Slow Wage Growth But Soaring Profits in the Current Recovery


The current economic recovery has done less to raise wages and more to pump up profits than any of the eight other recoveries since World War II. No wonder inequality continues to worsen, and most people still doubt that the economic turnaround will ever benefit them.

A recent study conducted the Economic Policy Institute, a labor-funded think tank, reports the alarming details. Over the three-year period beginning in early 2001, when the last economic expansion peaked and the recession began, corporate profits rose 62.2%, compared to an average growth of 13.9% by the same point in the other postwar recoveries that lasted that long. Total labor compensation (the sum of all paychecks and employee benefits), on the other hand, grew only 2.8%, well under the historical average of 9.9%. (See Figure 1.) What's more, most of labor's gains came in the form of higher benefits payments to cover the increasing cost of health care and pensions, not higher wages. In fact, in 2003 median weekly wages corrected for inflation declined, for the first time since 1996.

Growth in Corporate Profits and Labor Compensation

Source: Economic Policy Institute, “When do workers get their share?” Economic Snapshot, May 27, 2004.
Data from the National Income and Product Accounts, Bureau of Economic Analysis, U.S. Dept. of Commerce.

The extreme imbalance between wage and profit growth in this recovery is hardly surprising. Corporate cost-cutting has been the hallmark of this recovery; instead of hiring new workers, bosses have squeezed more out of the old ones. Corporate restructuring, layoffs, and the global outsourcing of both white-collar and manufacturing jobs have all made new jobs scarce. This recovery is still a long way from even replacing the jobs lost since the recession began in March 2001. As of June 2004, some 39 months after the recession began—and 31 months after it officially ended—total employment was still down 1.2 million jobs. Every other economic recovery, even the jobless recovery of the early 1990s, had restored job losses and added a large number of new jobs to the economy by the 39-month mark.

Poor jobs growth has left workers in no position to push for higher wages. Only the jobless recovery of the early 1990s did as poorly as the current job-loss recovery at improving workers' wages and salaries. After adjusting for inflation, wages and salaries increased just 1.1% during the first two years of each of these two recoveries, reports economist Christian Weller of the Center for American Progress. Wages and salaries in all other postwar recoveries, on the other hand, rose an average of 12.1% in the same period, or about 11 times more quickly. (See Figure 2.)

Real Wage Growth in Postwar Recoveries
(Percent Increase over the Eight Quarters after the Start of the Recovery)

Source: Christian Weller, “Reversing the ‘Upside-Down' Economy,” Center for American Progress, May 24, 2004.
Data from the National Income and Product Accounts, Bureau of Economic Analysis, U.S. Dept. of Commerce.

At the same time, corporate cost-cutting measures have made for rapid increases in productivity—how much a worker can produce per hour. For instance, in 2002 and 2003, the hourly output of U.S. workers went up at a 5.3% pace, exceeding the "new economy" productivity growth rate of 2.6% from 1996 to 2001. For the first time in a postwar recovery, productivity is growing far faster than the economy.

With little wage growth, the gains from improved productivity have gone nearly exclusively to corporate profits. But few of those profits are getting reinvested. Relative to the size of the economy, real investment at the end of 2003, some 10.3% of GDP, remained well below its pre-recession level of 12.6% of GDP at the end of 2000. Weller estimates that nonfinancial corporations are investing fewer of their resources than at any time since the 1950s. And with little investment, soaring profits have not translated into a hiring boom.

Only when labor markets genuinely tighten will workers be able to press for wage gains that match those of workers in earlier economic expansions. Until then, the benefits of this economic expansion, for as long as it can continue without the self-sustaining fuel of wage growth, will continue to go overwhelmingly to profits, exacerbating an economic inequality that is already unprecedented by postwar standards.

John Miller teaches economics at Wheaton College and is a member of the Dollars & Sense collective.

Sources:  Economic Policy Institute, Job Watch Bulletin, July 2, 2004; Economic Policy Institute, "When do workers get their share?" Economic Snapshot, May 27, 2004; Christian Weller, "Reversing the ‘Upside-Down' Economy: Faster Income Growth Necessary for Strong and Durable Growth," Center for American Progress, May 24, 2004.