Thursday, January 20, 2011

How is Corporate America Thriving in the Recession?

A question I get asked a lot is how can it be that so many American companies are turning healthy profits, and the Dow soaring, during such a damaging recession.  The answer I typically give is that US firms are very malleable and are able to quickly deal with lower demand.  What I mean by this is the relatively laissez faire labor market in the US makes it easy to shed workers and the threat of doing so makes it easier to get workers to put up with increased work loads, longer hours, etc.  So many firms are able to quickly adjust to the new demand they face and do just fine, thank you very much...

Now David Leonhardt has a more nuanced take of the seeming disconnect in the unemployment rate and the stock market in the New York Times.  Here is an excerpt:

Alone among the world’s economic powers, the United States is suffering through a deep jobs slump that can’t be explained by the rest of the economy’s performance.

The gross domestic product here — the total value of all goods and services — has recovered from the recession better than in Britain, Germany, Japan or Russia. Yet a greatly shrunken group of American workers, working harder and more efficiently, is producing these goods and services.

The unemployment rate is higher in this country than in Britain or Russia and much higher than in Germany or Japan, according to a study of worldwide job markets that Gallup will release on Wednesday. The American jobless rate is also higher than China’s, Gallup found. The European countries with worse unemployment than the United States tend to be those still mired in crisis, like Greece, Ireland and Spain.

Economists are now engaged in a spirited debate, much of it conducted on popular blogs like Marginal Revolution, about the causes of the American jobs slump. Lawrence Katz, a Harvard labor economist, calls the full picture “genuinely puzzling.”

That the financial crisis originated here, and was so severe here, surely plays some role. The United States had a bigger housing bubble than most other countries, leaving a large group of idle construction workers who can’t easily switch industries. Many businesses, meanwhile, are reluctant to commit to hiring workers out of a fear that heavily indebted households won’t spend much in coming years.

But beyond these immediate causes, the basic structure of the American economy also seems to be an important factor. This jobless recovery, after all, is the third straight recovery since 1991 to begin with months and months of little job growth.

Why? One obvious possibility is the balance of power between employers and employees.

Relative to the situation in most other countries — or in this country for most of the last century — American employers operate with few restraints. Unions have withered, at least in the private sector, and courts have grown friendlier to business. Many companies can now come much closer to setting the terms of their relationship with employees, letting them go when they become a drag on profits and relying on remaining workers or temporary ones when business picks up.

Just consider the main measure of corporate health: profits. In Canada, Japan and most of Europe, corporate profits have still not recovered to precrisis levels. In the United States, profits have more than recovered, rising 12 percent since late 2007.

For corporate America, the Great Recession is over. For the American work force, it’s not.

I encourage you to read the rest at the NYTimes.

Anyway, the chicken and egg problem is strong right now, corporations are sitting on a lot of cash and not investing because they are waiting for a sign that demand is going to surge, but of course with so many unemployed demand is not likely to surge.

One last little excerpt from the piece:

Improving high schools and colleges — reclaiming the global lead in education — would help even more. Remember, the jobless rate for college graduates is only 4.8 percent, and some highly skilled jobs continue to go unfilled.

In an economy where skilled labor is our comparative advantage, it pays to be skilled.

No comments: