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Why Salaries Keep Sinking While Corp. Profits Soar
The level of industry-wide layoffs approaches that seen in recessionary times, but business hasn't done this well since 1970. What's going on?
by Deborah Lutterbeck
Nursing used to offer secure, well-paying jobs. But nowadays nurses like Melinda Bagby worry about layoffs and are afraid to ask for a raise.
A coronary-care nurse with 15 years experience at Audubon Regional Medical Center in Louisville, KY, Bagby is at the top of her pay scale, earning $21 an hour. But since 1989 her pay has gone up only 60 cents an hour.
Audubon, owned by the country's largest for-profit hospital chain, Columbia/HCA Healthcare, is being restructured. Nurses worry that their ranks will be cut and that less-qualified nurses' aides will take over many of their patient-care duties.
It's not that Audubon can't afford to pay loyal employees like Bagby, but that corporate executives have put their growing profits elsewhere-including their own pockets. Columbia/HCA's profits increased by almost 25 percent last year, but Bagby's salary has increased less than 3 percent in six years, meaning that in real dollars her paycheck is worth less than it was in 1989. The company's CEO, meanwhile, saw his salary more than double from 1992 to 1994, and investors in Columbia/HCA have watched the value of their stock holdings increase 129 percent in three years.
Neither Bagby nor her employer is unique in today's economy. While profits for all types of industries have soared to a 25-year high, employees' wages and living standards are actually backsliding. The median salary for a full-time worker is $475 a week, down 1 percent from a year ago and 4.6 percent below its 1979 level. Median family income dropped 7 percent, from $39,696 in 1989 to $36,959 in 1993, while the stock market rose almost 50 percent over the same period.
The two trends are not unconnected. "One reason corporate profits are rising and stock prices have been soaring is that companies have managed to keep a lid on employee costs," says Labor Secretary Robert Reich.
Indeed, while companies used to go after the best-educated, most-competent person for the job and pay them what the market demanded, these days corporations are more likely to seek the candidate that can get the job done for the lowest cost. That might mean a computer, an overseas worker, a temporary employee or simply the least-experienced person.
In many industries fewer people are doing more work for the same pay-or less, in inflation-adjusted dollars. They rarely complain, for fear they'll be fired. "There is a pervasive sense out there in the American workforce that [workers] are lucky to have a job," Reich says. And this job insecurity makes workers more likely to settle for low wage growth, he says.
Job creation is centered primarily in the service sector and high-tech computer firms. But it's hard to raise a family on money earned serving gourmet coffee, and no one learns computer technologies overnight.
Layoffs add to workers' worries. "Every time an American worker hears about another mass layoff involving thousands of employees, he or she is further deterred from asking for a raise," Reich says.
Over the summer some 96,920 workers were laid off or told they would be, and when those people try to find new jobs, they'll have a hard time matching their old salaries. Between 1991 and 1993, 4.5 million workers with at least three years on the job were put out of work, according to the Bureau of Labor Statistic (BLS). In the same period 47 percent of the workers who found new jobs took a pay cut; for 30 percent of them the cut was at least 20 percent.
During the 1980s job losses were the factory workers' saga. America's manufacturing base collapsed, taking 3.2 million good-producing jobs with it from 1979 to 1993. By the 1990s these blue-collar blues had also become white-collar worries. Managerial and professional positions accounted for 24 percent of all permanent layoffs from 1991 to 1993.
The proliferation of mutual funds and influential institutional investors is demanding higher stock returns, and that trend, in turn, drives corporate executives to pursue a stocks and-investors-first management philosophy.
One of the easiest and quickest ways for companies to boost their stock prices is to announce that massive layoffs are part of a restructuring plan, and the strategy is a popular one. In recent years some 80 percent of U.S. companies have "downsized," or cut their staffing levels; among Fortune 500 industrial companies more than a quarter of all employees have been laid off.
According to the American Management Association, employment has become a zero-sum game; for every person who lands a new job someone else has been let go.
In fact, it's become much easier to find a place to invest in corporate America than a place to work. Bank stocks, for example have never looked better. This year they've outperformed the elite S&P 500 stock index, rising 41 percent, according to Keefe, Bruyette & Woods, a Wall Street firm that follows the banking industry. No longer burdened with bad real estate loans, money-losing Third World debt write-offs and junk bonds, banks' balance sheets now glitter.
Mergers are also creating higher returns. This summer two behemoths, Chase Manhattan Bank and Chemical Bank, linked to become the country's largest bank. But 12,000 people-from stock clerks to senior vice presidents-will lose jobs in the deal. And it's going to get worse. By the year 2005 some 450,000 banking-sector jobs will be gone, according to the accounting firm Deloitte & Touche. And Wall street's retrenchment goes beyond the banking sector; since the 1987 stock market crash, some 14,000 securities-and commodities-trading jobs have been eliminated.
Telecommunications, the much-hyped industry of the future, isn't producing as much employment as news copy. Cellular phone sales and interfacing on the information superhighway don't create many jobs. When phone giant AT&T announced its voluntary break-up this summer, it said it would be cutting more than 8,500 jobs. In October GTE said it would eliminate 4,700 jobs by the end of the year. Last year Bell Atlantic announced a plan to cut 5,600 jobs.
The manufacturing sector continues to erode. From March to September, 200,000 factory jobs were eliminated. People in their fifties and sixties are losing their jobs, according to Mary Anne Sedley, president of the national Employment Lawyers Association, and the jobs offered to recent high-school graduates pay 25 percent less than they did in 1989.
For many workers lucky enough to still have jobs, wages have declined in real, inflation-adjusted terms. Last year factory workers were earning an average of $7.97 an hour, 66 cents less than their hourly wage in 1983. Wages for construction workers dropped form $11.24 an hour in 1983 to $9.77 last year, the BLS reports. The sinking-salary trend has also hit many professions; accountants, underwriters, architects and aerospace engineers all earned less in inflation-adjusted dollars in 1994 than they did in 1984. And workers left in the Wall Street money business are making less of it; their average salaries have dropped roughly 14 percent since 1992.
So what's keeping the lid on wages? Economists point to several culprits. Among them: computers and other high-tech equipment, which is replacing many low-skilled workers; free trade policies, which allow companies to cross borders and oceans for cheaper labor; a low minimum wage, which creates a cut-rate pool of U.S. workers; chief executives who help themselves to larger shares of the profit pie; and the declining size and muscle of labor unions.
George Borjas, an economics professor at the University of California at San Diego, estimates that job losses in the auto and steel industries are responsible for roughly one fifth of the decline in U.S. wages.
While the government doesn't keep track of the number of American jobs lost because of open trade policies, economists say tens of thousands of workers have been displaced by cheap overseas labor. According to the BLS, since January 1994 some 42,000 workers have signed up for job-loss benefits related to the NAFTA agreement. Federal Reserve Board Chair Alan Greenspan disagrees, saying foreign competition "affects only a relatively small part of our work force-factory jobs of total employment-and some service activities."
Jobs at the minimum wage don't go far in the market place; a full-time worker earning the minimum wage makes less than $9,000 a year, far below the poverty level for a family of four. The real-dollar value of the minimum wage is even lower; while living costs continue to increase, the minimum wage hasn't been raised since 1991. In 1960 the minimum wage was worth today's equivalent of $6.40 an hour. And contrary to the conventional wisdom, which has most minimum-wage jobs going to high school students, 84.1 percent of minimum-wage earners were adults in 1991 and 42.6 percent of them were working full time.
President Clinton's proposal to raise the minimum wage to $5.15 an hour has gone nowhere. Businesses balked at the proposed increase, warning that its ripple effect would result in higher prices for just about everything. "Everyone who is making more than minimum wage is going to say `we want 90 cents too'," says Peter Eide, manager of labor law policy at the U.S. Chamber of Commerce. "Do you think it will come out of corporate profits? No. Everything is going to cost more," he says.
Overall, CEOs are doing exceptionally well. While the average worker's earnings were barely keeping pace with inflation last year, the average CEO earned $4.34 million in total compensation, up 15.9 percent from the previous year, according to executive compensation expert Graef Crystal, an adjunct professor at the University of California's Hass School of Business.
On average CEOs are earning six times more money than they were in 1980, and the gap between worker and executive earnings has grown dramatically. Twenty years ago the average CEO made about 35 times what the average production worker did; last year the CEO-to-worker earnings ratio was 120-1.
And as along as stock prices keep skyrocketing, corporate directors and investors are unlikely to question the CEO's compensation package. "A CEO who shows boldness by dramatically cutting payrolls in one fell swoop often gets rewarded [with] an uptick in the price of the shares of the company," says Labor Secretary Reich.
On top of that, corporate boards are filled with other CEOs who are unlikely to challenge a peer's pay. "Corporate boards have become even more buddy-buddy than they used to be," says Martin Mayer, guest scholar at the Brookings Institution. "The people on the inside aren't going to argue with you; after all, they're getting theirs." Employees, meanwhile, are getting next to nothing.
Money can't buy happiness, but it certainly helps grease the skids on Capital Hill. "Those companies and those individuals with the greatest resources have the most clout in Washington," says Labor's Reich.
Money helps shape who wins office, gives special interests access to congress members and helps explain why the wage issue isn't on the political agenda. The $41.6 million that labor PACs contributed to congressional candidates in the 1993-94 election cycles is a lot of money, but it's much less than the $73.6 million contributed by corporate and business PACs. These corporate interests have fared very well in the new Congress. The Republican plan to balance the federal budget in seven years barely touched 120 corporate welfare programs, for example, estimated by the Cato Institute and the Progressive Policy Institute to cost taxpayers more than $100 billion a year.
The GOP plan to reduce the capital gains tax is only the latest pro-business tax reduction passed by Congress. The largest tax break government gives business is an accelerated depreciation schedule, which allows corporations to take bigger tax write-offs sooner for their investments in capital assets such as plants and equipment. This tax break will be worth about $32.2 billion to corporations this year, according to the Congressional Budget Office. This and other tax breaks have lowered the average corporate tax rate to 31 percent, down significantly from an average of 44.3 percent from 1952 to 1979.
Businesses ranging from oil and gas companies to bed-sheet makers contributed almost $15.9 million to Republican party committees and $6.7 million to Democratic party committees in the first half of 1995. Soft-money contributions made by labor unions totaled $35,000 to Republicans and $896,000 to Democrats during the same period.
Many of these givers have specific legislative interests. Chicago-based textile maker Fruit of the Loom, for example, made its first soft money contribution-$100,000 to the Republicans-on February 7, 1995. Three days later the House Ways and Means trade subcommittee voted to ease quotas on low wage Caribbean countries where Fruit of the Loom has operations. The company has denied any connection between its contributions and the subcommittee's vote.
While median earnings have declined 15 percent overall since 1973, it's the middle and lower classes that have taken the hardest hits. More than 40 percent of all increases in earnings in recent years have gone to the wealthiest 1 percent of American households.
This increasing income inequality alarms Labor's Reich. "We are heading rapidly toward a two-tiered society composed of a relative minority of people who are extremely wealthy and a much larger number who are experiencing downward mobility and greater and greater job insecurity," he says. "That's not good for America. Ultimately it threatens our prosperity and our stability."
Edward Leamer, a Yale University economist, wonders if this growing wage inequality will lead to unthinkable class divisions in the 21st century, with "walled communities and police that separate these high-wage people from these low-wage people." An estimated 4 million Americans already live in so-called gated communities, says Mary Gail Snyder, co-author of the forthcoming book Fortress America.
For nurses like Bagby it's not so much the next century that concerns her as the next few years. "In the old days companies would go to their employees and say, `We aren't doing as well as we should be. What are we going to do about it?' " she says. But now it's stockholders and wealthy company directors who call the shots, managing the restructuring with stock prices in mind.
Bagby wonders how much longer she'll have a job-not because her company is doing poorly, but because it is doing so very, very well.
Reprinted with permission from Common Cause Magazine, Winter, 1995 (slightly abridged). Call Common Cause, a nonprofit group that seeks to improve how government operates, at 202-833-1200.