

remember, macroeconomics says that because of the phillips curve, inflation is a way to goose employment (because of sticky wages) in other words, the purpose of the policy of inflation is to screw laborers out of the real value of their labor.

tostitos1979• 12 years ago

I don't understand your argument. 40K in today's purchasing power buys you 1/20 of a house in San Jose. It is about real wages not nominal wages. And I think for many people in the middle class, we might be earning less than our parents did in their 20s and 30s (in real wage terms).

Addendum: what's more ... if someone in your pervious generation had a PhD, they likely would be able to get tenured jobs at Universities. That is a bit harder these days.

gaius3• 12 years ago

In what year was your grandfather 31?

bsamuels• 12 years ago

So just off the bat reading the title, I was expecting numeric evidence for a very numerically based claim.

The data the article provides does not support the author's claim, to say it nicely. For one to claim there's an association between wages dropping and corporate profit increasing, you'd need an area graph over time of corporate expenditures with with worker wages and other common expenses listed. Neither of the graphs included support his claim, as there's a multitude of other variables that could explain their trends. The second claim the author makes is that this is occurring specifically for US companies. There is no data at all cited for this claim.

I wish people would at least "try" when publishing articles with a political motive. All this article will do is reinforce the belief that wages need to rise for people who already believe it.

GolfyMcG2• 12 years ago

This is too logical for the internet. Someone might draw an objective insight from what you're suggesting.

zurn2• 12 years ago

Looks like it's just summarizing what the Chief Economist at Goldman Sachs thinks. There is lots of other reporting about it on the news.

Do you have a theory on what political motive GS might be pushing? Promoting worker wages with made up arguments and unfairly criticising corporate profits doesn't seem to fit their agenda.

afterburner3• 12 years ago

If they're long term enough thinkers, maybe they realize this trend doesn't have a happy ending.

venomsnake• 12 years ago

They had a Ford moment? Final realization that if there is no one to buy stuff the whole financial industry is doomed? Got scared of 6th year of depression?

VLM3• 12 years ago

What is the macroeconomic effect of workers 401K stock investment plans? Stock transactions. You get to skim a little off the top both at purchase and sale. Back in the old days when more people were working, on average having higher income, they'd skim more commissions.

There is an interesting secondary effect of small retail players having been net purchasers of stock via retirement plans, which is to push the market up. You can rely on the fed lowering interest rates to push the market up until rates hit zero, you know, like now, then that stops. Hmm what happens to stock prices when more baby boomers are selling than millennials are buying... Maybe their only hope is to get as many people contributing to retirement funds as possible to at least reduce the blow.

Stocks are fundamentally kinda like real estate in that sellers can stamp their feet and pout and demand whatever rate of return they like, but in the long run, the median sales price is going to be whatever the median dude can afford, and "the market" doesn't care what the sellers "need" it only cares what the buyers median income is, which has been falling for a couple decades depending on who cooks your numbers.

In the long run, not just next quarter, GS badly needs a lot more workers contributing to 401K and other retirement options. Maybe they're too heavily leveraged up to survive not having more workers to transactionally skim off of.

yummyfajitas10• 12 years ago

Here is the graph you want. Took me about 3 minutes on the federal reserve site.

http://research.stlouisfed.org/fredgraph.png?g=rnM

robzyb• 12 years ago

The title is "Why are US corporate profits so high? Because wages are so low".

Nothing in that graph supports that title.

In that graph wages look "about right", whereas profits look... weird. High, but also very weird.

There's certainly no causal link in that graph!

kirkbackus• 12 years ago

The second graph seems to truncate the first 15 years. I wonder if the data exists, or if it didn't actually support the author's point. Also, I think the author oversimplifies this issue.

I just don't see the connection where the direct cause of large corporate profits is low wages. Are the wages adjusted for inflation?

thrush• 12 years ago

I don't agree with this article (wages may be low, but that's exactly why corporate profits are so high). I think the internet and new technology has helped companies expand their profits at incredibly low cost. Consider the recent article about Stripe joining The Billion Dollar Club [1]. It's an absurd fact that such a small and new company can become so successful in so little time. If that is the effect that tech is having on small companies, imagine what effect it is having on large companies. The internet is like steroids for business.

[1] http://online.wsj.com/news/articles/SB1000142405270230463220...

dclowd99013• 12 years ago

So, we've done the environmentally-conscientious boycotts. We've done the healthy food boycotts. You know where I'm going with this...

Is there anywhere we can find out whether a company provides its employees meaningful wages and benefits (in relation to its corporate earnings)? Also, if anyone's knowledgeable on this, is it generally more beneficial to just buy from privately-owned companies (vs. publicly traded)? I would love to start buying exclusively from co-ops.

ctchocula• 12 years ago

Employees give inside info on their wages and benefits on glassdoor.com and indeed.com. The latter seems to have extensive forums for most companies [1].

[1] http://www.indeed.com/forum/cmp

curun1r• 12 years ago

I'm not sure about corporate earnings, but there are a bunch of lists on the internet that compare average worker compensation with CEO compensation and CEO compensation usually correlates pretty well with company profits.

Here's one such list: http://go.bloomberg.com/multimedia/ceo-pay-ratio/

dclowd99013• 12 years ago

This is exactly what I was looking for. Thank you!

jobu• 12 years ago

Is there any way for an average working schmuck like myself to capture some of these windfall corporate profits?

Invest in stocks with sizable dividends?

yetanotherphd• 12 years ago

No, there is no way. The information contained in this news report will have been incorporated into the stock price of all the companies long ago.

dclowd99013• 12 years ago

The returns are so paltry as to be laughable. Five percent a year? Yeah, enjoy that retirement.

If you really want to take advantage, start a business. Guess what? There's some cheap fucking labor out there, and you can easily undercut a dinosaur. Share profits with your employees and advertise it. Try to get ahead of a movement that is almost surely coming in favor of companies that treat their employees well.

hkmurakami• 12 years ago

Unfortunately, the firms that tend to enable this for employees tend to be limited to partnerships (Law Firms, etc)

gametheoretic• 12 years ago

Are you... asking if there is such a thing as a money tree?

Plenty (>90% ?) of people will tell you otherwise, but there's a case to be made that "investment" in public stock is essentially a game of reverse-routlette (i.e., not lose-lose-lose-lose-WIN but the other way around). What does the "anti-DOW" (most horrific deaths rather than strongest surviving) look like?

marvin• 12 years ago

You could have invested right after the financial crisis like me and others did. We have made more than a 3x return since then. This is in fact a direct result of the observations in the article.

But stock market investment, over the long haul, does give better returns than any other form of savings.

run4_too4• 12 years ago

Strange game, the only way to win is not to play.

InclinedPlane2• 12 years ago

Oh, so NOW correlation is causation. Great, I'll go correct my notes so I don't forget, it's always so confusing.

There's one thing lacking here, and that is, of course, a causal link. It would be nice if they went down the line and compared employee wages relative to corporate profits on a per company basis. It might be that there are different things at play here.

There's a lot of data missing from this incredibly shallow analysis. Not that I dispute the results, but the argument isn't well backed by the data.

Edit: as a side note I think a lot of problems with employment in the developed world today are due to extremely outdated labor laws that prove to be more damaging than helpful. The expectation of the entire system is that workers will be locked into employment at a particular company for life, will work 40hr/wk on average week in week out, and will rise in pay incrementally over their career. Those assumptions result in worker benefits being tied to employers. They're why the government can get away with hiding half the tax rate of the payroll tax from workers behind the "employer contribution". They're partly why savings rates have fallen so badly over the past few decades. And so on. A lot of which is ultimately to the detriment of the individual worker. If workers were more independent and more mobile, able to self-employ more easily, and so on then they'd tend to have much higher wages on average, I'd wager. The current system doesn't reward independence, it punishes it, but independence is precisely how workers gain an upper hand once they've built up a considerable amount of experience.

brc• 12 years ago

The thinking tends to imply that somewhere, workers wages are being set by a central committee, who is more interested in profits than wages. Such thinking is wrong.

I agree that there may be some cause that makes profits go higher and wages go lower, or they could be totally unrelated. But the driver of wages is competition for hiring people. It's no surprise that in a time of relatively higher employment, there has been little or no wages growth. What is surprising is that corporate profits have expanded. But then, if you have a monetary regime where printing money (QE) is designed to re-inflate the capital of financial institutions via devaluing the currency, then it's not surprising that profits go up for those with first bite at the new-money.

Is that the cause? I doubt it. But can someone hold down employee wages for the sole purpose of increasing their profits? No.

Solve unemployment, and you will solve stagnant wages growth.

nabla92• 12 years ago

When you cut the pie into different size pieces and one gets more than before and one gets less, causality is trivial.

InclinedPlane2• 12 years ago

Classic zero sum game fallacy.

nickff• 12 years ago

Could the correlation be due to "the dreaded third thing"?[1] (a common cause)

Perhaps large corporations are now deriving a large portion of their income and profits from government-derived sources, and relationships between executives and government officials or regulators; if this is true, there is no reason to give raises to employees, as the low-level workers are relatively unimportant.

[1]http://www.econtalk.org/archives/2013/10/oster_on_pregna.htm...

mariano54• 12 years ago

I had to comment on this due to the large amount of misinformation in this thread.

Many people think that companies should be kind, and pay more than the market wage for their workers. This is false and unreasonable. Companies try to minimize their costs, including wages.

Now if in some industry, some company is making huge profit margins, and paying low wages, what is the cause, and what is the solution? In economics, profits go down until they reach 0 or close to 0. Why? because if there are huge profit margins, more firms come in, to compete. Therefore in all industries, profits go down to a lower level.

Now why doesn't this happen in practice? The answer is artificial barriers to entry. Political agreements and regulations benefiting the big companies. So what is needed here is an easier path for new companies (Which are people after all). This will always ensure that profit margins stay low, and wages approach the true market rate.

The solution is not donation. Why would a company pay 9 dollars to a worker who is willing to work for 8? Why aren't YOU donating money to poor people in Africa? The answer is not minimum wage either. This distorts markets. If you want to alleviate poverty, in a more economically reasonable way, do it though universal income.

erichocean4• 12 years ago

Your intuition is correct, but unfortunately, it doesn't actually work that way, because on a per-employee basis, big business is ~4x more efficient.

That is, for every $1 in revenue an SMB brings in, big business brings in $4. (These numbers are averages, but the basic relationship holds across industries.)

I personally do not see how SMBs can compete when they are paying 4x more for labor.

The reason big business is so efficient is IT investment, and the problem with IT investment is that you need to be big in order to really take advantage of it. The amount of improvement SMBs get for a proportional amount of investment is low. You have to spend a lot to get anything, really, and SMBs just can't afford that.

So, to recap: big business profits stay high because SMBs actually can't force prices downward, due to the huge imbalance in labor costs between SMBs and big business.

If we could get the same IT advantage to SMBs at a cost that is proportional to their revenue, then the dynamic you expect to be occurring would, in fact, happen.

adharmad• 12 years ago

Big Businesses also have larger overheads, internal bureaucracy and are generally show on the uptake. A small and nimble SMB can surely take advantage of this?

After all, most of the tech startups are in some way small businesses and don't seem to have any trouble innovating against the lumbering tech giants.

WalterBright3• 12 years ago

Consider your statement in the light of looking at the 10 largest corporations in America on a decade by decade basis. Go back a few decades, and I bet you won't even recognize the names.

Again and again, small companies have displaced can't-fail big ones.

lgieron2• 12 years ago

You seriously believe that IT investment is the sole reason for large companies being more efficient? How about the fact that they can make large investments in general (for example, build a pipeline or a nuclear power plant), at the scale where few competitors exist?

run4_too4• 12 years ago

I personally do not see how SMBs can compete when they are paying 4x more for labor.

This makes the error of assuming that the only thing a consumer values is cost. That isn't actually the case, but it varies greatly.

zurn2• 12 years ago

Universal income would be nice but meanwhile unions work passably.

allochthon• 12 years ago

Companies have been unable to raise prices much because of the economic recovery has been fragile.

Perhaps related to a lack of disposable income and consumer confidence?

The concentration of wealth is starting to become genuinely worrisome from a societal perspective. There must be some sort of tipping point where real life crosses into dystopia, but I don't know quite what it would look like and what the longterm implications would be. The US political process is already buckling under the unseemly influence of contributions from a small number of donors. At what point are you awoken from your sleep and then realize that things really are going to be bad? What does "bad" look like, beyond what we're already seeing, such as long-time residents being priced out of San Francisco?

phamilton• 12 years ago

So another angle on this that I've heard is one of increased efficiency. The economic downturn forced a lot of companies to get more done with less. Once the revenue picks up again, the business realizes that they didn't need all those extra resources in the first place.

That could mean they hire fewer employees. It could mean they hire less skilled employees.

Admittedly speculation, I just wanted to throw it out there as an additional explanation.

tunesmith• 12 years ago

That's where my thought was going too. If profits are high while unemployment is also high, then it can't be that employers are far less socially responsible than they used to be. They were never that charitable about hiring workers to begin with. It must just be that they don't really need the workers.

wavesounds• 12 years ago

Isn't this really a problem of corporate/investment taxes so low (and full of loopholes) and taxes on everyone else so high?

For the average person once you add up federal income tax, state income tax, social security, medicare, medical, sales tax, gas tax and all the other government fees we end up paying its like 50% of your income going to the government.

We could essentially double most of the countries pay overnight which would have a stimulating effect on the economy as a whole creating more consumers for more products and thus more jobs and more returns on investments.

gmac• 12 years ago

By eliminating all personal taxes? Yeah, easy win ... Unless you like crimes to be punished, fires to be put out, kids to be educated, people not to be dying of poverty, and oh, a couple of other things.

ahomescu12• 12 years ago

A lot of those are currently funded (in the US) from local taxes: property and sales tax (at least that's how it is where I live, in a California county). School, police and fire departments are locally-funded. Getting rid of income taxes would not impact these. (EDIT: the GP was proposing abolition of all personal taxes, but the one that comes up the most in discussions is the personal income tax; we could just eliminate that one).

ozgung• 12 years ago

This reminds me of the Marx's theory of Surplus Value, which implies that "profit" equals the "stolen" labor.

http://en.wikipedia.org/wiki/Surplus_value

eli_gottlieb2• 12 years ago

This resembles Marx's theory of Surplus Value. This is evidence for Marx's theory of Surplus Value.

marcosdumay2• 12 years ago

I still doubt the theory, but yes, it's valid evidence.

Just don't jump onver a conclusion too fast, because it's still evidence for substitution of production factors (that leads to competition between them), an idea almost completely opost to the labor theory of value. (Did I already tell you that I hate economics?)

vidarh2• 12 years ago

It is also explicitly another prediction Marx made about capitalism: That the most successful (read: surviving) companies eventually by necessity will start to squeeze wages as the barriers to further expansion increases (that is, the population and disposable income does not grow fast enough to provide sufficient increases in profit) - those who don't will be unable to compete with those who do.

Marx believed that the end-stage of capitalism would be when increasingly profit comes by driving wages back down instead of expanding the overall market, and that the result will be a reversal of the gains made by the working classes at the same time as increased production, resulting in increased poverty and overproduction as the working classes can eventually afford fewer products.

limejuice• 12 years ago

"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."

I think there are other factors.

1. US effective corporate tax rate has been declining as corporations have found ways to keep profits in offshore tax havens. This is a huge contributor.

See for example this article about AAPL whose effective tax rate is 14% which is much lower than the US nominal corporate tax rate of 35%.

http://www.bloomberg.com/news/2013-05-23/apple-tax-rate-igno...

2. Outsourcing to lower cost centers. This is also contributing to lower US wages; If a company can move the work to India, Brazil, China, etc. at a much cheaper cost, they will do that. This has been going on for decades, but advancements in telecommunications and internet has made outsourcing to far away locations more efficient and cost effective over the past 10-15 years.

3. Federal reserve keeping short term rates at 0% and manipulating other fixed income rates with the QE program, e.g. buying $100BLN worth of MBS and US treasuries every month. This had the effect of creating record-low interest rates for corporate and junk bonds. This lowers interest costs for companies and also increases business demand because more companies are able to borrow $$ than otherwise.

Some of the revenues and profits are increased just because corporate and public debt has increased abnormally.

tsotha3• 12 years ago

It's almost like importing a million legal immigrants and another million illegals every year has some downward effect on wages.

woah• 12 years ago

dey took our JEEERBS

tsotha3• 12 years ago

Go back to reddit.

ergoproxy6• 12 years ago

Quite simply, "productivity" is the sum of all real goods and services produced in the economy, while "wages" are simply the share of that produce brought home by the workers who produce it. The difference is profit. If productivity increases (as it has since the 1950s) and wages flatline (as they have since the 1970s), then the result must be rising profits. You can see this graphed in the brief "The wedges between productivity and median compensation growth" at http://www.epi.org/publication/ib330-productivity-vs-compens...

The question left unanswered in this article is why are wages in the US falling relative to productivity?

Since wages are the "price" of labor, and prices are set by supply-and-demand, falling wages imply either (1) an increasing labor supply or (2) a shrinking demand for labor (or both). So here are some specific reasons for stagnating US wages:

INCREASING LABOR SUPPLY - Slave labor, prison labor and child labor in countries like China. - Immigration from Latin America after NAFTA. - Liberated women entering the paid US labor force starting in the 70s.

DECREASING DEMAND FOR LABOR - New labor-saving technology, computers and robots that work faster, better and cheaper than humans. - Financialization: Investors can make more money from asset bubbles in housing, bonds, and dollars than they can from labor. -- ZIRP: With real interest rates heading to zero (or less), why should I continue to pay high interest on the money I borrowed a decade ago to build this US factory? Liquidate the factory, fire the workers, and relocate somewhere cheaper; or better: simply use the money to buy bonds and bet on falling interest rates. -- High housing prices: An employer needs to pay his workers subsistence wages, which means enough to buy a place to live, but with housing prices so high, this is impossible. Better to bet on the housing bubble than buy labor.

praptak• 12 years ago

Financialization: Investors can make more money from asset bubbles in housing, bonds, and dollars than they can from labor

There is some dark humor in the fact that it was the laboring folks whose pockets got drained by the housing bubble.

eru15• 12 years ago

INCREASING LABOR SUPPLY - Slave labor, prison labor and child labor in countries like China.

China had enough farmers moving into industry. Slave, prison and child labour may happen, but they are not particularly efficient and so don't make much of a dent in overall figures.

ergoproxy6• 12 years ago

For there to be equilibrium between supply and demand, several conditions must be met: perfect competition; perfect information; no economies of scale; no barriers to entry; no negative externalities; and no cheating.

Things like slave labor, prison labor and child labor are cheating. There's a lot of evidence China cheats the free market in these ways, and that's why I singled them out.

For example, "Apple has cut ties with one Chinese supplier that was found to have 74 workers under the age of 16." Source: globalpost.com (January 26, 2013) http://www.globalpost.com/dispatch/news/business/technology/...

Foxconn's factories in China installed suicide nets to catch workers jumping off the roof, which sure makes them look like forced labor camps. Picture here: http://news.cnet.com/2300-13579_3-10013733-14.html

yummyfajitas10• 12 years ago

I've graphed employee compensation and business profits on the same graph. Not seeing much correlation. Compensation mostly goes up. Business profits go up and down.

http://research.stlouisfed.org/fredgraph.png?g=rnM

I don't get it.

digitalengineer3• 12 years ago

Could it be pensions? After bankruptcy they can dump those expensive plans. (Like the city of Detroid and other states already did).

yummyfajitas10• 12 years ago

Nowadays you are only allowed to underfund government pensions (USPS excluded). Private sector pensions must be fully funded - i.e., if an employee has vested a pension with an actuarial value of $20k, the company must put $20k into a separate fund to pay for it.

(Some old pension plans are grandfathered to escape this, however.)

mattmanser2• 12 years ago

Look at the graph again, work growth seem to be approaching a maximum, with it slowing heavily in the last few decades while corporate profits seem to be following an exponential type growth with a temporary drop in the recent recession.

Intentionally or not, your graph is incredibly manipulative, including not choosing a base-line zero on the y-axis for corporate profits which hides that exponential type growth.

yummyfajitas10• 12 years ago

What I see is corporate profits are volatile, whereas comp increases steadily. And they don't seem to move together - i.e., a spike in corporate profits doesn't correspond to a drop in wages, or vice versa.

The axes are just whatever the federal reserve site does by default. The baseline is also irrelevant to the main point - compensation and corporate profits don't seem to move together.

(This fact should not be surprising at all, since sticky nominal wages are the cornerstone of most modern macroeconomic theories.)

eloisant• 12 years ago

You should use nominal dollars. That would probably make it clearer that from around 2001 the profit started to skyrocket while compensation started to plateau. I wouldn't be surprised if the compensation in real dollar when down.

Also, your graph doesn't show people who lost their job. If you layoff people who make the less in the company, the average compensation goes up even if nobody got a wage increase.

jokoon• 12 years ago

If this goes on too long, it might get bad. Manhattan will become a closed island where you won't be able to go onto until you live there because there will be too many protesting attempts. Easy to do with all those bridges.

People will start to assault people in suits. You will either swallow the blue pill and join a select club of salesmen, or die with your dreams.

I don't like to have those ideas and I hope they're stupid, but right now I would not be surprised to see terrorist groups that try to attack individuals who have some sort of a public, very long shadow, like Dick Cheney or the Koch Brothers. Any important kind of people who blatlanty shows their disrespect for poor people in general and their unhidden narrow minded view of the world.

Right now I'm not suprised to see so many conspiration theories, people are pissed and they want to burn witches, and I'm sure you can find some. It's bad, but I don't see any political future that is trying to make things a little better. At least during the cold war, the US had to be better than the communists and prove how markets are liberating. Now it just seems communism had good ideas and that capitalism is going to slowly fail.

ahomescu12• 12 years ago

What I feel is missing from their analysis is a breakdown of corporate profits per employee, along with some hard figures, e.g., how much profit these companies make per capita. It might or might not be enough to make a dent (for example, $100 million split among 100k employees only comes to around $1000/year for each of them).

sgarg262• 12 years ago

If wages are low, does that somewhat signify that many of the corporation's business functions are staffed with skilled workforce that is in oversupply?

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

Related Stories