A wage crisis, not just a jobs crisis

Michael Cembalest, chief investment officer for J.P. Morgan Chase, says corporate profits are high largely because the wages of American workers are at a 50-year low relative to the size of the U.S. economy and to corporate sales.  From his point of view, corporate profits are what matters, but he thinks they rest on a shaky economy.  Hence the title of his report: Twilight of the Gods.

Here’s a summary of his report by Harold Meyerson in The Washington Post.

Michael Cembalest, the chief investment officer of J.P. Morgan Chase, … asserted in the July 11 edition of Eye on the Market, the bank’s regular report to its private banking clients, that “U.S. labor compensation is now at a 50-year low relative to both company sales and US GDP.”

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The primary subject of Cembalest’s report isn’t wages. It’s profits — specifically, the fact that profit margins (the share of a company’s revenue that goes to profits) of the Standard & Poor’s 500 companies are at their highest levels since the mid-1960s, despite the burdens of health-care costs, environmental compliance and other regulations that are presumably weighing down these large companies.

“There are a lot of moving parts in the margin equation,” Cembalest writes, but “reductions in wages and benefits explain the majority of the net improvement in margins.”  This decline in wages and benefits, Cembalest calculates, is responsible for about 75 percent of the increase in our major corporations’ profit margins.

Or, to state this more simply, profits are up because wages are down. That’s not the only reason profits are up — innovation and offshoring factor in as well — but among the reasons, it’s a doozy.

What’s behind this drop in the share of revenue going to wages?  After all, the workforce of the S&P 500 companies contains many more college graduates today than it did in earlier decades.  Cembalest cites high unemployment and the addition of 2 billion Asians to the world’s labor force since 1980 as the reasons for workers’ declining ability to secure their former share of company revenue. 

He’s right, of course, but his list is hardly exhaustive.  Surely the fact that the great majority of American employers no longer have to sit down and hammer out collective bargaining contracts with their workers has contributed to the increase in profits at wages’ expense.  And many of those employers want to keep it that way.

via The Washington Post.  [Hat tip to zunguzungu for the link]

Click on Twilight of the Gods PDF for the complete Michael Cembalest report.

The disconnects between wages and profits, and wages and productivity, are illustrated by the following charts.

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Click on Illusion of Prosperity: Corporate Profits Revisited Yet Again for the source and context of the above two charts.

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Click on Financial Armageddon: Not Hard to See for the source and context of the above chart.

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Click on It’s a recovery only if you’re rich for the source and context of the above chart.

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Click on The Real Story Behind Those “Record” Corporate Profits for the source and context of the above chart.

Varying explanations are given for why employers are holding down wages, but I think the simplest is:  Because they can.

It is to the interest of an employer—any employer, whether corporate, governmental or so-called “non-profit”—to get as much work out of the employee for as little pay as possible.  There are only two possible checks on the power of the employer to drive wages down; one is a full employment economy and the other is a strong labor union movement.  Neither exists in the United States today.

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3 Responses to “A wage crisis, not just a jobs crisis”

  1. Options Trading Tutorial Says:

    There is a third check on corporate overbearing-ness on labor: recession when demand suddenly dries up because not enough consumers have money to spend.


    • philebersole Says:

      For a couple of generations, the U.S. economy had strong consumer demand based on mass prosperity. This played out in the 1970s when growth in wages started lagging behind the growth of the overall economy.

      For the past generation, the U.S. economy had strong consumer demand based on mass indebtedness. This is played out now because the American people are maxxed out on debt.

      Some market and financial analysts see a future economy based on meeting the needs of desires of the wealthy elite rather than the mass public. Here are a couple of links to posts about this.



      Such an economy doesn’t need a prosperous middle class. All it needs is working poor, plus sufficient unemployed to keep the working poor motivated.

      Our country would be better off if your kind of thinking were the prevailing wisdom. I fear it is not.


  2. Anne tanner Says:

    Another possible factor: Gigantic C.E.O. bonuses tied to profits.


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