Posts Tagged ‘Corporate profits’

Dow Jones firms’ profit is $48,887 per employee

January 31, 2015
Profit-per-employee

Click to enlarge.

The 30 companies that make up the Dow Jones Industrial Averages took in an average profit of $48,887 per employee last year.  It would be interesting to know what those employees’ average incomes were.

LINKS

Five years into recovery, Dow companies squeeze workers as investors thrive by Michael Santoli for Yahoo Finance.

Another image of labor’s broken back: $48,887 in profit per employee! by Daniel Becker for Angry Bear.  (Hat tip to naked capitalism)

U.S. corporate profits and Chinese sweatshops

September 17, 2013

chart290813a
.

chart290813b

Costs and profits for Apple’s i-Phone

Defenders of sweatshop conditions in China say that low wages are the result of the impersonal workers of a hypothetical free market.  But a recent study (links are below) shows the real cause is the structure of the supply chain linking components producers such as Foxconn to customers such as Apple Computer.

When I hire a painter to paint my house, and he hires a helper, the free market works the way it ought to work because there is a rough equality of buying power.  But no such equality exists when individual workers are dealing not just with corporations, but with networks of corporations.

The corporate supply chain represents a concentration of power and a diffusion of responsibility.   When workers try to negotiate with Foxconn, managers can say that there is as limit to what they can do based on Apple’s requirements.   But Apple managers have no direct responsibility.  They can say there is a limit to what they can do based on their fiduciary responsibility to maximize return to stockholders.

You could say government should step in and set minimum wages and labor standards, but at the present time the governments of China and the USA are aligned with management, not workers.  Governments will not heed workers until they organize and create a base of power that governments must heed.  The workers of the world should unite.

Click on A Suicide Survivor: The Life of a Chinese Migrant Worker at Foxconn for a picture of working conditions at Foxconn by Jenny Chan.

Click on The politics of global production: Apple, Foxconn and China’s new working class for the text of the study by Jenny Chan, Ngai Punan and Mark Selden for their full paper.

Click on Apple et al create new working class for a duplicate copy of the study in Asia Times.  This is where I first came across the study.

(more…)

Magic formulas and failed corporate strategies

August 9, 2013
Clayton Christiansen

Clayton Christiansen

Clayton M. Christiansen of Harvard Business School is a brilliant management scholar who has written about how U.S. corporations fail when they neglect the basics of their business.  He wrote recently in Salt Lake City’s Deseret News about another reason the corporations decline when executives focus on the wrong things.

You have such concepts as Return on Net Assets (RONA), Economic Value Added (EVA), Internal Rate of Return (IRR), Earnings Per Share (EPS) and Gross Margin Percentage. They are all ratios.

By standardizing the definition of profitability, corporations lined up to optimize these profitability ratios. RONA provides a good example.  A company could improve its RONA by generating more revenue and put that in the numerator.

But the other way to improve this ratio is to reduce the denominator by a company getting rid of assets.  Reducing assets is much easier than increasing revenue.  So if a CEO is rewarded for a good RONA ratio, the incentive is to outsource aggressively. When there are no assets on a balance sheet, then this rate of return is infinite, and according to this definition, it might seems like such a company is doing better and better.

via Clayton M. Christensen

McDonnell-Douglas was an example, he wrote.  Its DC-3 transport was a powerhouse of the industry, but the company’s RONA was low.  The company started outsourcing more and more of its work, and its RONA rose to 60 percent.  But when the DC-10 had been put on the market, there was not enough cash flow to launch a DC-11.

The economist Milton Friedman said back in 1970 that corporate executives are employees of the shareholders, and that their object should be to maximize shareholder value.  Steve Denning wrote in Forbes, quoting Jack Welch of General Electric, that this was the “world’s dumbest idea,” which is not to say that Welch never believed in it.  Denning said the truth is that the executive is the employee of the corporation, and that the purpose of the corporation, in the words of management scholar Peter Drucker, to “create a customer.”

I find this discussion familiar, because I remember how, when I was reporting on Eastman Kodak Co. for the Rochester, N.Y., newspaper in the 1980s, Kodak exited or outsourced certain businesses because profit margins were not high enough, while its main competitor, Fuji Photo (now Fujifilm), simply tried to maximize its share of the market.  Like Kodak in the days of George Eastman, Fuji never gave up any basic technological or manufacturing capability.

Why are so many corporate executive beguiled by financial formulas at the expense of long-term survival?  Christiansen thinks it is because of dogmatism and Denning because of stupidity.  Probably they’re right in many cases.  But for certain categories of people, focusing on financial ratios makes perfect sense.   They include hedge fund managers, private equity fund managers who specialize in leverage buyouts and any other investor or speculator who wants to cash in and get out.

(more…)

Return on investment (of labor) is falling

July 11, 2013

blog_nelp_wage_declines

The United States officially has been in economic recovery in 2009.  Economic output, as measured by Gross Domestic Product, is up.  Corporate profits are up.  The stock market has reached new highs.  So, according to the law of supply and demand, wages should be rising, too.  Right?  Wrong.

Economics writer Felix Salmon has the figures.

NELP, the National Employment Law Project, has taken a detailed look at what happened to wages during the recovery — specifically, between 2009 and 2012.  They looked at the annual Occupational and Employment Statistics for three years — 2007, 2009 and 2012 — and created a list of wages for 785 different occupations.  They then split those occupations into five quintiles, according to income; the lowest quintile made $9.49/hr, on average, last year, while the highest quintile averaged $40.23/hr.  […]

The big-picture lesson that NELP draws is that between 2009 and 2012, real median hourly wages fell by 2.8% — and that the poorer you were to start with, the more your wages fell.  The top quintile didn’t do well: their wages dropped by 1.8%, in real terms.  But the fourth quintile did particularly badly: its wages fell by 4.1%, on average. 

To take one example, occupation 39-5012 — that’s Hairdressers, Hairstylists, and Cosmetologists — was earning $12.00 an hour, in 2012 dollars, in 2009.  But by 2012 they were earning just $10.91 per hour: a drop of more than 9%. 

Or look at occupation 51-6042 (“Shoe Machine Operators and Tenders”): that job saw wages fall 14%, in real terms, in just three years, with nominal wages falling from $12.69 to $11.69 per hour.

The charts show the large range of outcomes: some occupations are doing great.  At the top end, the highest-paid profession on the list, Psychiatrists, went from earning $69.48 per hour in 2007, to $83.33 per hour in 2012.  That’s a real increase of 8.3%.  But overall, everybody is doing pretty badly.

So what’s going on?

20120314-graph-the-1-percents-jobless-recovery-01

Click on Wage deflation charts of the day for Felix Salmon’s full article.

Click on The 1 Percent’s Jobless Recovery for the Century Foundation’s article.

Why wages are falling (British version)

June 21, 2013
Rising profits, declining wages in Great Britain

Rising profits share, declining wages share in Great Britain

A British blogger reports that the same thing is going on in Britain as in the USA.

Back in the 70s and 80s, bosses could often not efficiently monitor their workers. To keep pilfering and skiving within tolerable limits they therefore had to pay better than market-clearing wages, to buy goodwill.  The upshot was that wages rose even during downturns, because bosses feared that real wage cuts would create discontent and thus increase thieving, insubordination and malingering.

This led to a huge literature in economics on efficiency wages, gift exchange and insider-outsiders, which tried to explain high and sticky real wages.

However, as Frederick Guy and Peter Skott have shown, socio-technical change since the 80s such as CCTV, containerization and computerized stock control has made it easier for bosses to monitor workers.  Direct oversight means they don’t need to worry about buying workers’ goodwill.  They are instead using the Charles Colson strategy: “When you’ve got ’em by the balls, their hearts and minds will follow.”

Years ago, firms wanted smaller but motivated workforces.  Now they can control workers directly, they don’t need to worry so much about motivation except, of course for top-level managers who cannot be directly monitored – hence their rising incomes.

All this has three implications:

1. Talk of “wage rage” misses an important point.  At the point of production – to use a quaint Marxian phrase – there is little meaningful rage, because workers can do little to fight falling real wages.  (This poses the danger that such rage will find perhaps misdirected political expression, such as in antipathy towards immigrants.)

2. Issues of industrial organization – how firms are organized – have important macroeconomic effects. Macroeconomics cannot be easily studied separately from industrial organization.   Economists need to look inside the “black box” of industrial structure.

3. You cannot understand economics without understanding power.  The fact is that bosses’ power has risen and (many) workers’ power has declined. In this sense, the rising incomes of the 1% and the fall in real wages for the average worker are two manifestations of the same process.

Click on Stumbling and Mumbling for the original.  Hat tip to Avedon’s Sideshow.

Click on The Market Oracle for the source of the chart.

Corporate profits highest on record, wages lowest

June 27, 2012

Corporates profits are taking the largest share of the national output on record.

Wage-earners are getting the smallest share of the national output on record.

The fraction of Americans with jobs is the smallest in more than 30 years.

It does no good for corporations to do well if people aren’t doing well.  Things need to be brought back into balance.

One thing I learned in 24 years working for Gannett newspapers was that when you want to present economic data, one good chart can be worth a thousand words.  For more good charts, click on Dear America: You Should Be Mad As Hell About This and The Economy: Time for Companies to Pay Their Employees More by Henry Blodget of Business Insider, where I first saw the charts above.

Recovery feeds profits, starves wages

July 1, 2011

Economists at Northeastern University have found that the current economic recovery in the United States has been unusually skewed in favor of corporate profits and against increased wages for workers.

In their newly released study, the Northeastern economists found that since the recovery began in June 2009 following a deep 18-month recession, “corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent” of that growth. … …

According to the study, between the second quarter of 2009, when the recovery began, and the fourth quarter of 2010, national income rose by $528 billion, with $464 billion of that growth going to pretax corporate profits, while just $7 billion went to aggregate wages and salaries, after accounting for inflation.

The share of income growth going to employee compensation was far lower than in the four other economic recoveries that have occurred over the last three decades, the study found.

“The lack of any net job growth in the current recovery combined with stagnant real hourly and weekly wages is responsible for this unique, devastating outcome,” wrote the report’s authors, Andrew Sum, Ishwar Khatiwada, Joseph McLaughlin and Sheila Palma.

According to the Bureau of Labor Statistics, average real hourly earnings for all employees actually declined by 1.1 percent from June 2009, when the recovery began, to May 2011, the month for which the most recent earnings numbers are available.

via NYTimes.com.

Click on The Wageless, Profitable Recovery for the original article by Steven Greenhouse in the New York Times, which includes a link to the full Northeastern University study.

Hat tip for this link to Marginal Revolution, where Tyler Cowen wrote that such a steep “gradient” is unprecedented.

A snapshot of the financialized U.S. economy

June 9, 2011

Back in the 1980s, there was much talk of a “new economy” – an economy centered on the computer as the economic was based on the steam engine and the internal combustion engine in earlier eras, an economy led by the software engineers of Silicon Valley as in an earlier era it was led by the assembly lines of Detroit.

Now there is a new “new economy” – one based not on manufacturing or technology, but on finance.  We have seen this before in history.  Britain was the birthplace of the industrial revolution and once was the workshop of the world.  Later Britain was overtaken by the United States and Germany, two nations that promoted their manufacturing industries in a more intentional way than the British did.  For a long time the British said they need not worry about this – that their international trade surplus in “invisibles” (financial services, capital investment, insurance) made up for their deficit in tangible goods.

We now know the British were fooling themselves, and we Americans, too, are fooling ourselves if we think we can have an economy based on lending to Peter to pay Paul.

The purpose of a financial services industry is to serve the needs of the real economy – to provide capital to start-up businesses, and to help individuals buy houses and other big-ticket items.  This isn’t happening now.  The financial services industry’s current profits come from collecting on past debts, not on investing in the future.

(more…)

The stock market and the job market

July 9, 2010

Click on THIS CHART to see that the stock market appears to be rebounding from the recession.

Click on THIS OTHER CHART to see that the job market does not appear to be rebounding from the recession.

I think economic policy should be directed at people who earn their living from making things and providing useful services more than at people who get their living from owning financial assets.  I think the financial markets should be the servants of the real economy, not its master.

(more…)