Should Workers Earn A Larger Profit Share?

COMPANIES should share more profits with employees.

That's the view of Dean Baker, an economist with the Economic Policy Institute, a left-leaning think tank in Washington. "We have a more educated, more trained work force," he says. "But workers are not getting their share of the gains." Most workers' wages have been stagnant for a decade.

"Employees are part of the organization," says Allen Schick, an accounting professor at Morgan State University, Baltimore, Md., and one of four authors of a new paper on the impact of large corporate layoffs on profits. "Employees contribute something to a company - they create value. Everybody's interest should not be subordinated to the stockholders. Employees should not be thrown out for the interest of the shareholders."

Such liberal views may get more of an airing next week if a White House conference on corporate responsibility goes ahead as scheduled.

Mr. Baker this week looked at new Commerce Department figures on corporate profits for 1995 and concluded they were at historic highs. Nonfinancial companies are now making a profit of 8.82 percent on the current value of their investments. That is virtually identical to the 25-year high of 8.84 percent attained in 1994. The after-tax rate fell slightly, to 6.17 percent from 6.35 percent in 1995.

"Since 1952, the only time that after-tax profitability has been this high was in the years 1963-68," Baker states.

Such strong profits are one reason for the boom in the stock market. The Dow Jones industrial average moved to a new high Wednesday, though broader price averages did not. David Wyss, an economist at DRI/McGraw-Hill, a Lexington, Mass., consulting firm, forecasts profits "up a little or flat" this year.

"We don't see the market as terribly overpriced," he says. "But it is certainly not underpriced. There is room for a correction." If interest rates rise further for bonds, then stocks - seen as a competitive investment - could retreat in price, Mr. Wyss says.

Millions of people benefit from rising profits through rising stock prices. They have investments in stocks either directly or indirectly through mutual funds and some pension plans, such as 401(k) and 403(b) accounts. Baker, however, says almost all shares are owned by the most affluent 20 percent of Americans, especially the top 5 percent. "The bottom 80 percent have little interest in stocks, either directly or indirectly," he says.

Baker's analysis of corporate profits is challenged by Aldona Robbins, a senior research fellow with the Institute for Policy Innovation (IPI), a Lewisville, Texas, think tank. She notes that corporate profits make up a smaller portion of the economy today than they have for most of the postwar period. In 1994, profits before taxes accounted for 7.8 percent of total national output, compared to an average of 9.4 percent between 1947 and 1994. Profits after taxes average 5.1 percent of gross domestic product over this time period, but are today higher than 10 years ago.

But Baker holds such a measure of profits as "a little misleading" since the government's share of national income has grown in those several decades. A third, and more appropriate way to measure profits, he says, is as a share of the private sector - not the entire economy. The private-sector share of profits edges up or down in booms and recessions, but doesn't change much otherwise. It was 12.3 percent in both 1990 and 1995, for example.

In another study for the IPI, Ms. Aldona and her economist husband, Gary Aldona, found that when the real after-tax return on capital went up in the past five decades, so did much-valued investment by business - and vice versa when profits went down.

Baker cites a study of investment at 5,000 or so companies by his own institute indicating that the biggest push to greater business investment came from growth in sales, with cash flow (related to profits) next. He says his preferred measure of profits - as a percentage of capital invested - indicates business hasn't been investing much and can afford to pay workers more.

The study by Mr. Schick, by the way, found that of 119 firms that announced layoffs between 1982 and 1989, the average company experienced a dramatic drop in profits in the year prior to announcements. The year after, they had modest financial recoveries, and then a levelling off of profits. "This indicates layoffs are not a long-term positive influence on corporate performance," says another author of the study, William McKinley, a management professor at Southern Illinois University, Carbondale.