Prioritizing Profit: How Investor Interests Have Driven Wage Stagnation Since the 1980s

The relationship between companies and their investors has long been a driving force in shaping corporate priorities and wage structures. Since the 1950s, businesses have increasingly focused on maximizing shareholder value, often at the expense of employee wages. This shift became more pronounced in the late 20th century, particularly during the 1980s when policies and corporate governance models began to prioritize investor returns over reinvestment in labor.

Historical Context: 1950-1970s In the post-World War II era, roughly from 1950 through the 1970s, businesses were more balanced in their approach to growth. Companies saw value in sharing profits with employees, ensuring wage growth aligned with productivity gains. It was a period where labor unions held significant power, which helped secure livable wages for workers. During this time, corporate profits were not solely funneled to shareholders, but also reinvested into workers' wages, which supported the middle class and stimulated the broader economy. Wages rose in line with productivity, creating what many saw as the golden age of American capitalism.

The Shift: 1980s The 1980s marked a significant shift in economic priorities. Under policies associated with the Reagan administration, a more market-oriented approach was adopted. Deregulation, tax cuts for corporations and high-income individuals, and weakened labor unions contributed to a major change in business strategies. Shareholder value became the primary focus of corporations, guided by economists like Milton Friedman who argued that the sole purpose of a business is to increase profits for its shareholders. As a result, companies started prioritizing short-term financial gains and stock market performance. This shift meant that profits were increasingly directed toward dividends and stock buybacks, benefiting investors but sidelining workers.

During this period, wage growth decoupled from productivity. While businesses became more profitable, the gains were disproportionately distributed to shareholders rather than workers. The term "trickle-down economics" was coined to justify this approach, suggesting that the wealth gained by investors would eventually benefit the broader economy. However, this theory largely failed to materialize for everyday workers, who saw stagnating wages and a growing income gap.

1990s to Today From the 1990s onward, the investor-driven model intensified. Companies became more global, leading to increased competition and outsourcing, which further suppressed wages domestically. At the same time, stock ownership was concentrated in the hands of a small percentage of individuals, meaning the wealth generated by these companies disproportionately benefited a select group of investors. Workers, particularly those without stock-based compensation, were left behind as wages continued to stagnate, even while corporate profits soared.

Companies today keep investors happy because the modern economy heavily ties executive compensation to stock prices. A significant portion of CEO and executive pay is now stock-based, meaning their personal wealth is directly linked to pleasing shareholders. This has led to practices like stock buybacks, which artificially boost stock prices and generate immediate returns for investors, rather than reinvesting in the workforce. While this pleases shareholders, it often comes at the expense of paying workers a livable wage, particularly as inflation has risen and the cost of living has skyrocketed in many parts of the world.

The Wage Crisis This focus on shareholders over employees has contributed to wage stagnation, particularly since the 1980s. According to studies, worker productivity has risen by nearly 70% since 1979, but hourly wages have only increased by about 12% in the same period. In contrast, CEO compensation has increased by over 1,000% since 1978, highlighting the growing disparity between executive pay, investor returns, and worker compensation.

Ultimately, the business world remains investor-focused due to the structure of modern corporate governance, where short-term profitability is often prioritized over long-term investment in employees. Breaking this cycle would require a shift in economic and corporate policies, such as higher minimum wages, stronger labor protections, or even a rethinking of what constitutes corporate success. Until then, companies will likely continue to prioritize the financial interests of their shareholders over those of their employees, contributing to rising income inequality and worker dissatisfaction.