Higher Wages Won’t Break the Bottom Line

By Philip Cornell

Over the last few months, we’ve seen a lot of news about low-wage workers demanding pay increases. Putting aside that the minimum wage hasn’t been raised in more than a decade, many economic pundits say that to cover increased wages, businesses will raise prices. If price increases are widespread, then the purchasing power of the worker doesn’t change. Workers will demand another wage increase, prices will rise again, and we will have fallen into what economists deem a “wage-price spiral.”

At the Ludwig Institute for Shared Economic Prosperity (LISEP), we have taken a close look at corporate profits versus employee wages over the last 20 years. Our analysis shows that wage increases need not spark inflation. Corporate profits and cash reserves mean that industry can and should pay their workers more. Here’s a closer look at what we’ve found.

The dramatic stock market increase of the last decade has also meant skyrocketing corporate profits; in fact, they increased by 110% over the same period that median earnings increased by only 9%.(1) One could assume that workers in booming industries are being commensurately compensated, while faltering industries’ workers are not. This would mean the wages of workers in less profitable sectors would be driven down and could explain why aggregate wages have stagnated. But an industry-by-industry analysis shows earnings and profits are vastly askew.

The Bureau of Economic Analysis (BEA)(2) reports that the retail industry’s inflation-adjusted corporate profits increased 182% since 2001 while inflation-adjusted wages increased 11%.(3) In manufacturing, profits have gone up 113% while wages only rose 13%. In food manufacturing, profits increased 87%, while wages saw 8% growth. In the durable goods sector, profits went up 319%, but wages only 14% (shown below). Wholesale trade profits grew 80% yet wages only increased 3%. The two noticeable exceptions to this trend are the petroleum and the information industries so it makes sense that neither industry’s workforce is making news for demanding wage increases.

Corporate Profits versus Workers’ Earnings: Manufacturing


Does the profit-to-wage story change if we look at the last three years? Hardly. From 2018 to now, retail profits are up 69%, while wages are up just 5%. Food manufacturing profits are up 20%, with wages up a mere 1%. Durable goods profits are up 33% and wages only 6%. Despite one bad quarter of 2020, profits have outpaced earnings in every other period. This is illustrated below.

Corporate Profits versus Workers’ Earnings: Durable Goods


Another trend we’re seeing is that not only are businesses seeing growing profits that are not reflected in worker pay, but businesses are also reducing their workforces.(4) In the last three years, retail has cut 3.8% of its workers, manufacturing 2.5%, and durable goods 3.1%. Food manufacturing, an outlier, has increased its workforce by 2%.    

Further, cash reserves have also reached an all-time high, with Fortune 500 companies stockpiling more than $2.2 trillion in cash at the end of 2020, a 20% increase from the previous year.

Ultimately, giving Americans a living wage should not have to prompt inflation. In fact, companies already have the cash on hand to raise earnings, and don’t need to raise prices to match wage increases. And beyond wage increases, businesses also have the power to expand flexible worker benefits, which can increase employee health and boost productivity.(5) The same employees who have worked hard to increase company profits deserve a slice of the rewards. The wage-price spiral threat, in today’s economy, is actually more about expected corporate greed.  

August 24, 2021