Corporate profits

It’s time for corporate profits to return to the ’90s so companies can make up for decades of worker underpayment, says Morgan Stanley

  • Workers’ share of corporate income has declined for two decades to the benefit of owners and investors.
  • The labor shortage bridges that gap and companies will have to shift money from profits to payment, the bank said.

Morgan stanley says it’s time for companies to return their profit margins to what they were about thirty years ago, all in the name of worker power.

The investment firm’s research division this week released a report highlighting the gap between company benefit and workers’ wages. The gap has taken on new significance in the age of the pandemic economy in the midst of the extraordinary labor shortage. Companies struggled to rehire, and workers continued to quit at record rates in September. Trends have fueled a new focus on decades of skinny wage growth – and a new examination of the profit gains of corporate blockbusters.

To compensate for underpaid workers, Morgan Stanley said companies should cut their own profits over the next five years to retroactively close the gap. After all, the other option to compensate for the higher wages demanded by workers is to raise prices. These profits, the researchers write, should resemble their level in the 1990s.

“Real wages need to rise a further 7.3% above productivity growth to close the gap,” the report said. “If this catch-up takes place over the next 5 years, unit profits will drop 33% from current levels… This would bring the corporate profit share back to its 90s average on a pre-tax basis, and leave it slightly above an after-tax basis. ”

The team, led by U.S. Chief Economist Ellen Zentner, argues that narrowing the gap between profits and workers’ compensation can act as a “buffer” against higher wages that push up wages. price. In turn, trading profits for higher wages would help minimize inflation while meeting the Federal Reserve’s “maximum employment” target, the team said.

Labor shortage is the new normal in the United States

The chasm between pay and productivity is relatively new, Morgan Stanley added. There was a “close” relationship between the two in almost all industries from 1950 to 2000. As business incomes increased, workers’ wages generally increased at the same rate.

That link was severed in the 2000s, according to the bank. Workers’ wages began to slow profit growth. Institutions that have empowered workers, such as unions and high minimum wages, have weakened. Owners and shareholders of the companies, meanwhile, have benefited from soaring profits and soaring stock values, Morgan Stanley said.

The gap between corporate profits and workers’ compensation over the past two decades is unprecedented and threatens the structure of the economy, the bank said.

“This discrepancy between real pay and real productivity has never been seen before in recorded data,” they said, adding that falling workers’ wages “mark a break in the fundamental structure of the economy.” .

Closing the gap wouldn’t be a smooth transition, the bank added. Rising wages in today’s tight labor market could put downward pressure on stocks in the near future. Still, strong corporate earnings and “plentiful cash flow” would hedge against a sell-off, the team said.

The return to the profit-wage structure of the 1990s is less radical than it appears, economists added. Wage growth rebounded during the pandemic as companies scrambled to attract workers. The unusually tight labor market is already reversing the trend of the past two decades and politics is “[tipping] the balance in favor of labor, ”the team said.

It turns out that the labor shortage has already sparked this economic time travel.