Corporate Profits Soaring Thanks to Record Unemployment

In a January 2009 ABC interview with George Stephanopoulos, then President-elect Barack Obama said fixing the economy required shared sacrifice, "Everybody’s going to have to give. Everybody’s going to have to have some skin in the game." (1)
For the past two years, American workers submitted to the President’s appeal—taking steep pay cuts despite hectic productivity growth. By contrast, corporate executives have extracted record profits by sabotaging the recovery on every front—eliminating employees, repressing wages, withholding investment, and shirking federal taxes.

The global recession increased unemployment in every country, but the American experience is unparalleled. According to a July OECD report, the U.S. accounted for half of all job losses among the 31 richest countries from 2007 to mid-2010. (2) The rise of U.S. unemployment greatly exceeded the fall in economic output. Aside from Canada, U.S. GDP actually declined less than any other rich country, from mid-2008 to mid 2010. (3)

Washington’s embrace of labor market flexibility ensured companies encountered little resistance when they launched their brutal recovery plans. Leading into the recession, the US had the weakest worker protections against individual and collective dismissals in the world, according to a 2008 OECD study. (4) Blackrock’s Robert Doll explains, “When the markets faltered in 2008 and revenue growth stalled, U.S. companies moved decisively to cut costs—unlike their European and Japanese counterparts.” (5) The U.S. now has the highest unemployment rate among the ten major developed countries. (6).

The private sector has not only been the chief source of massive dislocation in the labor market, but it is also a beneficiary. Over the past two years, productivity has soared while unit labor costs have plummeted. By imposing layoffs and wage concessions, U.S. companies are supplying their own demand for a tractable labor market. Private sector union membership is the lowest on record. (7) Deutsche Bank Chief Economist Joseph LaVorgna notes that profits-per-employee are the highest on record, adding, “I think what investors are missing - and even the Federal Reserve - is the phenomenal health of the corporate sector.” (8)

Due to falling tax revenues, state and local government layoffs are accelerating. By contrast, U.S. companies increased their headcount in November at the fastest pace in three years, marking the tenth consecutive month of private sector job creation. The headline numbers conceal a dismal reality; after a lost decade of employment growth, the private sector cannot keep pace with new entrants into the workforce.

The few new jobs are unlikely to satisfy Americans who lost careers. In November, temporary labor represented an astonishing 80% of private sector job growth. Companies are transforming temporary labor into a permanent feature of the American workforce. UPI reports, “This year, 26.2 percent of new private sector jobs are temporary, compared to 10.9 percent in the recovery after the 1990s recession and 7.1 percent in previous recoveries.” (9) The remainder of 2010 private sector job growth has consisted mainly of low-wage, scant-benefit service sector jobs, especially bars and restaurants, which added 143,000 jobs, growing at four times the rate of the rest of the economy. (10)

Aside from job fairs, large corporations have been conspicuously absent from the tepid jobs recovery. But they are leading the profit recovery. Part of the reason is the expansion of overseas sales, but the profit recovery is primarily coming off the backs of American workers. After decades of globalization, U.S. multinationals still employ two-thirds of their global workforce from the U.S. (21.1 million out of 31.2 million). (11) Corporate executives are hammering American workers precisely because they are so dependent on them.

An annual study by USA Today found that private sector paychecks as a share of Americans’ total income fell to 41.9 percent earlier this year, a record low. (12) Conservative analysts seized on the report as proof of President Obama’s agenda to redistribute wealth from, in their words, those ‘pulling the cart’ to those ‘simply riding in it’. Their accusation withstands the evidence—only it’s corporate executives and wealthy investors enjoying the free ride. Corporate executives have found a simple formula: the less they contribute to the economy, the more they keep for themselves and shareholders. The Fed’s Flow of Funds reveals corporate profits represented a near record 11.2% of national income in the second quarter. (13)
Non-financial companies have amassed nearly two-trillion in cash, representing 11% of total assets, a sixty year high. Companies have not deployed the cash on hiring as weak demand and excess capacity plague most industries. Companies have found better use for the cash, as Robert Doll explains, “high cash levels are already generating dividend increases, share buybacks, capital investments and M&A activity—all extremely shareholder friendly.” (5)

Companies invested roughly $262 billion in equipment and software investment in the third quarter. (14) That compares with nearly $80 billion in share buybacks. (15) The paradox of substantial liquid assets accompanying a shortfall in investment validates Keynes’ idea that slumps are caused by excess savings. Three decades of lopsided expansions has hampered demand by clotting the circulation of national income in corporate balance sheets. An article in the July issue of The Economist observes: “business investment is as low as it has ever been as a share of GDP.” (16)

The decades-long shift in the tax burden from corporations to working Americans has accelerated under President Obama. For the past two years, executives have reported record profits to their shareholders partially because they are paying a pittance in federal taxes. Corporate taxes as a percentage of GDP in 2009 and 2010 are the lowest on record, just above 1%. (17)

Corporate executives complain that the U.S. has the highest corporate tax rate in the world, but there’s a considerable difference between the statutory 35% rate and what companies actually pay (the effective rate). Here again, large corporations lead the charge in tax arbitrage. U.S. tax law allows multinationals to indefinitely defer their tax obligations on foreign earned profits until they ‘repatriate’ (send back) the profits to the U.S. U.S. corporations have increased their overseas stash by 70% in four years, now over $1 trillion—largely by dodging U.S taxes through a practice known as “transfer pricing”. (18)Transfer pricing allows companies to allocate costs in countries with high tax rates and book profits in low-tax jurisdictions and tax havens—regardless of the origin of sale. U.S. companies are using transfer pricing to avoid U.S. tax obligations to the tune of $60 billion dollars annually, according to a study by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon. (18)

The corporate cash glut has become a point of recurrent contention between the Obama administration and corporate executives. In mid December, a group of 20 corporate executives met with the Obama administration and pleaded for a tax holiday on the $1 trillion stashed overseas, claiming the money will spur jobs and investment. In 2004, corporate executives convinced President Bush and Congress to include a similar amnesty provision in the American Jobs Creation Act; 842 companies participated in the program, repatriating $312 billion back to the U.S. at 5.25% rather than 35%. (19) In 2009, the Congressional Research Service concluded that most of the money went to stock buybacks and dividends—in direct violation of the Act. (20)

The Obama administration and corporate executives saved American capitalism. The U.S. economy may never recover.

1. ‘This Week’ ABC News with George Stephanopoulos, January 2009.
2. OECD report, U.S. lost most jobs among rich countries. EMMA VANDORE AP Business Writer
3. Carnegie Endowment for International Peace. Policy Brief 89. November, 2010. Uri Dadush & Vera Eidelman. Five Surprises of the Great Recession.
4. OECD Indicators of Employment Protection.,3343,en_2649_37457_42695243_1_1_1_3745...
5. The Wall St. Journal. June 8, 2010. Robert Doll. Opinion. The Bullish Case for U.S. Equities.
6. Bureau of Labor Statistics. International Labor Comparisons. Updated Dec. 2, 2010.
7. Bloomberg Businessweek. January 22, 2010. Holly Rosenkrantz.Union membership in the private sector declines to record low:
8. Joseph Lavorgna quote: CNBC. When will profits translate into jobs?
9. UPI. Temp work becomes a fixture. Dec. 20th, 2010.
10. Restaurant industry’s hiring helping to revive economy. DAYTON, Nov 28, 2010 (Dayton Daily News - McClatchy-Tribune Information Services via COMTEX):
11. Tax Notes, Martin A. Sullivan. U.S. Multinationals Cut U.S. Jobs While Expanding Abroad.
12. USA Today. May 26, 2010. Private pay shrinks to historic lows as gov't payouts rise.
13. New York Times. Economix blog. Catherine Rampell. Nov. 23, 2010. Visualizing Booming Profits.
14. $262 billion in equipment and software investment, calculated from EconStats.
15. ABC News. Dec. 20, 2010. Mark Jewell. S&P 500 Companies More Than Double Buybacks in 3Q.
16. The Economist. Companies’ cash piles: Show us the Money.
17. Corporate Income Tax as a share of GDP, 1946-2009.
18. Bloomberg. May 13, 2010. U.S. Companies Dodge $60 Billion in Taxes with Global Odyssey.
19. Bloomberg. Jesse Drucker. Dec 29, 2010. Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash
20. Center for Budget priorities. Robert Greenstein and Chye-Ching Huang. Feb. 2009. Proposed Tax Break For Multinationals Would Be Poor Stimulus
“Dividend Repatriation Tax Holiday” Failed in 2004, Unlikely to Work Now.



Welcome to EP Mark

This is the most under reported story and it seems no matter what, helping the U.S. workforce is the #1 thing corporations do not want to do, even when it implodes the economy as a whole.


... the inverse relationship between the size of the flag on Wall Street and it's furtherance of benefits to the nation and workers.

Well said, essenetial truth

"Aside from job fairs, large corporations have been conspicuously absent from the tepid jobs recovery. But they are leading the profit recovery. Part of the reason is the expansion of overseas sales, but the profit recovery is primarily coming off the backs of American workers."

It is coming off our backs. It's coming off the backs of workers all over the world, employed or not.

This is an excellent article. Thanks!

Corporate America's Brutal Recovery

Thanks for welcoming me to EP. I have learned a lot from the writers here and hopefully I can contribute in a useful way.
I think that there are three facts we should keep in the foreground when analyzing the lopsided recovery.
1. In the last two years, corporate profits have staged their most successful turnaround in US history.
2. The current profit recovery was more dependent on declining unit labor costs than any previous recovery. Thus, wages grew at the second slowest pace on record in 2010(2009 was the weakest).
3. The US profit recovery has outperformed foreign corporates by a wide margin.
Consider this nugget from Deloitte, "The 187 US companies that reported fourth quarter results posted an average growth in net income or profits of 45% over the last year. The 34 European companies in the study, most of them based in Continental Europe, have seen profits rise on average by 25% over the last year."

Ian Stewart, Deloitte’s chief economist explains, “While company revenues are starting to pick up, cost control was vital to delivering strong profits in the fourth quarter. Revenues for the 187 US companies we analysed rose 7% over the last year, but profits increased more than five times as fast, by 45%.

Clearly, corporate America staged their most successful turnaround at the expense of American workers and the national economy. Corporate America's Greatest Recovery and the Great Recession are two sides of the same coin.

Part I lays out the thesis, published in Dollars&Sense, check it out:

I welcome any criticism or questions.

American Ownership

I will have to dig for the information, but I've seen data showing that very few major corporations are 100% American owned. Do the stats you cited cover only true American owned businesses? Also, do the stats include corporate income from all sources, both foreign and domestic?

Because you can do wrong, and get away with it, doesn't make it right

formatting posts

There is a user guide to the right and a rich text editor, to use click on the link for it at the bottom of the text.

I request all URLs be properly formatted and images locally hosted. The user guide shows you the XHTML tags or the rich text editor is a WYSIWYG editor and has buttons.

This is important for layout as well as others finding the site, and it make the site look professional.

That's my only criticism and I will help people learn formatting, XHTML tags via email.

For example, corporate profits percentage increases, quarterly or annual, as an aggregate or even by sector, a graph of this would really help drive the point home.

Graphs get a little tougher to make but if one has one, you can upload it and format it on the site.

This article is just damning really and some nice economic eye candy would spell it out.

I think Citigroup in the midst of TARP signed a $2.1 Billion offshore outsourcing deal, JP Morgan Chase a > $5 billion one recently. All I.T./backoffice and no there is not a shortage of I.T. workers in the U.S.....

In other words, it looks highly suspect they used the excuse and cover of Economic Armageddon to offshore outsource even more divisions.

Why are Dems Allowing This?

Well, of course it's the campaign contributions. Plus I heard Geithner agree with Senator Hatch that more high tech temp work visas were needed.

Of course the obvious question is why?

How do these companies expect to survive when we have First World (kinda) social services and third world incomes except for the top few percent of rich and superrich? Do our elites really want their kids and grandkids to grow up living behind barbed wire?

It seems to me the rich have to give up a lot on the road from normal greed and exploitation. to extraordinary greed and exploitation. Wonder how many have thought of that?

Walk like an Egyptian

Great article, the numbers are all here documentation of our downfall. Now, what do you do about it when the President has sold out, the legislature and Supreme Court work for the Chamber of Commerce and the constituency is ignorant? There isn't any doubt wage earners have been getting screwed. I'm afraid the only thing that motivates people is hunger, real hunger pains.


Hunger and unions

The independent trade union movement was a key to the Egyptian revolution. Of course, you'd never suspect that by the corporate media coverage. But it was union activity to provide wages with which to buy food and other necessities. That's a bit of encouragement, the intentionality of organizing for the greater good.

Forces Behind the Egyptian Revolution Economic Populist, 02/11/2011

The same labor movement that staged the 2006 strike and a follow up in 2007, called for a national strike on April 6, 2008 to raise the nation's minimum wage and protest high food prices. Mubarak's government sent in police who took over the factory in hopes of preventing the strike. Conflict broke out with violence on the part of police toward the union members calling for the strike. Police arrested workers. Trials, convictions and prison sentences followed quickly. Other members continued to protest.

Naked Capitalism

Yves picked up this piece in the links, which is good, everybody needs to read this.

Level Playing Field

American experience is unparalleled. According to a July OECD report, the U.S. accounted for half of all job losses among the 31 richest countries from 2007 to mid-2010. (2) The rise of U.S. unemployment greatly exceeded the fall in economic output. Aside from Canada, U.S. GDP actually declined less than any other rich country

Consensus agrees entirely. USA is at the top of the pile-on. We and Canadian Neighbors can afford more than ever to share with the unemployed who are now taking the rap for our economic efficiency windfall. We can now get them back onto career paths by generating enough profit for the rehiring process. Those of us with positions should start working, start generating that profit, go to work early, but leave after hours. We should tell our Congressional Rulers to stop taxing the hell out of the impoverished, close down the income-prisons, auction higher-interest-longer-term treasuries to penny-pincher-s who are afraid of buying the flaky stocks now being barker-ed by the Wall-Street-Shell-Game. Our tax code is the best that money can buy. We need to stop selling tax-code to the excessively wealthy. Stop corporate welfare. Stop idiotic-Congressional-overspending. We need a $16,000 personal exemption and a $64,000 standard deduction. Do the preparers of tax forms have huge lobby to tell Congress not to simplify taxation? Then trash the IRS. Finance everything by bond auction, but close down the highly-political-income-prisons.

We got to take our country back, all the way back to 1934.



Is that "thanks to" or "despite"? I always thought it was the American consumer who made the world go round. So is high unemployment good for consumption?

High Unemployment and consumption

      Large US companies are less dependent on American consumers than they are American workers, but it varies by sector. The largest US multinationals derive more than half of their revenue from overseas, but two-thirds of their global workforce is still employed in the US.

In the next decade, 70% of global growth will come from the emerging markets--and US multinationals want to capture market share. The best way to do that is through an orderly decline in the dollar and abnormally high unemployment---which will put an anchor on labor costs and inflation.

Also, the highy unequal income distribution creates unequal consumption patterns. In the US, the top 5% of income earners contribute 35% of total consumer sales. The middle is getting wiped out, and it is reflected in the consumer market: Wal-Mart just reported their seventh straight quarter of declining same store sales. By contrast, Louis Vuitton, Hermes, and Coach are doing great---and at the other end---Family Dollar, Dollar Tree thrive. Plutonomy reigns in most countries, but US inequality stands out among developed countries.

revenues vs. work force in the U.S.

Where are you getting those numbers from with 2/3rd of MNC's workforce being in the U.S. as well as overall revenue streams?

Any breakdown by sector, industry? Also, the EE 70% global growth assumption, where is that stat coming from?

The reason I ask is I suspect EE's are yet another "bubble/herd" mentality for fast money and this mythical consumer market is in the end, going to be serviced by that nation's domestic producers. (i.e. China and India as policy).

It *should* be majority U.S. workforce for U.S. multinationals, I'm thinking about FCDC's most of their employees, or a good portion, even when operating in the U.S. are their home country citizens, until one moves to the "worker bees". But in spite of how great it is they are hiring "worker bees" for U.S. manufacturing, because that scales, creates domestic jobs....

I know there are some businesses that literally displace U.S. workers while operating in the U.S. I think the worst examples would be the BPO and tech industries....

It's clear from their employment rosters of national origin as well as immigration status of employees, this is what they are doing. i.e. 85% of employees, working in the U.S. are of Indian nationality, citizenship as an example.

Then, how about a nation like Germany with a trade surplus? Their percentages of hiring Germans for their MNCs must be way higher than the U.S. and they are managing to generate a trade surplus...

They also "hire local" as obvious from the various German FCDCs operating in the U.S.

In other words, it seems the U.S. policy by MNCs is to screw the U.S. worker, whereas a nation-state like Germany is "doing it right" or "righter" and they are winning at this globalization game yet not winning by screwing over their nation or German workers.

BTW: This site hosts graphs, images, but one needs to know how to use the site, format...

if you have excel data on the above, I can help create graphs offline. First up is to learn how to format a URL.

re: revenues vs. workforce

U.S. multinationals employ 10.1 million workers abroad, and 21.1 in the US.
The data is in the article--source note #11, tax analyst Martin Sullivan. here is the link

I'm sorry, but I don't have revenue/workforce data by sector.

In a recent Project Syndicate piece, Jim O'Neil explains how how emerging markets will dominate global growth going foward, "Indeed, at some point during this decade, the BRIC economies combined will become as big as the US economy, with China’s GDP alone reaching about two-thirds that of the US. The four countries will be responsible for at least one-half of real GDP growth in the world, and possibly as much as 70%."
Mr. O'Neil's projection may be overstated, but he is the EE expert.

Thank you for offering to help me learn how to format.

Ah, GDP vs. PCE

There are numerous projections China's GDP will exceed the U.S. in < 5 years and I believe it...that said, it's export driven. I like to call it the "mythical consumer market" as if people in India, China, Brazil are going to become immediate conspicuous consumers and per capita. ....and then, even if that happens, China in particular, would not be selling their own cars and advanced technologies to those new consumers..
i.e. the JVs of GM are seriously Chinese.

Thanks for this excellent analysis,

very helpful for us non-economists. EP is one of the best sites for this kind of clear, comprehensible information.

Great Article!

Oh my, what an overwhelmingly good and devastating writeup.

Because I am crazy I can say I am looking forward to many more.

Welcome aboard, Mark Provost!

How does this square with the

How does this square with the contention of people like Mish and Brett Arends that if we were to mark these corporations' assets to market/include their debts, they would, even with all these new profits, be insolvent?

"A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?"

Good post, though.

Corporate balance sheets are healthy

US financial firms hold all of the questionable paper, and you are correct that changes in FASB accounting rules have made it more difficult to ascertain their true value.
However, total US corporate debt relative to earnings, assets, and equity is within historical norms. Corporate balance sheets are actually healthy and improving, especially compared to household balance sheets.
The four primary metrics of measuring corporate debt are the debt-to-equity ratio; current ratio; the leverage ratio; and the interest coverage ratio.
Theodore Gilliland of Fisher Investments breaks down each one in this short article:

The only surprise is that this is no surprise

"Capitalist production can by no means content itself with the quantity of disposable labour-power which the natural increase of population yields. It requires for its free play an industrial reserve army independent of these natural limits."


"It is the absolute interest of every capitalist to press a given quantity of labour out of a smaller, rather than a greater number of labourers, if the cost is about the same. In the latter case, the outlay of constant capital increases in proportion to the mass of labour set in motion; in the former that increase is much smaller."