Why Don’t Jobs and Corporate Profits Match Up?

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Lucy Nicholson / Reuters

The vibe on Wall Street couldn’t be more at odds with deflated Main Street. Yes, stock prices headed down after today’s disappointing jobs report, which showed unemployment rising to 9.1%. But for anyone who hasn’t noticed, big corporations are still making a killing. What gives?

It was only last week that a slew of companies reported gleaming profits for the first three months of the year. High-end jeweler Tiffany, for instance,  posted a phenomenal 25% profit gain for its first quarter. According to the U.S. Commerce Department, overall corporate profits during the last three months of 2010 grew by 20.4%, their highest jump since 2004. A lot of Wall Street onlookers think that’s positive, even though companies were holding onto $1.9 trillion of that excess cash at end-2010, according to the Fed. Just last week, Janney Montgomery Scott’s chief investment strategist Mark Luschini said of the profit splurge: “The bright side is that there’s a clear dichotomy between the health of corporate America and the economy.”

So, what’s so great about corporate profits if they don’t translate into American jobs? The truth is, not that much. A lot of companies say they’re waiting for the global economy’s big uncertainties to clear up before hiring: Japan, the Middle East, the eurozone crisis. And of course there are a lot of questions about how things will shake out in the U.S., which have left companies clinging to cash: healthcare reform, financial regulation, a possible double-dip recession, taxes and the budget debacle.

But there’s something much bigger going on that companies aren’t all that bothered with: jobs no longer follow growth. Until roughly a decade ago, employment and economic growth moved up roughly in lock step, a notion that became the bedrock of economic policymaking in the developed world. But globalization means all that’s changing now, which raises some very big questions on what the U.S. should do to actually get jobs moving. A new paper out by Nobel laureate Michael Spence lends some insight into this trend:

Companies have little incentive to invest in technologies that save on labor or otherwise increase the competitiveness of the labor-intensive value-added activities in advanced economies. In short, companies’ private interest (profit) and the public’s interest (employment) do not align perfectly. These conditions might not last: if growth continues to be high in emerging economies, in two or three decades there will be less cheap labor available there. But two or three decades is a long time.

In the meantime, even though public and private interests are not perfectly aligned today, they are not perfectly opposed either. Relatively modest shifts at the margin could bring them back in sync. Given the enormous size of the global labor force, the dial would not need to be moved very much to restore employment growth in the tradable sector of the U.S. economy.

In the globalized labor market, companies are now using their profits to invest sparingly in high-skilled jobs in the U.S., which offers a better return on their investment, while sourcing more lower-skilled labor from abroad. Those investments still contribute to U.S. growth, but they don’t do much for U.S. jobs. “A lot of revenue growth is outside the United States. If I’m building new stores in China, I’m staffing them in China. That feeds back to some employment gains in the U.S., but it isn’t big,” says Dartmouth economist Matthew Slaughter.

The bottom line is that the good old profit motive can no longer be relied upon to secure more jobs for the average American. That may sound pretty hopeless, but there are solutions. Spence says more collaboration between government, business, and labor can help, which would 1) push corporations to invest in technology advancements they wouldn’t normally make, which would in turn increase the productivity of  lower-skilled U.S. labor, and 2) push U.S. workers to accept more globally competitive wages, aka less money.

A good example is Germany, which, unlike the U.S., still has a booming manufacturing sector despite being a wealthy, developed country. The reason? Long before the financial crisis and recession began, Germany’s business sector and labor unions got together to make mutually-beneficially sacrifices for what they considered good of the country. Employees agreed to slower wage growth, and corporations agreed to be less erratic with hiring and firing.  The agreement led to pretty paltry wage rises over the years for the average German, but Germany’s income inequality is low and its unemployment rate is only 6.3%. By contrast, U.S. unemployment is still sky high, even though wages on average have risen faster than most other advanced economies.

But the problem is this: There are still a few sectors of the U.S. economy that are benefiting from the new global game: finance, computer engineering and design, and not surprisingly, the top management at big corporations. So what would motivate corporate America’s big bosses to trade away their soaring incomes for the sake of the average Joe?  Obama should consider calling Germany to figure that one out. Otherwise, the invisible hand will continue on its merry way.

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