Why are Corporate Profits Growing Faster than Employee Wages?

Have you noticed a disparity between corporate profits and employee wages? With companies seemingly profiting at an unprecedented rate, while many employees feel stagnated or even decreasing wages, understanding the underlying factors behind this phenomenon is crucial. This article will explore the complex intersection of business strategy, taxes, and market dynamics that contribute to the growing gap in wealth distribution.

Understanding the Impact of CEOs and Strategic Decisions

The decisions made by CEOs can significantly affect a company's long-term profitability. Take Disney, for instance, where the retirement of long-term CEO Bob Iger led to a series of strategic changes that seemed to favor shareholders over employees. However, Iger's return to the CEO role and the subsequent changes he has implemented have sparked renewed discussions about the relationship between corporate profits and labor wages.

Employees and their wages are inherently dependent on the value they bring to the company. In a competitive market, salaries are determined based on an employee's skills and contributions. If a worker feels underpaid, they have the freedom to seek employment elsewhere, ensuring that salaries remain commensurate with their worth.

The Role of Globalization and Market Dynamics

The growth of corporate profits is not uniform across all industries. Some corporations have navigated through forced shutdowns and market disruptions, emerging stronger with increased market share. Others have benefited from global economic trends, such as the quadrupling of oil prices due to actions by the government. Even companies that operate under strict legal labor conditions must compete with those that do not, which can lead to a race to the bottom in terms of labor costs.

Typically, companies raise wages in a way that makes strategic sense for them. They strive to retain talent, which reduces the need for frequent replacements. The rate at which they increase wages is often determined by what they believe the market will bear without risking the retention of valuable employees.

Government Policies and the Impact on Business Models

Government policies, particularly those related to taxes, play a critical role in shaping corporate behavior. The 1980s saw drastic changes in tax policy, with President Reagan reducing the maximum tax rate from 78% to as low as 25%. Over time, taxes increased to around 39.6%, but this generally did not produce enough tax revenue to avoid significant deficits.

The tax code has a profound impact on the middle class and, consequently, on business models. When taxes on businesses are high, it is more financially beneficial to invest profits back into the business rather than simply pocketing them. However, when business taxes are low, cheap money becomes available, driving up investment in the stock market and leading to speculative bubbles. Stable economies rely on regulated banking and stock markets, which serve the broader economic interests rather than a small elite.

President Reagan's tax policies also allowed CEOs to be paid via stock options and to benefit from lower tax rates on income. This incentivized stock prices over business investments, leading to a corporate model focused on increasing the price of stock through fewer shares in circulation. This resulted in fewer jobs and stagnant wages, as companies prioritized shareholder value over long-term business growth.

The current economic landscape, with cheap money becoming scarce, underscores the fragility of this model. Without access to cheap financing, companies may struggle to continue the practices that have fueled their profits. The research and development necessary for innovation becomes constrained, leading to a decline in the company's relevance in the global economy.

In conclusion, while corporate profits have surged, the growth of wages has lagged behind. This phenomenon is driven by factors such as CEOs' strategic decisions, global market dynamics, and government policies, particularly those concerning taxes. Understanding these factors is essential for creating a more equitable economic system that benefits all parties involved.