Higher Wages Won’t Break the Bottom Line

August 24, 2021

For Immediate Release

_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

2001-2021

‍

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

2018-2021

‍

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.

Higher Wages Won’t Break the Bottom Line

Philip Cornell

August 24, 2021

For Immediate Release

_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.

Historically, systemic barriers have disproportionately hampered Black farmers’ ability to retain land ownership.

Despite this tragic history, there is still time and economic incentive to set some of the inequities right.

In 2021, working mothers with children under 18 earned just 61.7 cents for every dollar a father made. Much wider than the overall gender wage gap, this difference highlights both the motherhood penalty and the fatherhood premium.

Female-dominated, low-paying, part-time occupations are overrepresented among informal workers who also have a formal job.

We need to create an economic environment where companies can hire these workers as employees and pay them a living wage. There are steps policymakers can take to change the gig economy dynamic.

Dependency on tips over base pay is growing because of actions taken by gig companies to institute tipping.

Even for those lucky enough to be making what amounts in many states to the poverty wage of $15 per hour, many will get nothing but a week’s notice before being out on the street.

One study shows that consistent involvement in extracurricular activities increased a child’s likelihood of attending college by a whopping 400% compared to not being involved at all.

Studies have found that both men and women are paid less if they work in “nurturant” occupations.

Since 2015, the correlation between LISEP’s functional employment to population ratio and the inflation rate was more than four times as strong as the BLS’s employment to population ratio, which is depicted in the graph below.

The employment to population ratio settles the discrepancy between what we see around us and what the data says.

The NBER paper defines employment using the traditional BLS U-3 rate. However, the often-used U-3 number fails to capture the quality of jobs.

Among states with stricter COVID-19 policies, reducing unemployment benefits had little to no effect. The average effect of increased employment seems to have occurred only in those states with looser COVID protocols.

Corporate Profits versus Workers’ Earnings: Manufacturing

2001-2021

‍

Corporate Profits versus Workers’ Earnings: Durable Goods

2018-2021

‍

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.

Press Contact:

Philip Cornell

Additional Resources:

No items found.

About LISEP

The Ludwig Institute for Shared Economic Prosperity (LISEP) was created in 2019 by Gene Ludwig and his wife, Dr. Carol Ludwig. The mission of LISEP is to improve the economic well-being of middle- and lower-income Americans through research and education. LISEP’s original economic research includes new indicators for unemployment, earnings, and cost of living. These metrics aim to provide policymakers and the public with a more transparent view of the economic situation of all Americans, particularly low- and middle-income households, compared with misleading headline statistics.