Corporate profits

Corporate profits hit a record as wages are slashed

Corporate profits hit their highest percentage of GDP on record in the third quarter.

Just four years after the worst economic shock since the Great Depression, US corporate profits are stronger than ever.

Third-quarter corporate profits were $1.75 trillion, up 18.6% from a year ago, according to last week’s gross domestic product report. This boosted after-tax profits to their largest percentage of GDP in history.

But the record profits come at the same time as workers’ wages have fallen to their lowest share of GDP.

“That’s how it works,” said Robert Brusca, an economist at FAO Research in New York, who said there’s a natural tension between profits and labor costs. “If one gets bigger, the other gets smaller.”

Profits accounted for 11.1% of the US economy last quarter, compared with an average of 8% during the previous economic expansion. They fell to 4.6% of GDP during the recession.

“Corporate earnings have been hit hard by the recession, like everything else, but they’ve rebounded massively,” said Heidi Shierholz, an economist at the Economic Policy Institute, a liberal think tank. “Wages are determined by what’s happening in the job market and we haven’t seen a big rebound there.”

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A separate government reading shows total wages have now fallen to a record low of 43.5% of GDP. Until 1975, wages almost always represented at least half of GDP and reached as high as 49% at the beginning of 2001.

But overall economic growth has far exceeded growth in hourly wages and job creation since the end of the Great Recession, so workers’ share of the economic pie has steadily declined. This is despite modest hiring by employers pushing total wages to a record $6.88 trillion in the third quarter.

Two jobs, hard times

“It’s not because bad capitalists keep all the money,” Brusca said. He said companies with high labor costs have either gone bankrupt or relocated.

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Shierholz said she doesn’t think it’s a bad thing that corporate profits have increased. But the downward pressure on wages is hurting consumers’ ability to spend, and therefore the need for businesses to hire more staff.

“[Businesses] have the ability to employ more people, but it doesn’t make sense to hire more people until you have demand for your business,” she said.

CNN Money (New York) First published December 3, 2012: 5:28 a.m. ET