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As earnings sizzle, a chill for workers

Firms and investors, not the rank and file, reap gains from globalization and labor productivity.

December 18, 2006|Tom Petruno | Times Staff Writer

American companies are about to wrap up their fourth straight year of spectacular profit growth, which has filled corporate coffers with cash and kept the bull market alive on Wall Street.

Operating earnings of the blue-chip Standard & Poor's 500 companies have risen at double-digit percentage rates for 18 straight quarters, an unprecedented streak.

But to many rank-and-file workers, the booming bottom line may only serve as a reminder of what has been missing from their own paychecks.

Wages of average workers have just begun to improve in recent months after badly lagging behind inflation for much of this decade. Amid the surge in corporate profit, many workers have faced terminated pension plans, reduced healthcare benefits and rising outsourcing of jobs overseas.

The swelling earnings of business -- and of many top executives -- have become part of the debate about widening U.S. income disparities. When they take control of Congress next month, Democratic Party leaders will focus intently on those disparities, they say, and on trade agreements that some contend enrich multinational firms while destroying American jobs.

"I'm very passionate about this, and I'm going to be joined by some people who are equally passionate," said Sen. Byron L. Dorgan (D-N.D.). "Some reinforcements are coming."

Corporate leaders say they shouldn't be forced to defend the profitability of their businesses.

"It is a competitive world, and companies want to innovate and compete and win," said Larry Burton, executive director of the Business Roundtable, an association of 160 chief executives of major companies.

What's more, "a lot of us who are workers also are capitalists," said Barry Bosworth, an economist at the Brookings Institution in Washington. Small investors gain as rising corporate earnings boost the value of stocks held in retirement savings plans and other investment accounts.

The Dow Jones industrial average has rocketed 16% this year, to a record high of 12,445.52 on Friday.

Among the biggest U.S. firms, Bank of America Corp. earned $15.9 billion in the first nine months of this year, up 23% from a year earlier. Technology giant IBM Corp. posted a 25% jump in profit in the period, to nearly $6 billion. McDonald's Corp.'s results rose 15% to $2.3 billion.

By one government measure of profit margins, U.S. businesses overall were more profitable in the third quarter than in any three-month period since 1951, according to David Rosenberg, an economist at brokerage Merrill Lynch & Co.

In part, corporations simply have benefited from the strength of the domestic and global economies since 2001. As demand for their products and services has risen worldwide, so have their sales and profits.

But many companies' tight controls over spending also have helped earnings to balloon. And because labor is the largest expense for business overall, the damping of growth in wages and benefits has been a key contributor to corporate America's profit success in this decade, analysts say.

"Companies are saying, 'We can't afford anything' " when it comes to providing for U.S. workers, said Larry Mishel, president of the liberal Economic Policy Institute in Washington.

In the context of soaring earnings, "that's not irony, it's hypocrisy," he said.

One measure of the split between what employees get and what business retains shows up in national income accounts calculated by the Commerce Department.

Corporate earnings generated in the U.S. totaled $1.42 trillion at an annualized rate in the third quarter, or 10.7% of the economy's gross domestic income, government data show. That was the highest share of national income that companies claimed since the 1960s and was up from 6.2% at the end of 2000.

By contrast, total labor compensation accounted for 56.4% of gross domestic income in the period. That percentage has fallen from 58.4% in the fourth quarter of 2000 and has been in general decline since the early 1980s.

(The rest of national income includes rental and interest income and proprietors' profits.)

What's striking to many experts is that labor's share of the economic pie has failed to grow over the last decade even as American workers have become more productive. In essence, those productivity gains have flowed to companies and their shareholders, not to the rank and file.

"We've had nine years of great productivity growth, and most workers see no gain for it," said Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington.

In recent months, however, some measures of worker incomes have begun to improve. In the 12 months ended in November, average hourly wages rose 4.1%, the biggest pickup since the late 1990s, Labor Department data show.

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