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High Corporate Profits do not cause Businesses to Hire

June 16, 2011

Red is employment, Blue is Corporate Profits

I know, I am beating a dead horse here.  But us liberals need to get used to saying things more than once, and in more than one way.   I took the same old chart I’ve been using for a while.  It shows the growth in Corporate profits in Blue, and the growth in employment in Red.

In the 1990’s Corporate profits were growing well, but not great.  Employment was going gangbusters.  In the 2000’s, Corporate profits were incredible – but hiring was bad.

If we just compare the decades for the two different lines, it is quite clear.  The 2000’s had 5 straight years where corporate profits were higher than the best growth in the 1990’s.  The 1990’s had nearly 5 straight years where employment was growing as the best growth in the 2000’s.

I added some captions to the chart.  Feel free to pass it around so people understand this.  High corporate profits do not cause businesses to hire.

I do not know why anyone would claim that high corporate profits causes hiring more than high demand.

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

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  1. Peter D
    June 16, 2011 at 8:38 pm

    TC, I’ve had a related discussion with one “CP” over at pragcap:
    http://pragcap.com/should-the-fed-target-rates/comment-page-1#comment-59840
    We converged on the understanding that while short term profitability is not correlated with lower interest rates (and thus low rates cannot be drivers of expansion via short-term profitability channel), this might not be the case for long term profitability. As CP put it:

    Who says an expanding economy is induced by lower interest rates? I guess everybody does, to my knowledge.
    There are models to show why, and there is plenty of evidence of higher rates slowing the economy and lower rates pulling us back up again. I think this is so standard that if you want to argue otherwise, the onus is on you to show some theory or evidence.
    If we accept that lower rates induce the economy to expand, then that is a logical reason for businesses to invest, even if the investment is not expected to increase profitability – indeed even if it was expected to reduce profitability, so long as it increased gross profit, or earnings per share, by allowing higher volumes of ouput.

    What is your take? If the businesses want to expand they have to have some measure of profitability in mind, but it might not be the short term one…

    • TC
      June 16, 2011 at 11:55 pm

      You just want me to come in and lay down some smack on CP. 🙂 lol, if I must….

      It’s nearly all demand driven. Profitability doesn’t matter a whit – its nearly a binary decision. At some level of profitibiity, you’ll do business. At some lower level of profitibility, you’ll stop doing business.

      Imagine you have a 1 customer business, selling 1 product to this customer per year. Why and when would you ever expand this business? Would you expand this business if your supplier for this product cut their prices by 50% to you – so you’re making lots more money? No.

      Only increased demand would cause you to expand. Profitability has nearly zero to do with business expansion.

      1. Profitability + more demand = expansion
      2. Profitability + flat demand = no expansion
      3 Profitability + less demand = contraction

      Expansion is demand driven, with a binary decision on profits.

      • Peter D
        June 17, 2011 at 6:31 am

        OK, I see. So, is it correct to say that since interest rates affect profitability (?), there is some level of interest rates (low IR regime) where the business will expand/not expand regardless of what IR is (no diff, say, between 0% and 5%) and some lever (high IR regime) which strangles pretty much any expansion (say, 10%)?
        And some businesses can hedge interest rates, so, their expansion will not depend on IR at all?

  2. KTofPA
    June 20, 2011 at 9:26 am

    Corporate profits may spike to at a high level, but as your chart indicates…they can dip just a sharply. Hiring is more about economic stability than profits. No company wants to hire only to have to turn around and lay-off just a short while later. When there is more certainty in the economy there will be more hiring.

    • TC
      June 20, 2011 at 9:36 am

      That’s my point – corporate profits don’t make a difference to hiring.

      “When there is more certainty in the economy there will be more hiring.” For businesses, certainty = demand. Companies hire when they are swamped with demand.

      Corporate profits are not a big part of the hiring decision above relatively low levels of profitability. If a company’s business line is profitable, it hires and expands when it sees more demand, not high profits.

  1. August 2, 2011 at 5:58 pm
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