Unemployment’s silver lining

Posted: 30 June 2010 in Uncategorized
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There’s a silver lining to the current levels of unemployment—for capitalism.

Steve Matthews, for Bloomberg, argues that long-term unemployment is good for business. It leads to increases in productivity and lower inflation, and thus higher profits.

The 6.8 million Americans out of work for 27 weeks or longer — a record 46 percent of all the unemployed — are providing U.S. companies with an eager, skilled and cheap labor pool. This is allowing businesses to retool their workforces, boosting efficiency and profits following the deepest recession since the 1930s, and contributing to a 61 percent rise in the Standard & Poor’s 500 Index since March 2009.

“Companies are getting higher-productivity employees for the same or lower wage rate they were paying a marginal employee,” said James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “Not only are employees higher skilled, you have a better skill match. You have a more productive and more adaptive labor force.”

Falling wage pressures will help keep inflation low, contributing to lower Treasury-bond yields, according to Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. He forecasts 10-year Treasuries will yield about 3.1 percent in the third quarter, compared with 4 percent in April.

The lack of wage pressure also “reinforces the case for globally exposed companies” because “there has been better cost containment in the U.S. than in some of our competitors,” said Ethan Harris, head of North America economics at Bank of America-Merrill Lynch Global Research in New York. He said this would benefit businesses such as Cincinnati-based Procter & Gamble Co., the world’s largest consumer-products company, and Atlanta-based Coca-Cola Co., the world’s biggest soda maker. . .

U.S. productivity gains averaged 2.9 percent from 2000 through the first quarter of 2010, compared with 2.1 percent in 1990-1999 and 1.5 percent in 1980-1989, according to the Labor Department. The increased efficiency has helped improve earnings, with more than 80 percent of companies in the S&P 500 index reporting profits that exceeded the consensus analysts’ estimates during the most recent quarter, Bloomberg data show.

“The U.S. has been enhancing its global competitiveness,” Harris said. “We don’t see inflation picking up until there is a substantial drop in the unemployment rate.”

That’s exactly how capitalism works: capitalists in the midst of a crisis decide to lay off workers, leading to higher unemployment. Given the pressure of the reserve army of the unemployed, workers who have a job work harder, produce more, and their jobs fall behind the increased productivity. Profits rise and, over time, capitalists solve their crisis on their own terms.

For the capitalists, but not for the rest of us, that’s the silver lining of unemployment.

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