The Dalles To the editor:
In a December 27 New York Times article titled ‘The Fear Economy,” economist/columnist Paul Krugman discussed why corporate profits in 2013 soared to record highs, relative to GDP, despite lingering unemployment and weak economic growth. It was a wonderful insight into the workings of the labor market - and how conflicts of interest between wages and profits can play themselves out.
If unemployment is very low due to a booming economy, workers have little fear of getting fired and can bargain harder for higher wages, even at some expense of profit margins. And U.S. economic data clearly show a declining profit share of GDP during the full employment periods of the late 1960s and late 1990s. It is not clear, however, if total profit is hurt by very low unemployment, for the simple reason that the pie will be larger.
But if unemployment is relatively high and workers are easily replaceable, employers have the leverage to either work their employees harder or cut wages, both of which increase the rate of profit for the company. And sure enough, in a time of prolonged severe job shortages, labor’s share of the pie has fallen to historic lows.
While a smaller pie means it isn’t clear whether total profits are higher, it does shift the balance of power toward big business, which is considered a positive development from their perspective — albeit negative for everyone else.
This is why full employment policy is critical for those seeking to fix our low-wage, high-inequality problem. I applaud the Presidential nomination and Senate confirmation of Chairwoman Janet Yellen, who is a strong advocate of such policies. Hopefully she will pursue a more gradual, “dove” approach to Federal Reserve tapering, and not get intimidated by inflation hawks whose monetary ideas would be bad for wage-earners.