Obama wants businesses to raise pay. Here’s why they probably won’t listen.

There was one line in President Obama’s State of the Union address Tuesday night that captured the true balance of power that has existed between the president and U.S. businesses during the economy’s long, slow recovery. It came just after Obama mentioned a pizzeria owner in Minneapolis who had raised his worker’s wages to boost their morale.

"Tonight I ask more of America’s business leaders to follow John’s lead," the president said. "Do what you can to raise your employees’ wages."

Here’s the trouble with Obama's request. Companies have discovered that precisely by keeping wages lower, they have been able to boost profits to record levels and fulfill their ultimate goal: rewarding shareholders. In a report released earlier this month, Goldman Sachs chief U.S. chief economist Jan Hatzius noted that the strength in corporate profits is “directly related to the weakness in hourly wages.”

“The weakness of wages and the resulting strength of profits are telling signs that the U.S. labor market is still far from full employment,” Hatzius wrote. Here are the two key charts:

Exhibit 1: Wages Still only Growing 2%


Exhibit 2: Price-Cost Gap Is Key for Profits


Corporate profits are at all-time high as a percentage of GDP, which helps to explain why the stock market has had such a meteoric rise in the last year, something Obama noted in his speech as a source of income inequality.

Executives are hard-wired at this point to think that their primary responsibility  is to return value to their shareholders, whether that’s through boosting profits by cutting costs, raising dividends or purchasing shares through massive buybacks. Last year saw the return of the buyback, with the 30 companies listed in the Dow Jones industrial average authorizing the repurchase of more than $200 billion worth of shares.

It’s all the result of having a more financialized economy in which shareholder value comes first, an idea that only took root in the 1980s and has steadily blossomed since. Until Obama deals with this fact, every time he asks corporate America to do something like raise wages, executives will feel free to ignore him. And it’s no wonder: Because they don’t answer to the president -- they answer to shareholders.

Update: There's already a response from big business on whether they'd be willing to raise wages, and it's basically a no. John Engler, president of Business Roundtable, an association of U.S. corporate executives, spoke with my colleague Cecilia Kang and said that Obama's focus on raising pay distracts from the bigger problem of unemployment.

He said companies first need government policies that would create new jobs to strengthen the economy. To that end, Engler said he was pleased to hear Obama promise tax reforms, funds for job training programs and new infrastructure projects. But, he warned, any across-the-board mandate on wages would hamper companies that are trying to rebound from a prolonged slump.

The talk of wages "distracts from economic growth," Engler said. "Growth in wages follows growth of businesses and economic growth." He noted that wages are highly sensitive to local economics. "In North Dakota, because there is so much competition for jobs, a McDonald’s worker makes $14 an hour," he said.

“It’s better to get people with wages and opportunities on the middle-income ladder," said Engler. "And that takes growth and more jobs. The president mentioned the 1.6 million people who lost their unemployment benefits, but he didn’t mention the people – five times more – that have been unemployed for much longer. Companies are willing to hire them, but they need a growing economy for investments to be made."

In fact, Obama did mention the long-term unemployed during his speech: "I’ve been asking CEOs to give more long-term unemployed workers a fair shot at that new job and new chance to support their families; this week, many will come to the White House to make that commitment real."

What hasn't been figured out yet is how to make such promises stick.

Jia Lynn Yang is a staff writer at The Washington Post who covers policy and business. Before joining the Post, she worked at Fortune magazine.
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