A Philosopher's Blog

Tech, Wages & Profits

Posted in Business, Politics, Technology by Michael LaBossiere on August 11, 2014
Factory Automation with industrial robots for ...

(Photo credit: Wikipedia)

Despite the Great Recession, the profits for corporations have doubled since 2000. In contrast, the median household income in the United States has fallen from $55,986 to $51,017 (dollars adjusted for inflation, of course). Not surprisingly, corporate profits have gone from 5% to 11% of the GDP while wages of employee have dropped from 47% to 43%. While these numbers can be interpreted in various ways, one obvious implication is that corporations are making more money with fewer employees. It is also evident that corporations are doing better than most people (although some would say that corporations are people).

One plausible explanation for this is automation that increases productivity without increasing employment and employee income—a claim put forth by the authors of The Second Machine Age. Historically automation and other technological advances have increased productivity and eliminated jobs—but these have also consistently resulted in higher incomes in general (often by creating new and better jobs). That is, as some folks like to say, the rising tide of advancement lifted all boats. What is different about the current situation is that the rising tide of advancement has lifted the corporate yachts while causing the rowboats of the common folks to flounder (and some to sink).

If Erik Brynjolfsson and Andrew McAfee are right, recent advances are destroying jobs at a rate that exceeds the creation of jobs. This does have a certain plausibility since it is well-established that technological advances do eliminate jobs. The obvious example is how factory automation has reduced the number of factory workers. It certainly would not be shocking or amazing if the elimination of jobs exceeded the creation of jobs—even if the past has been different. One reason for this could be a matter of the nature of the advances. Another reason could be a matter of choice: employers elect to stick with the lower number of employees rather than creating more jobs and employing those whose jobs have been eliminated.

It also seems worth considering the impact of the “internet economy” on these numbers. To be specific, this economy features highly (over) valued companies that have relatively few employees. Consider, for example, companies like Facebook. Facebook was valued at $192 billion in July. 2014. IBM was valued at $198 billion. Facebook has about 7,000 employees while IBM has over 400,000. By way of comparison, Walmart has 2.2 million employees (making it the largest private sector employer in the United States). Behind Walmart are the fast food empires of Yum! Brands (523,000 employees) and McDonalds (440,000).

Having such highly (over) valued companies with relatively low numbers of employees would result in a high concentration of profits and wealth. Adding in the fact that the largest employers are in low paying industries (retail and fast food), it would certainly seem to help explain why corporations are doing much better relative to 2000, while most people are doing worse in terms of income.

If there is merit to this explanation, then there are some obvious concerns regarding the sort of economy in which the biggest employers are in low-paying sectors and big profits are made by companies that employee few people (and seem to profit from being excessively overvalued). Some are already suggesting there is a new class system emerging based on this new economy while others point to past bubbles and are waiting for companies like Facebook and Twitter to pop like digital balloons.

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  1. ajmacdonaldjr said, on August 11, 2014 at 6:35 pm

    Facebook and Twitter won’t pop like digital balloons. Both are now integral to business and news. IBM has seen better days though. I recently stopped in Bethlehem, PA on my way back from New England and found the huge steel mill in town, which was once the city’s largest employer, had been turned into a Sands casino. I thought this a very bad trade off… from a moral perspective.

    • Michael LaBossiere said, on August 12, 2014 at 4:40 pm

      They might last or they might Myspace.

    • Glen Wallace said, on August 14, 2014 at 11:20 pm

      Facebook and Twitter shares might simultaneously pop, or should be say implode, while the social networking sites remain relatively unchanged in importance and use. Right now, FB shares are trading at a P/E ratio of 80. While that is fairly high it is not astronomically high, like shares of Amazon which currently are trading at a price to earnings ratio of 875.

      Regardless, I think Facebook and Twitter are currently acting as a de facto monopoly and therefore should be nationalized. I argued for nationalization in an essay I wrote http://www.phispring.com/facebook%20monopoly.html where I demonstrated an effective competitive market cannot exist due to the special nature of social networking sites due to the inability of a user to choose from different sites that already has the same friends as Facebook. If anyone wants to view the status updates of a large group of friends or if you want a large group of friends to read your updates on one central website, you have only one choice — Facebook.


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