Acton Institute Powerblog

What if we redistributed all profits to workers?

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A perennial complaint by the political left is that the CEOs of American companies earn too much money. The implication is not, however, that the “excess” money should be distributed to the shareholders (who actually own the company). Instead, the idea is that “fairness” requires that much of the profit that normally goes toward the CEO’s pay should be redistributed to the rest of the company’s employees.

But what if we took it a step further: What if we redistributed all corporate profits to workers? What if the profits of every American company were not given to the shareholders but divided equally among every worker in America?How much do you think it would raise the average worker’s pay?

Take a moment to do a rough guestimation of how much the hourly wage would be raised if all profits were redistributed. Have a number in mind?

The answer to the question is that the average worker’s hourly wage would increase by . . .

. . . $7 an hour.

Kevin A. Hassett crunched the numbers to come up with that figure:

To answer this question, we gathered data on after-tax corporate profits from the Bureau of Economic Analysis. We then gathered data on average hours worked per week per nonfarm employee from the Bureau of Labor Statistics and transformed these weekly data into data on the aggregate number of yearly hours worked by all nonfarm employees. Finally, we divided quarterly corporate profits by the aggregate number of hours worked by nonfarm employees over the same period, labeling this value the “expropriation subsidy” on the chart. To get an idea of how much of a per hour wage increase this policy could create, simply add the values of the two lines at a point in time.

As the chart shows, if every dollar of U.S. corporate profits were allocated to America’s employees, the effect would be to add a bit more than $7 to the average wage.

For most of us, $7 an hour would be a welcome raise. But it also wouldn’t be life-changing. The average hourly wage for non-government workers is currently $25. Bumping it to $32 would have a small effect on our lifestyles, and almost no affect at all on the overall economy.

Most people with a basic understanding of economics realize that making a profit is a necessary incentive to encourage people to take the risks and endure the hassles that come with starting and running a business. If you work at a for-profit company, think what would happen if the business you work for stopped earning a profit. You probably realize that it’d be better to forego a $7 bump in pay if it meant getting to have and keep a job your job.

Yet most economically literate people who wouldn’t risk their own jobs over a $7 increase in pay are more than willing to risk the elimination of someone else’s job for that same amount. That is essentially what is happening in the debate about raising the minimum wage to $15 an hour.

The current federal minimum wage is $7.25 an hour. If we added $7 more we’d get a wage of $14.25. The “Fight for $15” campaign would increase it an additional .75 cents.

So where do employers get the additional $7.75 increase to pay their workers? From their profits. The problem, of course, is that many firms that hire minimum wage workers don’t have sufficient profits to pay an increase of $7 an hour.

Keep in mind the $7 we mentioned earlier was from all private industries. Many of the most profitable firms are the ones that do not hire many minimum wage workers. Of the 20 most profitable companies in the world, nine are based in the United States. These include two banks, Wells Fargo and JPMorgan Chase; two energy companies, Exxon Mobil and Chevron; two technology firms, Apple and Microsoft; and the conglomerate Berkshire Hathaway.

You don’t see many minimum wage bank tellers or gas station attendants in America. The reason is because those industries found ways to automate (e.g., ATMs and pay-at-pump machines) to eliminate their low-skilled labor costs. So the industries that often make less profit than the average are the ones that are expected to bear the brunt of the cost of subsidizing the increase in minimum wages.

While it may feel that raising the minimum wage is the right thing to do, it doesn’t help those who are put out of a job because they are priced out of the labor market. If you wouldn’t want to lose your own job so that someone else could make an additional $7 an hour, then you shouldn’t be eager to do the same to America’s least-skilled workers.

Joe Carter

Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).