Guest Post: Corporate Profits Surge At Expense Of Workers

Tyler Durden's picture

Submitted by Lance Roberts of StreetTalk Live,

There was an interesting article out this morning from Reuters stating: "From the companies' point of view, it makes perfect sense these days to hoard cash.  First, Congress lets overseas profits accumulate untaxed, so long as offshore subsidiaries own the cash. Second, companies have a hard time putting cash to work because fewer jobs and lower wages mean less demand for products and services. Third, a thick pile of cash gives risk-averse CEOs a nice cushion if the economy worsens.

Given the enduring hard times, you might think that corporations have used up their cash since 2009. But real pretax corporate profits have soared, from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011, data from the federal Bureau of Economic Analysis shows."


There is a very interesting, albeit disturbing, contradiction in the statement above.  The initial assumption would be that if companies are having a hard time putting cash to work, because there is less demand for products and services, this would infer lower revenues. The chart shows the change in reporting earnings and sales (top line revenue) for the S&P 500.  Since the beginning of 2009 the total growth in sales per share has been 21% as compared to a 206% increase in reported earnings.  This confirms our assumption that lower revenues and demand is behind the historically high levels of corporate "cash hoarding."  However, if revenue growth is weak then how are real pretax corporate profits soaring?  The answer comes down cost controls and productivity. 


The single biggest expense to any company is full-time employees due to payroll, taxes and benefits.  While the economy has grown since the depths of the last recession - demand has remained weak in terms of sales growth.  The lack of demand has kept businesses on the defensive with a focus on maximizing profitability of each dollar of revenue.  During the recession, and recovery, businesses have kept very tight controls on costs by reducing inventory levels, cutting budgets and maximizing productivity per employee.  This has also led to massive changes in hiring and employment.  Temporary hires (which have lower wages and no benefit costs) have substantially outpaced permanent employment since the end of the last recession.  Since the first quarter of 2009 part-time employment has increased by more than 1.5 million while full-time employment is still lower by 1.25 million.  The analysts and media have been quick to jump to the idea that temporary jobs will ultimately turn into full-time employment. However, in an economy that is growing at a sub-par rate with a large and available labor pool - the use of temporary versus full-time employment may well be the "new normal". This also explains why dependence on "food stamps" have surged by over 14 million participants during the same period.


In order to see the impact more clearly we need only to look at the levels of corporate after-tax profits to employees.  In 2009, coming out of the recession, the ratio of corporate profits to employees was 0.90.  Today, that ratio has soared to 1.50.  The reason for this is twofold.  First, while employment has recovered, real unemployment still remains very high.  In the most recent employment report while 84k new jobs were created - 85k people went on disability.  Out of the 84k new jobs more than 1/3 were temporary with the bulk of the remainder in lower paying service related jobs.  This is not the kind of employment picture that leads to long term increases in end demand.


Furthermore, over the past decade the demand on businesses to increase profits, from shareholders and Wall Street, has driven productivity higher and wages lower.  Real wages are well below the long term trend due to the large, and available, labor pool which keeps wages and salary levels suppressed.  Lower wages are double edged sword for businesses.  In the short run lower wages increase profitability.  In the longer term, as wages fail to keep pace with inflation, consumers struggle to maintain their standard living which forces them to cut back on consumption eroding end demand on businesses.  The cycle, which is deflationary in nature, is very difficult to break.

While it is enticing to want to force corporations to deploy the cash and create jobs - the unfortunate situation is that it is the very demands to maintain profitability that keeps them on the defensive.  Secondarily, let's not forget that we live in a free market economy and businesses are in the "business" of making profits. 

As Bernanke stated, in his recent testimony to Congress, it is imperative that Congress acts with fiscal policy changes that promotes real, organic, economic growth.  Corporations will not increase hiring, and ultimately wages, until end demand substantially increases.  Consumers can not increase demand until they have more money to spend.  This "chicken and egg" syndrome is indicative of the problem that faces an economy trapped in a deflationary cycle.  Fiscal policy that leads to productive investment, removes uncertainty about future regulatory and tax implications, and provides an environment that allows cash to be invested at profitable rates of return will ultimately break the blockade the economy currently faces. However, until then, businesses have no incentive to release their "cash hoards" as long as "poor sales", as shown in the recent NFIB report, remain their primary concern. 

For investors, the continued increases in profitability, at the expense of wages, is very finite.  It is revenue that matters in the long term - without subsequent increases at the top line; bottom line profitability is severely at risk.  The stock market is not cheap, especially in an environment where interest rates are artificially suppressed and earnings are inflated due to "accounting magic."  This increases the risk of a significant market correction particularly with a market driven by "hopes" of further central bank interventions.  This reeks of a risky environment, which can remain irrational longer than expected, that will eventually revert when expectations and reality collide.

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Cranios's picture

This sounds like communist BS. Corporations are doing well at the expense of workers - unite, Komrades!

sickofthepunx's picture

that's your inference.  read like a straightforward analysis to me.

pretty rare find these days on zh


battle axe's picture

The reason that the Stock market is up is simple, there is no VOLUME, so it is easier and easier to effect it, it is a false flag. This bitch is going to be hit with reality real soon....... 

Xibalba's picture

    "We may congratulate ourselves that this cruel war is nearing its end. 
    It has cost a vast amount of treasure and blood. . . . 
    It has indeed been a trying hour for the Republic; but 
    I see in the near future a crisis approaching that unnerves me and causes 
    me to tremble for the safety of my country. As a result of the war, 
    corporations have been enthroned and an era of corruption in high places 
    will follow, and the money power of the country will endeavor to prolong 
    its reign by working upon the prejudices of the people until all wealth 
    is aggregated in a few hands and the Republic is destroyed. 
    I feel at this moment more anxiety for the safety 
    of my country than ever before, even in the midst of war. 
    God grant that my suspicions may prove groundless."
      Abe Lincoln

    Precious's picture

    Easy money for banks who don't deserve it, and wealthy investors who don't need it.  Zuckerberg gets a 1.5% loan on his 6 million dollar house.   Like he needs that.  But of course, it is never enough for them. It's not even about the money to them.  It's their mentality.  It's their drive to never let anyone else take the slightest fucking perceived advantage of them.  It's their hypnotic state of material accumulation at every fucking, even insignificant, decision point.  More.  Me.  Win.'s picture

    It's about the levers of control available to some people who want to win. We all want to win. We all "want to have it all," although the definition of "all" varies from person to person.

    Getting Old Sucks's picture

    I always envision all the CEO's calling each other and saying "Hey Jamie, buy my stock and I'll buy yours.  Let's get a rally going here and when the muppets jump in tomorrow, we'll sell it to them and make a profit."

    mick68's picture

    The market is a joke and in no way reflects the real economy. In fact, it's the opposite, since it's manipulated up just about every day and represents profits gained by the slashing of jobs, cutting costs, and all sorts of dubious dealings.

    Not that this matters to greed infested investors, who don't care how many graves are dug to create their gains.

    MillionDollarBonus_'s picture

    I have three simple solutions to this problem:

    1. Mandate that all corporations hire 20% more workers

    2. Provide a guaranteed government job for all unemployed Americans

    3. Quadruple the minimum wage so that businesses are forced to pay people decent wages

    Progressive solutions are simple and cut to the heart of the issue. But it seems that no matter how hard we try to solve these problems, libertarians always find some way to disagree.

    pods's picture

    Please bitch don't derail another thread.



    TheCanadianAustrian's picture

    All good ideas, but I think we can do more.

    - Mandate that ALL Americans 20 or older immediately obtain AT MINIMUM a master's degree if they don't already have one. If they can't afford one, force the student to take out a loan to cover all tuition and housing costs, wiith the money paid DIRECTLY to the universities up front (don't want the students blowing the money on booze and weed), and make sure the loan is FIXED at 0.25% interest for 50 years (we need to charge some interest in order to reduce the possibility of a government budget deficit).

    - Immediately institute new sin taxes in order to increase government revenue and discourage unproductive behavior. We can start by upping the taxes for cigarettes and alcohol, but also institute the following: $20 tax (per person) for oral sex, $50 per person for premarital intercourse, $200 for sexual relations (any kind) with someone of the same sex. For divorce, the government should confiscate 50% of ALL assets of both the man and the wife up-front. This money can be used to fund pro-family awareness campaigns.

    Toolshed's picture

    You should immeditely change your screen name to Douchebag.

    mick68's picture

    Cranios still thinks the US is a democracy, and communism is the threat. Can't cure stupidity I guess. Nonetheless, he's just a slave to the money, if more employment made him money he'd change his tune immediately, therefore the opinions of fools like him mean nothing.

    AnAnonymous's picture

    Nonetheless, he's just a slave to the money, if more employment made him money he'd change his tune immediately, therefore the opinions of fools like him mean nothing.


    For US citizens, everything is situational.

    It is all about being on the wrong side or the right side of US citizenism.

    As some US citizen middle class are slowly sliding toward the wrong side of it, well, they bemoan and invent fantasy.

    Secure them back on the right side and they will write songs to the glory of US citizenism.

    US citizen eternal nature.

    TheFourthStooge-ing's picture

    Verbally incontinent AnAnonymous let loose with:

    For US citizens, everything is situational.

    Made me laugh, since for you everything is situational. If you hate something, you label it with US citizenism. Everything else that you don't hate is then somehow a victim of the eternal nature of US citizenism.

    Very simple minded.

    Very AnAnonymousitizenismistic.

    greggh99's picture

    You're right. Workers have got nothing to do with it. Each passing year production requires less and less workers (human ones anyway). Soon corporations won't need workers at all.

    Ying-Yang's picture

    Yes.. and machines will replace management... CRAP

    Ying-Yang's picture

    Bullshit.... management, owners and board members decide what to pay workers.

    Want more profits? Pay workers less. Want better moral? Pay workers more.

    If you want the consumers to be fiscally healthy then their bosses take less profits and pay them BETTER. Now see how that works?

    Wealth inequality has a lot to do with where you want profits to end up, the stockholders or employees.

    Bunga Bunga's picture

    And it's very consistent that the 1% boycott all products from socialist countries like Germany.

    TruthHunter's picture

    When Henry Ford raised workers wages to $5 per day, after determining that it would be good for business if they all owned a car, the rest of the corporate world

    thought he would ruin them.

     Within certain limits higher wages benefit employers.

    On the other hand, the total social cost of farm labor(and many other minimum wage workers) is not met  by the wages paid them.  Their retirement and medical care are subsidized by the rest.

    vast-dom's picture

    " Secondarily, let's not forget that we live in a free market economy and businesses are in the "business" of making profits." Are you fucking stupid? And then the next paragraph starts with Bernankzi! Yes you are fucking stupid! 


    And for corporations it IS working out just fine. I mean, who the fuck cares about the sheeple anyhow? The job of corp is to max out profits where MC=MR, right? But when ZIRP and bailouts and QE come into picture plus profits as function of subsidies like foodstamps etc. then what? 


    It's all fucked up!

    ACP's picture

    Yes, it is completely fucked up. It makes planning for the future extremely difficult.

    Look at the pattern in big stocks today - obvious computer control. The financial world is completely lawless. It's like the Wild West. I don't know why there's so much security around the stock exchanges & Wall St because they're fucking everything up faster and more efficiently than any terrorist could.

    HaroldWang's picture

    It may not turn out to be like last year but it should. Actually it should be worse but it won't be with the election on tap. I've been saying the same thing to all the bizarre QE-hopers and those who think the fiscal cliff will get resolved. There will be no QE no matter how bad the data, if the market continues to stay at these levels. The Fed will not step in to a market that is near the high of the year. 

    Same with the fiscal cliff. If the market is up, as it is, there is no motivation for them to resolve anything. Why would they if everything looks great in stock market land??

    vast-dom's picture

    shift the chart back and it will look like yet another pattern. charts have become useless. 

    Jason T's picture

    Aggregate demand will no doubt fall.. total Personal Income is in trouble .. shitty wages, less jobs created and personal current transfer receipts out of steam.

    buzzsaw99's picture

    They control all costs except their own pay which has gone the plaid.

    Dumpster Fire's picture

    Secondarily, let's not forget that we live in a free market economy


    I soiled my armor.

    williambanzai7's picture

    Real organic growth? Why bother. Fire everyone and just trade the shares. In our economy value creation is driven by financial rent and Ponzi innovation.

    Bob's picture

    Sure, why mess with a good thing?

    EnglishMajor's picture

    It's as organic as a honeybee, only the workers still in the hive are so numb from "running the playbook" for 1 or 2 other bees who are no longer there that they don't feel themselves taking it up the ass.

    sethstorm's picture

    Or one could take oneself out of the equation and just let computers duke it out with other computers.

    azzhatter's picture

    I'm a free market guy but there is something wrong in a world where the WalMart family is worth $86 Billion and the workers who produce the wealth live in double wides(if they are lucky). Just something wrong.

    devo's picture

    No, it actually makes perfect sense. It seems wrong because you're used to seeing American's with a higher standard of living.

    GoldRulesPaperDrools's picture

    Very true.  Of course, if WalMart were forced to buy products built here in the states instead of cheap garbage built in China and Indonesia and India and every other near-poverty third world country then they'd only have maybe 20-30 billion and you'd have American workers with more income, but the globalists don't want that.

    +1 for the name and the icon of Mark Mothersbaugh :)

    devo's picture

    I have a hard time blaming Wal-Mart for hiring the cheapest labor since I manage my money in a similar manner. If a grocery store has cheaper bread, I buy from that store. If a bank gives a higher yield, I put my savings in that bank. If gas is cheaper at station x, I go there. So, for Walmart to go to China because their labor is cheaper makes perfect sense to me. It's hypocritical to say they're bad for doing it. If they hired Americans to make those products, we'd all be paying much higher prices. So on one hand people complain that Walmart is evil, but on the other, many of those same people shop there and enjoy the lower prices. I think there's a disconnect where the average American consumer doesn't fully understand why Walmart can/does offer low prices. If the argument is that it's bad for the Chinese workers...well, China's standard of living has been rising for 30 years now, and it looks to become an economic superpower as their currency rises over the next decade.

    Walmart/China labor force is pretty much Milton Friedman in action.

    azzhatter's picture

    It is hypocritical when you see the slave labor conditions they work under in China, Bangladesh, Sri Lanka etc. And the pollution they endure. I lived in China for years and I saw the hypocrisy first hand of american corporations

    devo's picture

    Well, by purchasing the cheap labor we no longer need to manufacture those goods here. So over time, the American middle class will become the cheap labor and the loser in this game (i.e. we will be working in sweatshops owned by China). This is the "punishment" or revenge you seem to want for the indignation you feel.

    There is always going to be someone working in a sweatshop. Simple Bell Curve in action (1% on each side). In the past, there was more slavery, so it's actually a step up. Do I think it's great? No. Do I understand why it happens? Yes. Can I fault any parties? No--they all seem to be acting in their self-interests and voluntarily. Correct me if I'm wrong.

    azzhatter's picture

    No country has ever prospered by labor arbitrage over the long term.

    devo's picture

    Right, I just said that--the U.S. middle class is going to pay (pun intended).

    AnAnonymous's picture

    So over time, the American middle class will become the cheap labor and the loser in this game


    It wont happen as long as the 'American' middle class keep living in 'American' countries.

    'American' countries have been accomodated to support certain standards of living. They can not be retrofitted at will to enable much lower standard of living.

    Activity can not be relocated in US citizen countries.

    akak's picture


    Activity can not be relocated in US citizen countries.

    Logic, intelligence and the ability to self-indict can not be relocated in Chinese Citizenism trollbots.

    azzhatter's picture

    and your argument is precisely the argument white slave owners told the blacks from africa. At least you're not sleeping in a grass hut

    devo's picture

    That's not my argument at all.

    On the internet, people have an idea in their head, and they'll read others' comments and (mis)interpret them in a way that allows them to expound upon those ideas and tee off, put words in others' mouth, etc. My argument is simply that it is natural to gravite toward the lowest price. Everyone does it. So when corporations do it, I understand.

    GoldRulesPaperDrools's picture

    You're quite right, and in the corporate context of profits and maximizing returns I understand why they do it as well. 

    The problem is our country is bankrupt and has an increasingly shrinking pool of people off which to draw tax revenue because a) the Republicans push this `free trade/global economy` nonsense to help their coprorate purse-masters make more money, and b) the Democrats want more and more illegal, uneducated, impoverished people imported here to build their voter bloc and put more stress on the country's budget liabilities.  Both parties have helped drive the American middle class into poverty and given them a long-term outlook of despair.

    As a matter of national health, there should be laws and tax policies that protect Americans' collective earning potential as a labor force because, at the end of the day, our country's tax revenue suffers when wages suffer.  Unless, of course, you want to hear more of Barry Obongo's `you didn't build that` (so we're justified in taking your money) rhetoric and policies.

    AnAnonymous's picture

    My argument is simply that it is natural to gravite toward the lowest price. Everyone does it.


    It is so natural that before the introduction of US citizen economics, everyone did not do it.

    akak's picture

    It is so natural for dogs to shit on the sides of the road that before the introduction of US citizen flush toilets, everyone but the Chinese did not do it.

    Bob's picture

    We seem to have this notion that if our de facto royalty have earned their wealth in the system known as free enterprise, that makes it right, end of story. 

    What seems to be missed in this is that actual royalty also once earned their wealth and position.  Ultimately developing nation states from primitive anarchy is what they did.  For better and for worse. But the claim that they were the state had some sense, especially by the standards of their time.  

    But at some point the differential per se becomes morally repugnant. Regardless of the nature of the claims of superior merit.  Doesn't matter if it's part "envy," either.  Royalty by any name offends a basic human sensibility that needs no justification.  It is what it is. 

    By the time the megawealthy drive the entire world into the ditch, you'd think they'd be relieved of their driving priviledges.  Who bought the car has nothing to do with it.'s picture


    Ultimately developing nation states from primitive anarchy is what they did.  For better and for worse.


    For the worse, I'd say. The history of government is one long list of chicanery, outrage and war. You don't hear much about the days of "primitive anarchy" as you call them, probably because no one felt compelled to write, "Everything is going well and we have plenty to eat," in the history books.