There is a growing debate over why prices are so high, why prices aren’t falling, what is driving prices. Conor Pope has another instalment in his series on price outrages. Answers vary according to sectors. But one of them must be rising profits. Profits now take a bigger slice of the price of goods and services in the domestic sector than wages. In the economic sectors dominated by domestic-owned enterprises in 2021:
- Total profits (gross operating surplus) made up €97.4 billion
- Total employee compensation made up €92.3 billion
This is unusual. In modern economies, wages (employee compensation) usually exceed profits, though the history of most European countries has seen wages fall as a share of income over the long term, with profits rising.
Of course, when measuring the Irish economy, one has to introduce caveats. In this instance, profits are boosted by aircraft leasing which are removed by the CSO when assessing national income (GNI*). This is because aircraft leasing, while domestically-owned, has little impact on domestic activity: aircraft is bought abroad, flown abroad, maintained and warehoused abroad. We don’t have profit data for aircraft leasing in the CSO’s productivity database but we can remove the Administrative Services sector, where those profits dominate.
When we do this, profits fall below wages – but not by much.
- Total profits (gross operating surplus) made up €81.8 billion
- Total employee compensation made up €86.6 billion
But the story of rising profits remains.
Prior to the crash, profits and wages rose together – that is, they shared out productivity gains equally. The crash drove down profits which is usual in periods of economic contraction. However, since 2012, profits have nearly doubled while wages rose by less than 50 percent.
Importantly, during the two years of the pandemic, profits, excluding administrative services, increased at an even faster pace. Between 2019 and 2021:
- Profits rose by over 21 percent
- Wages rose by 8.6 percent
Unfortunately we don’t have data for 2022. Again, we have to caveat these numbers. The lockdown period saw considerable changes in sectoral composition meaning that economy-wide data is likely to be volatile. It is likely this data won’t settle until this year. But the pattern of rising profits is well established.
We can also get in an insight into the inputs into gross output, or price. Unfortunately, for the domestic sector, we only have data for manufacturing.
Unsurprisingly, materials and services used in production make up the largest amount of inputs. Energy, in 2021, makes up a small amount but this will have risen in 2022 with the price hikes.
The key point is that profits (capital) make up 22 percent of total output while wages make up only 15 percent. Profits make up a bigger slice of price than wages.
It is important to remember that while profits economy-wide are rising, they may not be rising uniformly across all sectors, or across Irish and foreign-owned enterprises. Unfortunately, the data does not allow us to safely assess profit increases at sectoral level given the data distortions by multi-nationals.
We would probably find that many businesses are also suffering from a profit-price spiral. One example of this would be businesses that purchase energy as part of their inputs. If there are ‘excess’ profits in energy, then businesses as well as households will be paying over the odds.
What all this calls for is a greater focus on profits. When it comes to wages, we get up-to-data on a quarterly basis. It is possible to bread down this data by sex, age, size of enterprise, sector, public/private sector, region and even county-level, etc. We get a wall of relatively-contemporaneous numbers when it comes to wages. And a further benefit is that this data is not distorted by multi-national tax and legal strategies.
However, when it comes to profits the data can lag by two to three years with few details. You are left with putting together a puzzle with a lot pieces missing.
This is further exacerbated by the fact that many companies do not have to file complete company accounts, laying out their profit-loss accounts and balance sheets. Full and partial exemptions include small companies (which can still have significant commercial activity), companies based abroad – especially headquartered in tax havens, and private unlimited companies (e.g. Dunnes Stores).
What we need is Freedom of Economic Information to operate alongside the current Freedom of Information legislation. This would require:
- The Government to increase resources to the CSO to allow them to gather and publish contemporaneous data on profits on a par with wages.
- All companies that do business in the state publishing their full company accounts in a timely manner.
- Providing free access to company accounts. Currently, people have to pay to get accounts from the Companies Registration Office. This service should be free. The UK provides free company information so why can’t we?
We need to get a better understanding of the role of profits in the economy – who makes how much and what is done with profits (re-investment, retention in the company, dividends, etc.).
We know that profits are driving prices. We are in a profit price spiral. Greater attention on profits will help inform policy, identify price-gouging and, potentially, name and shame. Most importantly, it would provide the information the Government needs to control and eventually bring down prices.
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