Profits Are Booming. Why Aren’t Jobs?

To gaze upon the world of American corporations is to see a sunny place of terrific profits and princely bonuses. American businesses reported that third-quarter profits in 2010 rose at an annual rate of $1.659 trillion, the steepest annual surge since officials began tracking such matters 60 years ago. It was the seventh consecutive quarter in which corporate profits climbed.

Staring at such balance sheets, you might almost forget that much of the nation lives under slate-gray fiscal skies, a place of 9.4 percent unemployment and record levels of foreclosures and indebtedness.

And therein lies the enduring mystery of this Great Recession and Not So Great Recovery: Why have corporate profits (and that market thermometer, the Dow) spiked even as 15 million Americans remain mired in unemployment, a number without precedent since the Great Depression? Employment tends to lag a touch behind profit growth, but history offers few parallels to what is happening today.

“Usually the business cycle is a rising-and-falling, all-boats-together phenomenon,” noted J. Bradford DeLong, an economics professor at the University of California, Berkeley, and a deputy assistant secretary for economic policy in the Clinton Treasury Department. “It’s quite a puzzle when you have this disjunction between profits on the one hand and unemployment.”

A search for answers leads in several directions. The bulls’ explanation, heard with more frequency these days, has the virtue of being straightforward: corporate profits are the economy’s pressure cooker, building and building toward an explosive burst that will lead to much hiring next year.

The December jobs numbers suggest that that moment has yet to arrive, as the nation added just 103,000 jobs, or less than the number needed to keep pace with population growth. The leisure industry and hospitals accounted for 83,000 jobs; large corporations added a tiny fraction.

More Jobs Abroad, More Jobs at Home

Investing abroad is not about “shipping jobs overseas.” There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. A successful company operating in a favorable business climate will tend to expand employment at both its domestic and overseas operations. More activity and sales abroad often require the hiring of more managers, accountants, lawyers, engineers, and production workers at the parent company.

Consider Caterpillar Inc., the Peoria, Illinois-based company known for making giant earth-moving equipment. From 2005 through 2007, the company enjoyed booming global sales because of strong growth in overseas markets, especially those with resources extracted from the ground. According to the company’s 2007 annual report, Caterpillar earned 63 percent of its sales revenue abroad, including $1 billion in sales in China alone. As a result, Caterpillar ramped up employment at its overseas affiliates during that time from 41,238 to 50,788, an increase of almost 10,000 workers. During that same three-year period, the company expanded its domestic employment from 43,878 to 50,545, a healthy increase of 6,667.5

Caterpillar’s experience is not unusual for U.S. multinational companies. A 2005 study from the National Bureau of Economic Research found that, during the 1980s and 1990s, there was “a strong positive correlation between domestic and foreign growth rates of multinational firms.” After analyzing the operations of U.S. multinational companies at home and abroad, economists Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr. found that a 10 percent increase in capital investment in existing foreign affiliates was associated with a 2.2 percent increase in domestic investment by the same company and a 4 percent increase in compensation for its domestic workforce. They also found a positive connection between foreign and domestic sales, assets, and numbers of employees.6 “Foreign production requires inputs of tangible or intellectual property produced in the home country,” the authors explained. “Greater foreign activity spurs higher exports from American parent companies to foreign affiliates and greater domestic R&D spending.”7

http://www.cato.org/pub_display.php?pub_id=10652

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