Corporate profit climbs 87% while worker pay rises 4.5%

By Art Pine
Bloomberg News

May 11, 2004

U.S. corporate profits surged 87 percent from the third quarter of 2001 to the end of 2003, according to Commerce Department figures. Wages and salaries grew 4.5 percent.

The increase in workers' pay was the smallest for the first nine quarters of any recovery since World War II, said Barry Bosworth, who directed the White House Council on Wage and Price Stability during Jimmy Carter's administration. After inflation, real wage gains were 1.1 percent, Bosworth said.

"What you have here is a dual economy," said Bosworth, now an economist at the Brookings Institution, a research group in Washington. "You can talk all you want about the benefits from the rapidly expanding economy, but the only people who have gained have been the stockholders."

Sluggish wage growth may undermine the economy, especially as the stimulus from this year's federal tax refunds fades, interest rates rise and higher energy costs begin to bite, said Jared Bernstein, an economist at the Economic Policy Institute, a Washington group that researches labor issues.

"If we don't start seeing a greater increase in labor income, the recovery could easily stumble," Bernstein said.

Wage gains have been curbed by a loss of 1.5 million jobs since January 2001 and productivity gains of more than 4 percent in each of the past two years, the first time that's happened since the government began tracking that figure in 1947.

Because of the rise in worker output per hour, companies have been able to meet rising demand without having to lure new employees or retain existing ones by boosting wages.

"Ultimately, what matters is new job growth to fuel spending in the economy," said Rajeev Dhawan, director of Georgia State University's Economic Forecasting Center in Atlanta. "Employers are not increasing salaries because the labor market isn't tight."

Federal Reserve Chairman Alan Greenspan, asked during an appearance before a congressional committee last month if the U.S. has been in a wage recession, responded, "We had been in a period where real compensation and, especially, real wages have been going up very moderately, if at all."

Greenspan said he thought "that's about to change" because "virtually all of the gains in productivity have ended up in rising profit margins and hence in a decline in the proportion of that national income going to compensation of employees."

Lowest since '47

Labor's share of the income of non-farm businesses, the broadest measure of what workers gain from the economy, fell to 60.2 percent in the fourth quarter of 2003, the lowest level since 1947 and down from 64.6 percent in the third quarter of 2001, the Bureau of Labor Statistics said.

"We have this huge slack in the labor market, and tremendous productivity gains, and the income from the recovery has been locked up in the corporate sector," said David Rosenberg, chief U.S. economist at Merrill Lynch & Co. in New York. "We've had a redistribution of income to the corporate sector."

The job losses since 2001 and competition from overseas, which puts pressure on U.S. companies to cut labor costs, have given workers little leverage to win big pay raises, Bosworth said. Even the economy's 7.8 percent expansion in the 27 months to the end of 2003 hasn't helped much, he said.

Reports last week suggest that wage growth may accelerate. On Friday, the Labor Department said the U.S. created 288,000 jobs in April, after a revised gain of 337,000 in March. The back-to-back increase was the largest since March and April of 2000.

On Thursday, the department said productivity grew at a 3.5 percent annual rate during the first quarter, down from the more than 6 percent pace in the second half of 2003.

"Wages will start to rise a little faster, and the profit margins that are quite large will probably shrink a little bit," said Douglas Lee, president of Economics from Washington, a Potomac, Md.-based consulting firm. "The workers will begin to see more of the benefits of the strong productivity growth."

The Commerce Department said on April 30 that wages and salaries rose at an annual rate of 4.8 percent in the first quarter, the fastest pace since the third quarter of 2000.

Inflation rising

At the same time, inflation accelerated in the first three months of the year at the fastest pace since mid-2001. The gross domestic product price deflator, used to adjust economic-output figures for price changes, increased at a 2.5 percent annual rate, up from 1.5 percent in the fourth quarter. Faster inflation would erode the gain in wages.

Executive pay hasn't been as restrained as that of workers. Salaries of chief executives rose 8.7 percent on average in 2003 at 70 companies studied by Bloomberg, while U.S. employees' average pay inched up 1.5 percent.

CEO pay, which in 1980 was 40 times larger than that of the average worker, grew to be 400 times to 550 times bigger by 2000, William McDonough, chairman of the Public Company Accounting Oversight Board, said in an April speech at the Committee for Economic Development in Washington.

"I knew a lot of CEOs in 1980, and I can assure you the CEOs of 2000 were not 10 times better," said McDonough, who called the rise "grotesquely immoral."

Economists say wages are unlikely to post significant gains anytime soon, even though last week's jobs report and other recent economic indicators have been favorable.

The Labor Department has reported gains in total compensation costsfor workers, much of which reflects a 14 percent jump in 2003 in what companies pay for medical insurance and other benefits, the Henry J. Kaiser Family Foundation said in a survey released in March.

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