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What's In Store for Employee Wages Going Forward?

// David Schawel - VP, Portfolio Manager

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November 14, 2013
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While it may be a surprise to some in the startup community, the last few years have seen record high profit margins for the largest U.S. corporations.  In fact, over the last few years, corporate after tax profits accounted  for the largest ever share of gross domestic product (GDP).  As encouraging as this may seem, a major reason for this stems from the low wages that employees are now earning.  In fact, as of 4Q 2012, total wages fell to a record low of 43.5% of GDP.  Historically, wages typically account for roughly 50% of GDP.  So, in short, corporations have never been more profitable and employees are getting an increasingly smaller share of the pie.

FRED Graph

In the financial community, many refer to this relationship as "labor versus capital."  Currently the tide is decidedly in favor of corporations who have taken advantage of the persistently high rate of unemployment to exert leverage on employees through lower wage increases.  As of the October 2013, employment report wages were growing at an annual rate of only 2%.  Market participants closely watch wage growth because it is a necessary ingredient for a more robust economic recovery.  Some more in-demand industries are seeing wages growing faster than 2%, but as a whole, the pace is slow.  Corporations, on the other hand, should expect a more robust labor market to eventually return, which will mean higher costs and lower margins.

 

 

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