Profit Surge Should Ease Bargaining Climate

by Labor Research Association (LRA Economic Notes)

http://www.laborresearch.org/story2.php/355

Although bargaining conditions are still difficult, the
current surge in corporate profits provides more
favorable conditions for wage gains than workers have
seen for several years, and better conditions than they
may see in 2005.

U.S. corporate profits pushed past $1 trillion for the
first time in 2003. Last year, profits grew 18.3
percent, topping 2002’s 17.4 percent increase. For the
first half of 2004, profits will rise 20 percent to 40
percent in most sectors on revenue gains of less than
10 percent.

The most significant economic story of 2004 is the
radical shift in income from U.S. workers to corporate
coffers. Sharply lower wages in the context of record-
setting profits have altered the fundamental
relationship between labor and capital in the national
income accounts.

In all post-World War II recoveries but this one,
workers received an average of 65 percent of the growth
in national income while corporate profits consumed 15
percent to 18 percent, according to a study from
Northeastern University. In this recovery, the labor
share is less than 40 percent and the profit share is
more than 40 percent.

U.S. corporations have achieved unprecedented profits
through sharp workforce reductions, lower real wages
and substantial productivity gains. Real wages are
down 2 percent to 4 percent in most sectors since 2001;
productivity exploded during the same period.

Year-over-year unit labor costs dropped 1.6 percent for
the business sector in the fourth quarter of 2003 and
1.3 percent in the first quarter of 2004. Although
health care benefit costs are still rising, the decline
in real wages and the rise in productivity more than
offset increased health benefit expenses.

These unit labor cost savings are pure profit for
companies. Nonlabor unit costs remained unchanged for
2003 and the first quarter of 2004.

Merrill Lynch provides an example of higher profits
achieved through labor cost savings at the level of the
firm. From 2001 to 2003, the company cut its workforce
by 24,000 employees, reduced compensation costs from 50
percent of revenues to 40 percent, and increased profit
margins from 17 percent to 28 percent.

For the first quarter of 2004, Merrill Lynch reported
profits of $1.3 billion, up 95 percent from the first
quarter of 2003.

Employers have been able to hold wages at recession
levels despite the radical turnaround in profits
without increasing employee turnover. Turnover rates
have been low since the 2001 recession.

Part of the downward pressure on wages can be traced to
soft labor markets, but employee concerns about job
security now exceed levels that can be explained by
unemployment rates.

Additional downward pressure on wages derives from
shift in the workforce mix toward low-wage retailing
and service jobs. Three years ago, Wal-Mart emerged as
the largest company in the country, ending General
Motors’ and Exxon’s decades-long lock on the top
position.

Wal-Mart’s 1.4 million workers earn an average of
$18,000 a year. Of the ten largest employers in the
United States, five are now low-wage retailers.
McDonald’s and Target employ more workers than IBM and
General Electric.

Beyond low labor costs, a rare combination of other
conditions have supported extraordinarily high levels
of profitability. These favorable conditions will fade
by the end of this year, however.

Corporations will face higher nonlabor costs and lower
revenues as the following trends emerge:

* Slower economic growth. 2005 forecasts call for U.S.
GDP growth to slip into the 3.0 percent to 3.5 percent
range, down from 4.0 percent to 4.5 percent for 2004.
Higher interest rates. As the Federal Reserve raises
interest rates, the era of free money will end.

* Higher rates will hit debt-ridden consumers, slow the
housing and auto markets, and increase corporate costs.

* Higher taxes. The effective corporate tax rate has
remained near 26 percent for the past two years,
substantially lower than the 33 percent average for the
previous ten years. The depreciation provisions of
Bush’s 2002 and 2003 tax cuts added about $42 billion
to corporate profits in 2003 and will add more in 2004,
but these provisions sunset at the end of this year.

* Lower revenues. The imbalance between the share of
income going to capital and the share going to labor
will eventually chew into consumer spending. The shift
in wealth from labor to capital has fueled investment
spending, but the investment increase is not sufficient
to offset a shortfall in consumption.

* Weaker dollar. Part of the profit increase can be
traced to favorable currency developments. But the
weak dollar is damaging the European economy,
undercutting growth in developing markets and forcing
oil prices still higher. By the end of 2004, demand
for U.S. goods will drop and the short-term boost
provided by the weak dollar will disappear.

Any push for wage gains must hit now, before nonlabor
costs rise and revenues turn down.