The single most important factor determining U.S. inflation is employee compensation. Compensation accounts for about 65% of national income—a rise in compensation increases disposable income thus stoking demand in the economy. However, and more importantly from an inflation perspective, higher compensation boosts labor costs, forcing firms to raise their prices to maintain profit margins.
There are at least two reasons I like that statement:
1. I like their choice of words here: Compensation accounts for about 65% of national income. They refer to a percentage of national income, not a percentage of national economic activity. National Income is a technical term, well-defined and specific. National Economic Activity, apart from my own definition of it as "spending," is non-technical and to my knowledge undefined and uncounted.
2. I like their explanation of inflation. They consider both sides of the supply and demand equation: Rising compensation boosts demand, they say, but "more importantly from an inflation perspective, higher compensation boosts labor costs, forcing firms to raise their prices to maintain profit margins." They consider both demand-pull and cost-push inflation, and they say the cost-push forces are more significant.
I like that because, in my view also, our inflation has been cost-push for some time. Idunno, maybe J.P.Morgan and the report's author, Dr. David Kelly, are supply-siders concerned only about business conditions and not at all about customers' conditions. I see no evidence of that, but I don't care if they are. They agree with me that inflation is a cost-push problem. Good work, guys.
There are also two reasons I don't care for that opening statement:
1. It sounds like there is absolutely nothing that can be done to improve the standard of living: Any increase in payroll will cause a price increase. Of course, we know better. For if living standards can fall -- and we know that can happen -- then they can change; and if they can change, they they can rise. But you don't get that from the excerpt.
They describe compensation as part of income. And clearly it is; but income is not the same as cost.
(After a long delay...) Here we go. The most recent corporate tax data I could find is from 2006. I found the link at Paul Caron's TaxProf Blog. (NOTE: Clicking on his "2006 Corporate Tax Returns" link starts the download of a 6½ meg PDF. Clicking on the graphic at right gives you the relevant bit of it.) On page 83 of that PDF, the two left-most columns give a nice breakdown of corporate numbers for 2006.
Halfway down that page we find total [corporate] receipts. A few lines down from that we find total deductions. Total deductions -- basically, everything bookkeepers had receipts for, and corporations paid no tax on -- added up to $25.5 trillion for 2006.
In the breakdown of costs under "total deductions" we see that compensation of officers cost more than $473 billion, or about $0.473 trillion. Salaries and wages came to $2.457 trillion. Added together, salaries, wages, and compensation of officers amounted to a bit under $3 trillion.
So, all the spending corporations did that year, or all they could legally deduct anyway, came to $25.5 trillion. All the money paid to employees came to a little under $3 trillion, or less than 12% of total costs. Not 65%. Twelve percent.
So basically, if everybody in the company got a 100% raise, that would increase costs by 12%.
But that's not a realistic raise.
Say you work for an "average" corporation where employee compensation amounts to 12% of expenses. Here: You work for SmallCorp, with total deductions of $100. Labor costs: $12. Now everybody gets a 10% raise. What happens to the numbers?
Labor costs go up $1.20, to a total of $13.20. Total costs also increase by $1.20, to $101.20. So a 10-percent pay increase translates to only a 1.2% cost increase for SmallCorp.
Of course, SmallCorp has to pass along that 1.2% increase to its customers, plus a little something for itself. So those customers see a cost increase in addition to any across-the-board pay hike of their own. And the customers' customers see somewhat greater cost increases. By the time every working stiff in the country gets that 10% raise, and those costs have worked their way through the system, we'd see a substantial jump in prices, no doubt.
My point nevertheless remains valid: Employee compensation is far less than 65% of business costs.
1 comment:
I'm of the opinion the compensation portion doesn't include a myriad of costs related to hiring, firing, training, facilities, health care etc.. Aside from that, I'd argue there's a definite agenda out there to devalue human beings or, to be more accurate, the importance of their contribution to the corporate enterprise, treating them like expendable commodities. This has been keeping with the outsourcing and downsizing of the American worker, who's been the most productive in history. It's not so much that we can't make things and do it well, as much as those who control the gears of capitalism want reasons to maximize short-term profits.
Now a good economic topic to be a reactionary about: America has become more about pushing piles of paper (Federal Reserve notes to be exact) around than making things. To substitute for a weaker manufacturing sector, we've had a service economy forced down our throats not as a policy goal but as a fallback necessity, a means of saving face politically.
On paper, the outsourcing may make sense. But for America, economic globalization has decimated employment. The argument is that they can make it for less overseas. Probably so. But they also have newer factories, and health care--the largest expense related to employment--is subsidized by the state (and less in demand due to a younger workforce.)
To rationalize the mass exodus, corporate leaders blame higher compensation costs. They have a point in the short-term, but the compensatory benefit of off-shoring is beginning to dwindle--foreign workers will want the flat screen, the Playstation, in short, to be more like us. Chinese workers have been willing to labor for $1/hr. coming in from working the rice patties. Recent strikes in China are showing that the workforce won't work for that much less for that much longer.
Our tax policy should reflect the goals of our economy, but rarely does, especially with outsourcing. Too often, deductions flow to companies with the craftiest accountants, Enron-style offshore subsidiaries, and financial firms with paper profits (now amounting to over 40% of American "GDP").
Another huge point is that large companies simply don't hire as much as smaller ones. Of course, tax policies reflect the amount of influence and lobbying large entities expend in Washington; if small businesses could lobby like that collectively, they'd be more fairly treated under the tax code, and a bigger chunk of national income would go to compensation.
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