In the second year of a pandemic that began with the loss of 20 million jobs, American workers are doing surprisingly well. It’s just that big American companies are doing even better.
Over the past two quarters, U.S. companies outside of the financial sector have posted their highest margins since 1950 – one of the reasons stock markets continue to hit all-time highs.
During earnings calls, many executives complained about the pressure from rising costs of labor and materials. But overall, profits were up 37% from a year earlier, according to data released last week by the Commerce Department.
Companies also paid more money to their employees, with total compensation up 12% in the last quarter from a year earlier. This is partly because millions of Americans have returned to work, but also because many got a raise when they did. Hourly incomes have generally kept pace with the rapidly rising cost of living, and in some low-wage industries such as leisure and hospitality, they have far exceeded it.
Seen this way, it seems like everyone is doing it, and too bad for the great zero-sum struggle between labor and capital. At Deere & Co., for example – the tractor manufacturer that suffered the most high-profile strike in the pandemic – workers have fought for a 10% raise, but the company is still expected to earn even more next year. that record profit he posted on Wednesday.
But this rosy scenario does not apply everywhere, and there is no guarantee that it will last.
Most American workers, unlike those at Deere, are not unionized, which means they likely have less bargaining power. Superstar tech companies may be making money, but many small businesses – restaurants, for example – struggle to stay afloat as their costs rise. Income is outpacing inflation for now, but this race is not over yet.
In a US economy heading into a post-pandemic era, the share of growth that workers and businesses can squeeze for themselves will be a key part of the answers to many big questions.
Among them: Can President Joe Biden keep his low majorities in Congress next year and get his spending plans through? Where is the Federal Reserve’s policy heading? And, related to the two, how long will the pandemic price spike last?
Consumer prices in the United States rose 6.2% in the 12 months to October, the highest since 1990. New data on corporate profits suggests that businesses can comfortably pass on all of their costs higher, which means there could be more inflationary pressure ahead.
“If profits are high, there is going to be a continued demand for workers, and in a tight labor market, there is going to be continued upward pressure on wages and compensation,” said Robert C. King, research director at the Jerome Levy Forecasting Center in Mont Kisco, New York.
What all of this shows, King says, is a strong economy, not an economy that is about to tip into recession because of soaring prices. As to how this growth is distributed, King acknowledges that there will be local struggles between labor and capital, but believes that, on the whole, the idea is “somewhat of an illusion” – because when companies distribute money to workers, they usually distribute it correctly. back.
“Individual businesses might not see this,” he says. “But businesses as a whole can safely say that when they spend more money on workers, it will be a situation where they get more income.”
The main reason businesses and workers are earning more than in February 2020, even though the economy has gone through a record recession since then, is US tax policy in the COVID era. Strong support to households meant that their incomes actually increased, an unprecedented result in a crisis, so they also bought more products from businesses.
Unfortunately for Biden, many opponents – including centrist Democrats in Congress who he needs votes to pass legislation – point to pandemic-related spending as the main driver of rising inflation. This is one of the reasons why clean energy and child care bills, which should be his administration’s historic accomplishments, are being reduced.
The president has promised higher salaries. He is under pressure to keep high prices under control. He didn’t say much about high profits, the third leg of that stool, but Biden called companies a politically sensitive industry: gasoline.
Wholesale prices have actually fallen in recent weeks, but the price at the pump “hasn’t budged a dime,” the president said on November 23. If that margin had been up to historical standards, “Americans would be paying at least 25 cents less per gallon right now as I speak. Instead, companies are pocketing the difference in profit. This is unacceptable.
Biden ordered a Federal Trade Commission investigation. He was also urged to take action against “price hikes” in other industries. Still, a president has limited power over pricing, and polls suggest high inflation is one of the big threats to Biden’s Democrats in the midterm elections next November.
The institution that is supposed to have the tools to fight inflation is the Fed, and much of the job outlook will depend on what it decides to do next.
With their benchmark interest rate close to zero, US central bankers have downplayed pandemic price spikes as “transient.” But they are less and less comfortable with this point of view and are turning to a stricter policy – which puts downward pressure on inflation by restraining job and wage growth.
This could have implications for the evolution of the income balance between labor and capital.
“It’s a prism through which I will listen to so many trade reports about the effects on wages and price increases,” Chicago Fed Chairman Charles Evans, one of the Chicago Fed chairman, Charles Evans, told reporters Nov. 18. most conciliatory decision-makers in the central bank.
The Fed has argued for low rates in part on the grounds that they help create a vibrant job market with better wages. After falling to its lowest level in decades after the 2008 crisis, the labor share of national income has started to rise again in recent years amid historically low borrowing costs.
However, when wages are rising faster than productivity, Fed officials tend to worry more about inflation. The problem with this view, Evans said, is that it can end up “locking in” a lower share of income for workers than they might otherwise reach, thus making monetary policy anti-worker.
The disappearance of commitments from the Fed and government spending politicians during the COVID era may be a longer-term risk for workers. In the short term, there is probably already enough fuel in the economy to support the demand that creates jobs and raises wages. Households saved money. Companies have profits that they can invest.
Much of this is due to macroeconomic policy, but the efforts of the workers themselves also make a big difference. At Deere, they did – and the company’s high profits probably played a key role.
Employees went on strike in October, the busiest time of the year for the company’s customers on American farms. They refused a deal that management and union leaders had accepted. Then they refused a second, much better one. The company was showing signs of panic, asking software engineers to replace factory chains.
“Workers can be tired of seeing the fruits of their labor go to companies with record incomes,” said Chris Rhomberg, professor of sociology at Fordham University at this point. “Deere workers clearly believed the company could afford more. “
A few days later, they were right.
Bloomberg’s Josh Eidelson contributed to this report.