Corporate Profits

Corporate profits have increased far more than labor income during the pandemic, continuing a trend that began in the mid-2000s.

Corporate profits and employee wage & salary compensation, U.S.

Indexed to 1954

Sources: Federal Reserve Bank of St. Louis and Bureau of Economic Analysis (BEA). Notes: Corporate profits (also known as “profits from current production”) are before tax and include the inventory valuation adjustment and capital consumption adjustment. Both corporate profits and employee wage & salary compensation are adjusted for inflation using the GDP implicit price deflator, and indexed to 100 in 1954. Gray bars= recessions.

Historically, corporate profits and employee compensation have tended to fall during recessions and rebound afterward, with corporate profits swinging more widely than employee compensation. But since 2000, the growth in corporate profits has greatly outstripped growth in employee compensation.¹ Experts attribute these unprecedented increases to increased “corporate market power.” As corporations have consolidated and purchased smaller companies, they have less competition, which allows them to demand higher prices of consumers. This, in turn, contributes to inflation.²

Average hourly earnings have nudged upward from $31.38 in December 2021 to $32.82 in December 2022.³ But corporate profits have surged — growing from a then record-high of $2.5 trillion in Q3 2020 to $3.0 trillion in Q3 2022.⁴ If the labor market continues to be tight, and workers continue to push for higher wages, weak competition among corporations will allow companies to pass on these costs by raising prices further to maintain high profit margins.

Recent inflation has been driven by several factors, including rising wages, corporate market power, and supply chain disruptions.⁵ Policymakers interested in reining in inflation while minimizing the ill effects of increasing unemployment among low-wage workers can focus on measures that increase competition, thereby curbing corporations’ ability to raise prices.⁶

1. “Corporate profits versus labor income”. FRED. August, 2018. https://fredblog.stlouisfed.org/2018/08/corporate-profits-versus-labor-income/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog

2. “Rising Corporate Market Power: Emerging Policy Issues”. Akcigit, Chen, Diez, Duval, Engler, Fan, Maggi, Tavares, Schwarz, Shibata, and Villegas-Sánchez. International Monetary Fund. March, 2021. https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2021/03/10/Rising-Corporate-Market-Power-Emerging-Policy-Issues-48619

3. “Average Hourly Earnings of All Employees, Total Private”. FRED. https://fred.stlouisfed.org/series/CES0500000003

4. “Corporate Profits with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj)”. FRED. https://fred.stlouisfed.org/series/CPROFIT 

5. “Why Market Power Matters for Inflation”. Konczal. Roosevelt Institute. September, 2022. https://rooseveltinstitute.org/publications/why-market-power-matters-for-inflation/

6. “The Fed May Finally Be Winning the War on Inflation. But at What Cost?” Steinberger. The New York Times Magazine. January, 2023. https://www.nytimes.com/2023/01/10/magazine/inflation-federal-reserve.html