Corporate profits

The Myth of Corporate Profits

Where’s the proof of the r > g crowd’s favorite talking point?

HAre rising corporate profits coming at the expense of the American worker? Venture capitalist and billionaire Nick Hanauer seems to think so. As he puts it, “Corporate profits are at their highest in 50 years while unemployment is also at their highest in 50 years. If it were true that the rich were the job creators, we would be drowning in jobs today. Next comes another argument about how corporate profits have actually suppressed the wages of the average worker. ThinkProgress title his piece, “Corporate profits hit record high while worker wages hit record high.”

Let’s look first at corporate profits and unemployment. This is a bit of an odd argument, as it seems to imply that our recent economic crisis was the result of soaring corporate profits, not the bursting of the housing bubble. Either way, Hanauer likely blames excess corporate profits for the decline in aggregate demand, as he often argues that the wealthy aren’t spending enough of their income to keep the economy in balance. It does not matter that consumer spending per capita has proportionally increased with the income share of the top 1%.

The chart above measures the unemployment rate relative to after-tax corporate profits before dividends are paid as a percentage of gross domestic income (which equals GDP, but is calculated differently). There does not seem to be an inverse correlation between the two. In fact, for many periods there seemed to be a decline in corporate profits as unemployment rose.

There is also considerable evidence that corporate tax cuts boost employment. From the United States the corporate tax rate is higher than any other country (and yes, the effective rate is too), US companies have a strong incentive to do business abroad and keep their profits there. Even if all US corporations were required to do business only in the United States, the high corporate tax rate still mitigates the amount of investment that would otherwise have taken place without the tax.

Corporate profits and unemployment don’t show much correlation, except in recent years.

When it comes to corporate profits and wages, ThinkProgress the article uses this chart below to make its point. The red line measures corporate profits (without mentioning whether they are before or after tax) and the blue line measures private sector wages, both as a percentage of GDP.

Note that what is being compared is the profits of the companies to the wages of all workers, not to the employees of the companies. Excess corporate profits would be at the expense of the employees of those corporations, not the entire workforce. Similarly, social benefits, which represent 19% of the average income of a worker, are not measured by this graph. Business profits and workers’ compensation should be measured as a percentage of business income, not the economy as a whole.

More importantly, the y axes on the right and left sides of the chart are not equal. They were cleverly manipulated to achieve the result ThinkProgress wanted to. When we measure company employee compensation against company pre-tax profits and do not manipulate the y-axis, we get this result:

Historically, corporate profits have averaged 12% of corporate revenue, while employee compensation has averaged 63%. Of course, since these are pre-tax corporate profits, they are actually a little less than they appear. Just as lowering corporate taxes leads to higher employment, a series of studies that I have cataloged in a recent column at Rare detail how worker wages would be higher without corporate income tax, since corporations absorb some of the tax in the form of lower worker wages.

— Matt Palumbo is the author of The conscience of a young curator and In defense of classical liberalism.