The Fight Between Wages and Profits: When Will It End?

Wages and salaries have been growing slower than the overall economy for decades. After-tax profits have been growing much faster than the economy. 

It's time for an update of a chart we've posted before:

Source: Federal Reserve, Bureau of Labor Statistics, Bureau of Economic Analysis.

The drift between these two adds up to an enormous sum. Peter Orszag wrote last year: "If labor compensation hadn't fallen so much as a share of national income, American workers would be enjoying about $750 billion more in take-home pay."

Now, this chart isn't as simple as it looks. Part of the reason wages take up a smaller share of the economy is because benefits like health insurance take up a larger share of workers' total compensation. And part of the reason corporate profits have grown as a share of the economy is because of a shift from industrial-commodity corporations to technology firms that naturally have higher margins.

But there is no doubt that part of the swing between wages and profits is explained by one growing at the expense of the other. This is natural -- we've been through two other cycles since 1900 -- but I wonder how long the current cycle can last. Take this recent story about Wal-Mart (NYSE: WMT  ) :

Walmart, the nation's largest retailer and grocer, has cut so many employees that it no longer has enough workers to stock its shelves properly, according to some employees and industry analysts. Internal notes from a March meeting of top Walmart managers show the company grappling with low customer confidence in its produce and poor quality. "Lose Trust," reads one note, "Don't have items they are looking for -- can't find it."

There comes a point where it is in capital's best interest to increase labor's share of output. If Wal-Mart is any indication, we're probably pretty close to that point. 


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 08, 2013, at 4:02 PM, luckyagain wrote:

    "There comes a point where it is in capital's best interest to increase labor's share of output. If Wal-Mart is any indication, we're probably pretty close to that point."

    It will never happen. Companies will never give more money to their employees without some outside pressure. The major one for years was the threat of unions. With the almost total destruction of unions in this country, there is nothing to pressure companies into raising the pay of their employees. CEOs getting bonus for cutting cost not for raising it.

  • Report this Comment On April 09, 2013, at 10:44 AM, Hwed wrote:

    Companies invest their money in areas where profit comes from. The increase in profits hasn't come from uneducated peons working a cash register or doing data entry.

    That increase has come from innovators in technology and business, so that's where the money goes.

    If you start letting peons siphon profits, get ready for peon layoffs.

  • Report this Comment On April 17, 2013, at 6:43 AM, The1MAGE wrote:

    Sorry, but this is such a bad article. Really nothing but fanning the flame of ignorance and political dissent.

    It was mentioned that benefits were not taken into account here, but what if they were? What would the difference be?

    Also, have we taken into account how many more people are working for themselves, and owning companies then before? What about the much wider ownership of stocks then in the past?

    Then we must also take into account the fact that the average person is still better off then they were historically, if you look at the real facts, and not some of the bs statistics too often used. (7 different (official) ways inflation is calculated.)

    This chart is still too simplistic. Searching, if I found the right numbers, the GDP grew by more then 49 times. If pay is supposed to keep up, then the average annual income should be over $148K per year. (2010 numbers.) And we know the average income in 1950 will not equal $148K in inflation adjusted dollars.

    A quote I have heard before is that a 1/9 slice of a large pizza can be bigger then a 1/6 slice of a small.

Add your comment.

DocumentId: 2350888, ~/Articles/ArticleHandler.aspx, 7/30/2014 12:01:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement