Corporate Profits and Employment Growth: Why They Don’t Have to Come Together

One of the most pressing economic concerns in the post-recession era is how to boost job growth. Despite a recent string of positive job monthly job reports, unemployment remains a primary concern. From an output perspective, we have already returned to the level of real GDP we were at before the crisis. As the graph below shows, however, total employment has lagged behind.Screen Shot 2014-04-07 at 6.13.02 PM

An opinion piece in today’s WSJ by Bill Galston explores this issue of slow job recovery. Galston points out that fixating on one number – the unemployment rate – does not begin to tell the full story:

“During the recession, 60% of job losses occurred in middle-wage occupations paying between $13.83 and $21.13 per hour, while 21% of losses involved jobs paying less than $13.83 hourly. During the recovery, however, only 22% of new jobs paid middle wages while fully 58% were at the lower-wage end of the scale. In other words, millions of re-employed workers have experienced downward mobility.”

This downward mobility trend is the reason behind the great concern over inequality that has been topical as of late. More Americans are finding that their only opportunities are at the bottom of the income scale, and opportunities in the middle are fleeting. One of the culprits of this trend is an increase in automation and computerization of tasks once performed by wage earning humans. Low interest rates and high costs of hiring employees (benefits, healthcare, etc) give firms a strong incentive to turn to technology to boost output instead of hiring additional labor.

The other concern that Galston brings up is that corporate profits are soaring at the same time that wages and employment have remained stagnant. As he describes:

“Corporate profits after taxes in the fourth quarter of 2013 rose to an annual level of $1.9 trillion—11.1% of GDP, a postwar high. Meanwhile, total compensation—wages and benefits such as health insurance and pensions—fell to their lowest share of GDP in at least 50 years. From December 2007 through the third quarter of 2013, the compensation share of national GDP declined to 61% from 64%.”

Galston’s point goes back to a point Paul Krugman has brought up recently about capital income earners (he calls them the oligopolists) versus the wage income earnings. The capital income earners are receiving a higher share of national income than at any point in recent history. However, just because corporate profits are soaring, does not necessarily mean that wages and employment gains have to follow. An interesting write up in Zero Hedge, describes the problem – in order for companies to invest more and hire more, aggregate demand has to rise. Just because companies are making money, does not necessarily mean that the demand is sufficient to warrant increased investment and hiring. Companies may be boosting profits by cutting costs, which does not warrant expanding their business. Until consumers and businesses increase their demand for goods and services, thereby boosting aggregate demand, corporations will not boost hiring enough to offset the losses suffered during the recession.