Profits, Compensation, and Unemployment: A New Pattern?

September 22, 2011

In the above chart, corporate profits as a percentage of employee compensation reflect the after tax profits of companies compared to the total compensation provided to American workers. As this percentage increases, corporate profits are increasing relative to employee compensation. Historically, corporate profits as a percentage of employee compensation and the unemployment rate have moved in opposite directions: in the past, both employees (through lower unemployment rates) and employers (through higher profits relative to employee compensation) have benefitted together during periods of prosperity and both have suffered together through difficult periods.

The historical pattern mentioned above holds for the period 1968 – 2008 when the unemployment rate and corporate profits as a % of employee compensation move in opposite directions: high relative profits for employers have historically coincided with low levels of unemployment. However, beginning in 2009 both the unemployment rate and corporate profits relative to employee compensation began to move sharply higher. This appears to be the first time in recent history that they have moved in tandem to such a dramatic degree and shows that corporate profits relative to employee compensation are at historical highs given the current unemployment rate. Intuitively, this makes sense, given that economic growth has been slow: companies have achieved profits through cost-cutting and efficiencies, which unfortunately comes at the expense of jobs. If previous patterns repeat themselves, either corporate profits relative to employee compensation will decline or the unemployment rate will begin to recede noticeably as companies begin to hire.