Why Are Corporate Profits High While Jobs and Wages Stagnate?

Economists tell us that the nation is in recovery; many Americans might disagree. Corporations have been doing relatively well, as profits have returned and GDP has begun steadily rising. Yet we haven't seen hiring bump up very much -- the national unemployment rate is 9%. We also aren't seeing wages rise much. Instead, much of the additional output is being produced by the current set of workers, which means that productivity is soaring. Why aren't corporations instead hiring more people or compensating workers them more fairly for their higher productivity?

This was one of many good questions I received while appearing on C-SPAN's Washington Journal on Saturday Morning (clip below). A caller from Philadelphia, PA wondered why he's working harder, but the corporate profits aren't being passed down to him. His experience is not at all uncommon. Productivity has risen, but wages have not. Companies also remain slow to hire, which would reduce the burden on overworked employees.

The Hiring Problem

I addressed the hiring side of the equation on-air. When a recession ends, there tends to be some lag to when firms and companies are comfortable hiring aggressively again. Even when they begin seeing additional demand, they need to make sure there's some permanence in the trend. After all, if they hire a bunch of workers, and demand falls again, then they will have excess inventory and higher labor costs than their lower profits can support.

So it's the uncertainty inherent in an early recovery that prevents hiring from ramping up quickly. Firms wonder if the seemingly optimistic data they're seeing is a real trend. And even if consumers are back, they want to be sure they understand how much they'll be spending in the medium- to long-term, not just in the short-term.

At this point, a double-dip looks like a more and more distant fear. As a result, we might be beginning to see firms hire more aggressively for precisely the reason just described. We've been getting somewhat consistent readings of 200,000+ jobs added per month in the private sector over the last three months. Those aren't huge numbers, but they're certainly better than what we saw throughout most of 2010. Firms do appear to believe that the tide has turned.

The Wages Problem

But a part of the caller's question went unaddressed. Why haven't wages risen? After all, if your boss forces you to be more productive, then hiring is only one way to create balance: your pay could also be raised accordingly. There's only reason to complain if you aren't being compensated in fair proportion to your productivity.

This problem is also connected to the lackluster hiring, however. Think of the labor market in the same way you would the market for some good, say houses. If housing supply is low and demand is high, then they call that a seller's market. There are few of houses to choose from and lots of buyers. As a result, the few sellers out there can demand a higher price, and desperate buyers must accept it.

Now think about the labor market. There aren't a lot of jobs out there, but there is a huge number of unemployed people. This is an employer's market. People are desperate for jobs. So employers can use the situation to their advantage. In this case, they can get away with paying their current workers less in relation to their productivity than they would be able to if the labor market situation was reversed, if unemployment was low and many jobs were available.

In a good job market, a highly productive worker has leverage. The worker can move to another company doing similar work for more pay. He or she is the scarce resource. But right now, most workers have little bargaining power: their employer can find someone else to accept relatively poor pay instead; after all, there are more than 20 million Americans who have no job but want one.

That results in stagnant wage growth. Unfortunately, this is common in the early stages of a recovery. Once the labor market becomes healthier, however, workers have more leverage to demand better pay. If their employer refuses, they can find another who values their productivity more. The good news is that workers will eventually have more negotiating power again to demand fairer wages. The bad news, however, is that a healthy labor market that would create this opportunity is likely still at least a few years off.

If case you want to see the entire 40-minute segment, the video is below. I address a number of economic issues from unemployment to credit to monetary policy: