Corporate Profits Are Flush…So Why Aren’t They Hiring?

I keep hearing this in the business news, and I heard it again in President Obama’s speech to the national Chamber of Commerce on Monday, February 7: corporations are sitting on mountains of cash, and yet they’re not hiring.

How much is “mountains” of cash? In the neighborhood of, say, $2 trillion. With a T.

In fact, while the rest of us have been stuck in the dried-up job market, corporations have raked in record profits at the fastest rate ever after a recession.

Aren’t higher profits a sign of higher demand? And don’t businesses hire more when demand goes up?

So what gives?

I’ve yet to see a business reporter focus on that question, so I did a little research. Still not much out there. The best piece I found was not written by a reporter but by a common-sense economist I’ve mentioned before: MIT’s Simon Johnson. He addressed this very issue on a January 27 post to a blog he co-founded, The Baseline Scenario, which is passionately dedicated to explaining how “too big to fail” got us into this mess and cannot be allowed to continue or we’ll never get out of it.

In his clearly written piece, Johnson points out that “the link between corporate performance — measured in terms of profit or executive pay for U.S. companies — and domestic employment has fundamentally changed in recent decades,” and as a result, employment takes longer to recover after a recession.

Then he points to this astounding chart, from Calculated Risk blog, showing how much longer job losses have dragged on in this recession compared to all others in the last 60 years. After three years, we’re still at the bottom. Yikes!

CalculatedRiskblog.com chart showing percent job losses for recessions since WWII

CalculatedRiskblog.com chart showing percent job losses for recessions since WWII

While Johnson acknowledges, with refreshing honesty, that economists don’t yet fully understand this phenomenon, he throws out two of the usual suspects: cheaper labor abroad (think: outsourcing], and job hunters don’t have the needed skill mix (so, G.E.’s of the world, use some of that $2 trillion to train us – hel-lo!!).

But then he adds another fresh possibility: “Or perhaps … companies can effectively keep out new entrants [by not hiring] – thus keeping profits artificially high and, at the sectoral level, limiting employment.”

This scenario has at least two implications: (1) that companies might still feel badly stung by the sudden and severe credit crunch that started the mass layoffs in 2008, and maybe they’re scared it might happen again – and soon – and maybe they know something we don’t; and (2) that there is a new emphasis on “keeping profits artificially high,” most likely for stock market purposes. Either one would be a very bad thing, because it would mean no hiring of workers – specifically, no permanent-full-time-with-benefits hiring of U.S. workers – for a long, long time.

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