Monday, April 23, 2012

Notes on Labor

The PIMCO Equity Focus post ​Newtonian Profits offers analysis of economic conditions designed, it seems, with investors in mind. Not that there's anything wrong with that -- as long as the analysis is good.

Assessing "the vulnerability of profit margins", the article offers one item in particular that grabs my attention: "1. Increase in Cost of Labor". I want to split that item into two parts and consider both of them. Here is the opening:

Labor costs are about 70% of the total cost of production for corporations, according to Federal Reserve research. There is no question that if competition for a finite labor pool increased, this could put immediate pressure on corporate margins.

Seventy percent. Yeah, but it depends how you do the counting. Labor costs are nowhere near 70% of total corporate expenditure. There is a lot of double-counting that has to be not done, in order to reach the 70% number. But it isn't just counting. It is spending that is not counted. And spending is significant. Spending requires a medium of exchange. Spending creates demand. Spending helps to create inflation. Even when it's the spending we don't want to double-count.

Here is the balance of the item:

However, in the U.S. unemployment remains high, stuck at 8.2% as of March 2012, with 14.5% of Americans either out of work or looking for more work (source: Bureau of Labor Statistics). Obviously individual industries and companies may experience wage inflation due to scarcity of workers with specialized skills, but until unemployment falls closer to more normal levels, corporate margins do not appear vulnerable from a spike in unit labor costs. Last week’s disappointing jobs report highlights labor’s slow recovery.


It's funny, there at the end they call the jobs report "disappointing". But that report is the evidence that suggests profits will remain high, so how "disappointing" is that to PIMCO, really?

Anyway: until unemployment falls closer to more normal levels, corporate margins do not appear vulnerable from a spike in unit labor costs.

So if your plan is to solve the debt problem by creating some inflation, how are you gonna get wages to go up along with prices? It's the key question. Because if wages don't go up along with prices, then rising prices will just make things worse.

It's not rising prices that make it easier for us to pay down debt. It's rising incomes.

In related matters...

From Yahoo Finance, Inflation outpaces earnings, threatens spending:

WASHINGTON (Reuters) - Consumer prices rose modestly in March amid signs a spike in gasoline costs was ebbing, but inflation still outpaced workers' earnings and threatened to undermine spending.

Yeh, but inflation will solve the debt problem, right? Or so they say.

And this, from Bill Conerly's Businomics Newsletter of April 2012:

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