Home > Main > Businesses hire more people when they are swamped with demand, not when they have high profits.

Businesses hire more people when they are swamped with demand, not when they have high profits.

June 16, 2011

We just lived through the fastest rebound in corporate profits since the 1940’s.  Did your company hire?

Here is Bloomberg making an astounding observation:

“Earnings will climb an average 10 percent a year through 2013, more than three times quicker than the economy, after what has already been the fastest rebound since the late 1940s, JPMorgan Chase & Co. projects. ”

The fastest since the late 1940’s!   Where is the hiring now?

There is a weak relationship between corporate profits and hiring.   We’ve had high corporate profits for nearly 2 full years – but last month we added employed only 54,000 more people.  High Corporate profits do not cause businesses to hire!

Businesses hire more people when they are swamped with demand, not when they have high profits.

I made this unsupported statement about how high demand causes hiring, and not corporate profits.   But unsupported does not mean untrue.

Over at the Big Picture, Invictus does the work I did not.  He shows a comparison of retail sales and employed people.   Raising retail sales means greater demand.  Retail sales and hiring are strongly correlated.  The chart is quite clear about the relationship, but Invictus goes into nice detail about how this works.   The reason for this is because retail sales is a direct measure of demand.

The Bloomberg article makes a claim that simply is not supported by any evidence.  They claim in this article that high corporate profits are about to cause a hiring spree.  I don’t see this in the data at all.

If you read the entire Bloomberg article, you’ll see that there are almost no lines about actual hiring in the entire article.   There is plenty of talk about increased corporate profits. There is talk about “Gunpowder” to hire, or “growing businesses” due to high profits.   But there is not much talk about how that means actual hiring.

I am far more concerned about where and how actual hiring will take place.

Hiring tends to take place when companies have to turn away business to their competitors because they do not have the manpower to take that business.

Red is employment, Blue is Corporate Profits

Look at the late 1990’s in this chart of corporate profits against changes in employment.   The late 1990s did not have rapidly growing corporate profits, but the hiring was just incredible.  That’s because businesses were swamped with demand.

Businesses hire when they are swamped with business, not when they have high profits. High profits can be related to demand, but high demand is not necessary for high profits.

Focusing on making businesses more profitable will not end our slump.  Focusing on increasing demand will end our slump.

Businesses hire more people when they are swamped with demand, not when they have high profits.

  1. beowulf
    June 16, 2011 at 4:49 pm

    Its like Thomas Jefferson said, “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains”. One or the other of the GOP presidential candidates will go full-on Pat Buchanan on the trade issue and may win the nomination over it.

    Interesting point about the link between retail sales and demand, That’s something to do be said for a national sales tax (or VAT); a counter-cyclical sales tax holiday would be more effective than a payroll tax holiday in managing effective demand.

  2. TC
    June 16, 2011 at 4:53 pm

    I was surprised to see it such a strong link as well.

    I don’t know if the counter cyclical VAT would be better than a counter cyclical payroll tax. Seems to me that prices changing that much would be counter productive for many people, and the exectution would be much simpler for the payroll tax.

    Maybe they could just be complementary

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