Inflation and Corporate Profit

There was a moment during the pandemic in 2021 where many workers felt that for the first time in decades the pendulum had swung in their favor. By this I mean that because of government subsidy in unemployment insurance, workers begun to feel as though they had options in terms of who they wanted to work for, and why. A cushion in income meant that workers, particularly blue collar workers, didn’t have to sell their labor to the first bidder. The result of which, in brief, is that workers suddenly had the choice as to whether they wanted to work for the first salary offered- or wait for another competitive offer.

This dynamic has been unusually absent within the blue-collar labor market in the past decades, but returned loudly in the latter months of 2021. The U.S., communally, didn’t quite know how to describe this situation: It started first with the term “great resignation”, which then moved quickly to “the great negotiation”, and then ultimately “the great regret”. These articles are of course cherry-picked in an attempt to form a linear narrative of corporate response to increased labor power. I can’t discount the myriad articles detailing the great resignation, which described the shifting power from corporations to labor. What I would like to call out is the tacit implication of the shift, and the winners and losers which result.

The trajectory of these labor movements are experienced by individual workers, but narrated in aggregate by a media which relies on surveys and opinion polls. In the final case, according to the last article, regret that their new companies don’t match the values or motivations of newly transplanted workers. In all cases the most pronounced coverage misses the point entirely: The disjunction between worker contribution and compensation was highlighted during a period where money was “printed to offset the worst aspects of the economic shutdown due to Covid-19”. Companies and workers alike were given unique buffers against economic downturn. Companies were expected to continue production and paying salaries. Workers were expected to…well this is less defined.

In a rare juxtaposition, everyday workers were buoyed against a unique economic downturn, and given the opportunity to level-set, and look toward their economic future. What they noticed, is that the economic power of their labor was in fact undervalued, and warranted reconsideration. As an analog to the 2008 crisis, the labor force felt for a moment that it too could be the recipient of support when an “act of god” supplanted the normal economic conditions within which they worked.

In labor relations between labor and corporations, at least in the past few decades, a typical description has used the dynamic posed in the axiom ” a rising tide lifts all ships”. As the HHH index has increased, and corporate labor purchasing power has consolidated into fewer and fewer hands, leverage among skilled and unskilled workers has necessarily weakened. Though the subsidy which workers received during Covid-19 was received mostly by lower income workers in the service industry, who realized that chain corporations had little recourse to operate without them, it presented a novel condition for the working lives of many in this country. This sentiment naturally spread elsewhere, to corporate and white collar jobs, where it began to manifest as a troubling “great resignation” for corporations.

What should we make of, then, the claims that wages are exacerbating inflation? Does labor power in this context lead to runaway inflation? Is the hidden mystery of inflation really just a selfish desire by workers to get more money? Well let’s compare wage increases to corporate profits during this time of inflation. Data indicates that wage increases slowed to 1.2% in Q4 2021 from 1.4% in Q3 2021. This equated to an average increase in wages of 4% for the average worker from the 12 months prior. This was analogized as “going from 120 mph to 90 mph”. The framing of this speed analogy suggests that workers wages are are slowing, but still above “normal” as 90 mph is still well above an average of…well I guess 60 mph according to the national highway system?

From CNBC:

Fourth quarter earnings for the S&P 500 are expected to be up 22.4%, according to Refinitiv, capping off a remarkable 2021 where overall earnings will be up approximately 49%.

Certainly the S&P is not the entire economy, so a 1:1 comparison can’t be made to average workers’ wages, but we should ask: which speed analogy should be ascribed to the profit increases of corporations? 1200 mph to 600mph? 1000 mph to 500 mph?

We can tell from popular coverage, that wage increases are treated as unsustainable speeds and momentum, and corporate profit increases are treated as omens of economic growth. But why? If the vestiges of “trickle down economics” are true, and we must assume they are from the disparity in coverage, workers must be experiencing windfall economic benefit from record corporate profit. This is not nearly the case, and in fact the two run in convex relationship to one another.

Inflation for all items rose 7.9% from 12 months prior in February 2022. This means that the 90 mph at which the velocity of workers’ wages is traveling is consumed entirely by inflation. At the same time, the corporations of the S&P 500 outpace the rate of inflation by an order of 3:1. This forces us to ask the question: are wages the primary driver of inflation, or profits? Critics of profit centered inflation will point to consumer demand as a metric of inflation – that is, as more consumer money chases fewer goods, the price of goods must necessarily rise. We can see from the chart below that this is essentially true. Consumer spending has increased through January 2022. However, from January 2021 to January 2022 consumer spending only increased by 6.57%. Average wages fell short of this and profits tripled this figure.

We would be remiss to not include oil prices as a strong contributor of inflation, particularly in Q1 of 2022. However, energy prices do not explain the 12 month trend, corroborated by the past decades of the discrepancy between wages, profits and inflation. In an environment of growing inflation and high gas prices, we should question the common narrative that wages, and not other factors like corporate wages, cause increased inflation. The data is clear, wage growth has indeed grown as a result of pandemic monetary policy, but so too have corporate profits.

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