Monday, January 16, 2012

Corporate profits are high by historical standards

We are going to look at corporate profits. We want to check the claims made by Occupy Wall Street and others that: 1) corporate profits are at record levels; 2) labor's share of GDP is shrinking and 3) the US is overly dependent on financial profits. The data comes from the US Commerce department's National Income and Product Accounts.

The chart directly below shows corporate profits (CP) as a percent of gross domestic product since 1947. You can clearly see corporate profits are are at a historic high. They have never been higher except once during the 1950s. The trends has been upward since 1980. Corporate profits are at record levels.

Employee compensation as a percent of GDP has fallen since April 1980 from a high of 68% to the current 61%. That's an 11% share drop. Labors share of GDP is dropping.

The third chart displays the ratio of corporate profits to employee compensation. In the 1980s corporate income was about 11% of the size of employee income. In other words, income earned by employees was 9 times larger than corporate profits. Now, in 2011, the ratio of profits to wages is 24%, meaning the amount of income for wages is only 4 times larger. The growth in corporate profits has come largely at the expense of employee compensation.

The next chart graphs the profit / wage ratio during recessions. It is a good check on our logic of declining employee compensation. It shows the profit to wage ratio shrinks during a recession and recovers during growth periods. One must think about short term wages and employment being relatively fixed compared to corporate profits.

Finally, we break corporate profits into non-financial and financial components. You can see profits from financial transactions constitute about 42% of total profits since the 1950s. This trend has been consistent for the past 60 years. They did top 50% during the late 70s and 80s. They also topped 50% in July 2008.

However, "overly" dependent is relative. There is a market for many of these financial products and services. There has been tremendous innovation, job creation and wealth creation in the financial services sector. We cannot yet judge whether this is a net plus or minus for the economy.


1) We seen evidence of employee compensation and increased profits. Steps must be taken to stabilize the wage part of GDP. We can raise the minimum wage, lowering the cost of education, and establishing a basic right to unemployment compensation and training.

2) Unfortunately, we you add 1.5 billion low wage workers to the global system they are going to depress wages. Until they become net consumers they will continue to drag down wages. We are seeing the effects. Corporate profits are simply a by product of the lower wages.

Note: Additional data come for the St. Louis "FRED" database.

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