I saw an interesting video today. This post isn’t about its political ramifications. In fact, I have no freaking clue what they’re trying to say. But the part that caught my eye was this:
It’s an agenda that – so far – has resulted in an increase in U.S. corporate profits of 45%, while wages of America workers has risen only 3% in the last five years.
That sensationalist quote makes it sound like corporations are eating up profits at the expense of their workers. The problem with their implied conclusion is that if profits went up 45%, so should wages. Unfortunately, that’s not realistic.
Let’s say a service-oriented corporation had $10,000 in employee wages (its only cost) and made a profit of $1,000. In other words, they had total revenue of $11,000.
But then they had an awesome year and sold $12,000 worth of services. Let’s say we funnel that 50/50 between “profits” and “wages”. Notice that wages increases to $10,500 (5%) while profits increase to $1,500 (50%).
For every $10 in wage costs, you might get $1 in profit. Wages are the single biggest cost of running a company. Unlike revenue, profits are a fraction of wages.
That little figure they threw out means nothing. Even if revenue jumped 45%, it would still be misleading since most companies would spend it to increase HR, not increase wages by 45%.