NEVER mind the divide between Main Street and Wall Street. The big gap at the moment is between workers and corporations. Although unemployment remains stubbornly high and wage rises are hard to come by, corporate profits are taking a larger share of American GDP than before the financial crisis (see chart). America stands out from the pack, one reason why its stockmarket has been outperforming the rest of the developed world. In both continental Europe and Japan, earnings per share are well below their November 2007 levels. But even in America, the tide may be turning. Quarterly-results seasons tend to involve a ritual dance. In advance companies guide analysts’ forecasts down so they can beat the consensus on the day. But so far the second quarter has seen fewer companies beat expectations than in the first quarter. And forecasts for the rest of the year, and for 2013, are being steadily revised down. According to Société Générale, only a third of profit-estimate changes were positive over the four weeks up to July 16th. There is plenty of scope for disappointment. Global profits growth is still expected to be 13.5% next year, compared with 6.3% in 2012. Adam Parker, a strategist at Morgan Stanley, is forecasting that S&P 500 companies will earn $99 per share next year, compared with a consensus expectation of $118.

Why have profits been so high, despite the fragility of the economy? American firms were very quick to sack workers after the crisis started. But there is also a longer-term explanation, based on the weakened power of labour after the entry of countries like China into the global employment market. Companies have been able to move production offshore and to resist demands for wage increases from workers in their domestic market.

But even if capital is lording it over labour, a second mechanism ought to bring corporate profits down. A high return on capital should encourage a wave of investment. The resulting expansion in capacity should increase competition and reduce returns. But that has yet to happen: companies are still hoarding cash.

There are three potential explanations for this cash mountain. The first is that executives are worried about excessive regulation. American bosses in particular may be waiting for a possible change of administration after the presidential election in November.

The second is that firms are reluctant to invest in the face of weak demand. Domestic consumers have been under pressure from austerity and higher commodity prices; the euro-zone crisis and a slowdown in developing economies is weighing on export prospects. Companies may have milked all they can from productivity improvements. The irony here is that a high share of GDP for profits automatically results in a low share for wages and thus may eventually be self-limiting—a positively Marxist outcome.

The third explanation for cash hoarding is the most intriguing. Andrew Smithers of Smithers & Co, a consultancy, suggests incentives may be to blame. Managers are motivated by share options and share prices are driven by changes in earnings per share. Spending cash on share buy-backs boosts earnings per share immediately, whereas a capital-investment programme may actually reduce earnings in the short term.

Capital expenditure may have a pay-off in the long run but, given the ever-shortening career span of the average chief executive, few may be willing to take a chance that they will be around for the long term. A recent paper* from the Federal Reserve Bank of New York suggests that executive incentives may even be driving the business cycle by their effects on investment.

The incentive problem may not apply just to executives. Shareholders too may prefer a share buy-back to the uncertain pay-off from an investment programme. Many shares are owned by professional fund managers, who are themselves judged by clients on their performance over the most recent quarters.

It is surely far better for profits to fall because firms are indulging in an investment spree than for profits to fall because executives’ caution is sending the economy into the doldrums. Businesspeople are among the most vocal in their calls for government deficits to be cut, but if firms spent more, and hired new workers, deficits would fall of their own accord.

* “Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts”, by John Donaldson, Natalia Gershun and Marc Giannoni, December 2011