"Last year, America's after-tax profits rose to their highest as a proportion of GDP for 75 years; the shares of profit in the euro area and Japan are also close to their highest for at least 25 years. UBS, a Swiss bank, estimates that in the G7 economies as a whole, the share of profits in national income has never been higher. The flip side is that labour's share of the cake has never been lower. So are current profit margins (and hence equity values) sustainable? Are they fair?
Corporate profits may be inflated in various ways. If firms made full provision for the future cost of pensions, their earnings would be smaller. And especially in America, the share of profits in national income has been bolstered by the surging profits of the financial sector which have benefited hugely from falling interest rates. Even so, the impressive efforts of American firms to boost productivity and cut costs are genuine (see article). Firms elsewhere, notably in Japan and Germany, are also restructuring aggressively. The share of profit in GDP always rises sharply after a downturn, but in the United States a bigger slice of the increase in national income this time has gone to profits than in any previous post-war recovery. Over the past three years American corporate profits have risen by 60%, wage income by only 10%.Economist, "Breaking records", 10 februari 2005
If the share of wages in GDP continues to slide, there could be a backlash from workers who feel short-changed. Yet the chances of this are lower than before. The old divide between “them” and “us” is becoming blurred: many workers also own shares directly or through pension funds, which sooner or later will give them a slice of profits. In any case, there are good reasons to believe that profits growth will soon slow sharply and that workers will make up some of their lost ground.
there is another factor that might have raised the return on capital relative to labour in a lasting way, namely the integration of China and India into the world economy, along with their vast supply of cheap labour. To the extent that this increases the global ratio of labour to capital, it will lift the relative return to capital. Outsourcing may not have destroyed many jobs in developed economies, but the threat that firms could produce offshore helps to keep a lid on wages. As a result, the share of profits in national income could stay relatively high for a period. Labour's share would remain low, though workers may still be better off if the cake itself is growing faster. But this is not a reason to expect profits to continue to grow faster than GDP; indeed, in a competitive market profit margins will eventually narrow. Even if outsourcing reduces costs, competition will eventually force firms to reduce prices, distributing the benefits back to consumers and workers.
Stockmarket investors seem to think otherwise: current share valuations appear to assume that profits will continue to outpace GDP growth. Most analysts still expect American profits to grow by an annual 10% over the next couple of years. With nominal GDP growth of around 5%, that implies the proportion of GDP going to profits growing still larger. But this looks unlikely, and if so, share prices are overvalued. Both economic theory and historical experience argue that, in the long run, profits grow at the same pace as GDP. Such long-standing rules deserve more respect.
"Some years ago, looking at data from the OECD Secretariat, I became concerned about the rather steep fall of labor’s share of Gross Domestic Product in France and Italy among the large economies. Now there is also a discernible fall in Germany and about the same in the U.S. (Evidently the temporary lows in investment activity in the early years of the decade lowered the profit share, which masked the downward trend.)Edmund S. Phelps, "Some costs of globalization", presentation vid ASSA-konferens 7 januari 2006 (pdf)
This is a problem not only because it presages low levels of employment but also because it may augur social problems caused by depressed rewards from work relative to non-wage income. In addition, wage rates at the low end have increased very slowly, if at all, for a couple of decades or more.
This fall in labor’s shares in all or most of the G7 economies is surely linked to the large rise in the trade with Asia and to the new information technologies, the creation of which were facilitated by globalization."
"'Nothing contributes so much to the prosperity and happiness of a country as high profits,' said David Ricardo, a British economist, in the early 19th century. Today, however, corporate profits are booming in economies, such as Germany's, which have been stagnating. And virtually everywhere, even as profits surge, workers' real incomes have been flat or even falling. In other words, the old relationship between corporate and national prosperity has broken down.Economist, "Decoupled", 23 februari 2006
This observation has two sides to it. First, as Stephen King and Janet Henry, of the HSBC bank, point out, companies are no longer tied to the economic conditions and policies of the countries in which they are listed. Firms in Europe are delivering handsome profits that are more in line with the performance of the robust global economy than with that of their sclerotic homelands. In the past two years, the earnings per share of big listed companies have climbed by over 100% in Germany, 50% in France, 70% in Japan and 35% in America. No wonder Europe's and Japan's stockmarkets have outpaced those in America, despite the latter's faster GDP growth.
Second and more worrying, the success of companies no longer guarantees the prosperity of domestic economies or, more particularly, of domestic workers. Fatter profits are supposed to encourage firms to invest more, to offer higher wages and to hire more workers. Yet even though profits' share of national income in the G7 economies is close to an all-time high, corporate investment has been unusually weak in recent years. Companies have been reluctant to increase hiring or wages by as much as in previous recoveries. In America, a bigger slice of the increase in national income has gone to profits than in any recovery since 1945.
The main reason why the health of companies and economies have become detached is that big firms have become more international. The world's 40 biggest multinationals now employ, on average, 55% of their workforces in foreign countries and earn 59% of their revenues abroad. According to an analysis by Patrick Artus, chief economist of IXIS, a French investment bank, only 53% of the staff of companies in the DAX 30 stockmarket index are based in Germany; and only one-third of those firms' total turnover comes from there. Only 43% of all the jobs at companies in France's CAC 40 are in France. With the profits of these firms so dependent on their global operations, it is not surprising that corporate prosperity has failed to spur 'home' economies."
"CAPITALISTS are in clover. Profits have soared since the dark days of 2001 and companies are so flush with cash that they are buying back their own shares, merging and acquiring each other as if the good times will never end.Economist Buttonwood, "By the sweat of their brows", 30 november 2006
A Marxist would say this is a classic case of big business exploiting the workers. Funnily enough, some out-and-out capitalist economists would agree. They argue that profits in America, for example, are at a 40-year high as a percentage of GDP precisely because capital is winning at the expense of labour. Globalisation has brought the Indian and Chinese workforces into the world economy, which has kept the lid on wage costs. That has allowed the economy and profits to grow, without the kind of pay-and-price spiral that occurred in the 1970s.
That is the theory, at least. But economists have always been tempted to dream up grand theories for trends that are just part of the economic cycle. Profits are very dependent on whether the economy is expanding or contracting: businesses have fixed costs and when demand is strong, revenues rise faster than costs; when demand is weak, they fall faster.
So the reason American profits have been remarkably strong may originate closer to home than in Shanghai. Nick Carn, a strategist at Odey, a hedge-fund group, says it is pretty simple: companies' revenues are determined by the pace of consumer spending; their costs are largely driven by wages. Profits have grown because Americans have borrowed money to spend more than they have been earning. This cannot continue forever.
Another reason why profits cannot remain permanently high is the iron discipline of capitalism itself. If returns on capital are high, then new companies will emerge to take advantage of this. And as existing businesses invest more capital, eventually more competition will drive profits back down."
"In its semi-annual World Economic Outlook, the IMF examines how trade, technology and immigration have stitched the world's labour markets together at an astonishing rate, leaving rich-country workers unsure of where they stand. Weighting each country's workforce by its ratio of exports to GDP, the IMF estimates that global labour supply has in effect risen fourfold since 1980 as China, India and once-communist countries have opened up. Most of the extra workers got no further than secondary school (although the relative supply of graduates has gone up by 50%). With this surge of competition, you might expect labour's share of the pie to shrink.Economist, "Smaller shares, bigger slices", 4 april 2007
In some cases, the competition is direct: workers cross borders to take jobs in rich countries. Although unwelcome in many places, immigrants' share of the workforce has risen a lot in some European countries (notably Britain, Germany and Italy) and in America, where it is close to 15%. The more important channel, though, is trade: largely because of China, developing countries' share of rich countries' manufacturing imports has doubled since the early 1990s. “Offshoring”—shifting production, especially of intermediate goods and some services, abroad—has been on the rise, although the IMF notes that it has grown more slowly than total trade.
Globalisation is not the only possible reason why labour's share has shrunk. New technologies have probably taken a few degrees off the workers' slice too. Several countries have also fiddled with labour-market regulation, pushing the wage share one way or the other.
The IMF has made perhaps the most valiant attempt so far to weigh these competing explanations. It is impossible to disentangle technology and globalisation entirely: advances in telecommunications, for example, are what enable Indian software engineers and call-centre workers to serve customers in America and Europe. That caveat noted, the fund's results, for 18 countries split into four groups, are shown in the chart.
It finds that both technological change and the globalisation of labour markets have depressed labour's share in all four groups. For the 18 countries as a whole, reckons the IMF, technology has mattered more. However, there are marked differences among them.
Technological change had the biggest effect in Europe and Japan. In Anglo-Saxon countries (America, Australia, Britain and Canada) it was much smaller. In America, indeed, technology seems to have raised labour's share. The fund thinks this may reflect America's lead in using information technology. When a country first exploits IT, labour's share of the national cake goes down. As time goes by, though, workers adjust and learn. Once their skills match the technology better, their productivity and their share go up.
The effects of labour globalisation were most evident in Anglo-Saxon and small European countries. However, it has touched different places in different ways. In Europe the effects of offshoring and immigration have been more marked than in the Anglo-Saxon world; in Japan they have scarcely registered. The labour-intensive goods that rich countries import have fallen in price, pressing down on the workers' share. But this has been broadly offset by price falls in the capital-intensive goods they export. In Japan these prices fell by enough to yield an overall net gain in the labour share."
"in 2006 American profits achieved their highest share of GDP since the second world war. /.../Economist Buttonwood, "A fair share", 27 augusti 2009
In terms of operating earnings, the best calendar year for the S&P 500 was 2006, when profits reached $88 a share. According to Citigroup, which has just raised its forecasts, earnings will not regain that level until 2013. The current era rather resembles the biblical dream of seven lean years.
Tim Lee of pi Economics reckons that American profits may be depressed for some time, because the country is headed for a prolonged period of slow growth. This argument depends on a number of assumptions. Is America headed for slow growth and, if so, why? One reason could be a demographic shift, with baby boomers dropping out of the workforce; if labour becomes more scarce, real wages will rise, at the expense of profit margins.
However, other nations are in a worse demographic position. In addition, the conventional explanation for the high share of profits in 2006 was the downward pressure on wages arising from the growing Chinese manufacturing labour force, a factor that is unlikely to disappear soon. /.../
Mr Lee says slower growth implies a lower return on assets and thus subdued profits. Indeed, a casual look at the ratio of corporate profits to net assets since the early 1950s shows two peaks: in the mid-1960s and late-1990s, both periods of robust growth. The lows for the ratio came in the stagflationary 1970s."
jfr 16 maj 2010, "Lindgren och Linder och löneandelen"; 9 juli 2009 "Ett försök till Freeman-Robinson-syntes"; 20 juli 2009 Sven Oskarsson-citat om globalisering och relationen arbete-kapital.
Uppdatering 28 april 2011
Buttonwood-kolumnisten i Economist konstaterade förra månaden att efter krisens botten har en anmärkningsvärt stor del av den åter växande kakan gått till profiter. Detta sätts också in i ett långsiktigare perspektiv: "Wages still account for a much greater slice of income than profits, but labour’s share has been in decline across the OECD since 1980."
Economist Buttonwood, "Marx, Mervyn or Mario?", 24 mars 2011
Uppdatering 12 juli 2011
Tony Jackson spekulerar i sin senaste kolumn i FT om de uppdrivna vinstmarginalerna och om huruvida det nu finns strukturella faktorer som kommer ta ner vinstmarginalerna igen.
Han åberopar en ny rapport från Morgan Stanleys "Europa-analytiker" (vilka?) som hävdar att två faktorer som ligger bakom den ökade vinstandelen i de rika länderna de senaste trettio åren är a) lägre räntor och skattesänkningar, och b) teknologi, outsourcing och fallande råvarupriser.
Jackson, "Forces behind margins may be on the wane", FT 11 juli
Uppdatering 8 augusti 2011
New York Times konstaterar att vinsterna som andel av BNP nadde sin hogsta andel nagonsin i USA ar 2010, och att lonernas andel (alltsa oraknat benefits/fringisar) for forsta gangen sjonk under 50 procent.
Floyd Norris, "As Corporate Profits Rise, Workers' Income Decline", NY Times 5 augusti
Uppdatering 23 oktober
Peter Orszag, "As Kaldor's Facts Fall, Occupy Wall Street Rises", Bloomberg 19 oktober
Mike Konczal, "Labor Share, Long-Term Trends and Financial Crises", Rortybomb 20 oktober
Uppdatering 27 april 2012
Lawrence Mishel på Economic Policy Institute har två nya papers - ett mer formellt, ett mer informellt - ute om urkopplingen mellan produktivitetsutvecklingen och kompensationsutvecklingen i USA:s ekonomi. Han bloggar om det nyare, mer informella pappret:
"the paper identifies the relative importance of three wedges driving the median compensation-productivity gap: 1) rising compensation inequality, 2) declining share of labor compensation in the economy (the shift from labor to capital income), and 3) divergence of consumer and output prices. /.../
The most important factor in the 2000-11 era was the decline in labor’s share of income and the corresponding increase in capital’s income share. In contrast, the period of sharply rising productivity and falling unemployment in the late 1990s saw a rise in labor’s share of income. Growing inequality of compensation was very important throughout the 1979 to 2011 period. Growing inequality of compensation and the erosion of labor’s income share are the key overall drivers of the wedge between productivity and median compensation, accounting for two-thirds of the wedge since 1973 and about 85 percent of the wedge since 2000. These factors, in turn, reflect the various ways that the typical worker has lost bargaining power in the economy over the last three decades: excessive unemployment, eroded labor market institutions such as the minimum wage and unions, globalization, deregulation of industries, privatization, and the rising power of finance. The third factor, the fact that output prices (covering investment, exports, imports, government as well as consumption) grew more slowly than the prices of consumer purchases—sometimes labeled a deterioration in “labor’s terms of trade”—was evident throughout most of the last three decades and was most important in the 1970s and least important in the 2000s."Mishel, "Understanding the wedge between productivity and median compensation growth", 26 april
Uppdatering 27 juni 2012
"From the late 1970s, the capitalist model underwent another transformation, one characterised by a backward shift in the way the proceeds of growth were divided. By 2007, the share of output going to wages had fallen to 53 per cent in the UK. In the US, the fruits of growth became even more unevenly divided, with the workforce ending up with an even smaller share of the economic cake. There were similar, if shallower trends in most rich nations.
This process of decoupling wages from output has led to a growing “wage-output gap”, with a very profound, and negative, impact on the way economies function. This is for three key reasons. First, by cutting the purchasing power needed to buy the extra output being produced, the long wage squeeze brought domestic and global deflation. Consumer societies started to lose the capacity to consume. The solution to this problem – which would have brought a prolonged recession much earlier – was to allow an explosion in private debt to fill the demand gap./.../Stewart Lansley, "Inequality, the Crash and the Crisis, Part 2: A model of capitalism that fails to share the fruits of growth", OECD Insights-bloggen
Second, the intensified concentration of income led to the growth of a tidal wave of global footloose capital – a mix of corporate surpluses and burgeoning personal wealth. According to the pro-inequality theorists, these growing surpluses should have led to a boom in productive investment. Instead, they ended up fuelling commodity speculation, financial engineering and hostile corporate raids, activity geared more to transferring existing rather than creating new wealth and reinforcing the shift towards greater inequality. Little of this benefitted the real economy. /.../
Third, the effect of these trends has been to intensify the concentration of power with wealth and economic decision-making heavily concentrated in the hands of a tiny minority. In the US, such is the concentration of income, 5 per cent of earners account for 35 per cent of all consumer spending. A new elite has been able to exercise their muscle to ensure that economic policies work in their interest. Hence the inaction on tax havens, the blind-eye approach to tax avoidance and the scaling back of regulations on the City and Wall Street, policies that have simultaneously accentuated the risk of economic failure."
Uppdatering 25 juli
"The irony here is that a high share of GDP for profits automatically results in a low share for wages and thus may eventually be self-limiting—a positively Marxist outcome."Buttonwood, "Capital gains", Economist 21 juli