Pesky Workers Conspire To Kill The Market Rally

Paying people is still bad for profits.
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Credit for today’s frothy stock market can be given to many forces, from the Trump Administration’s deregulatory binge, to the 2017 corporate tax cut, to the recent stock buyback bonanza. But taking a look at the companies that have dominated the stock market this year, a very convincing case can be made the shareholders have automation to thank for the money they’ve made this year.

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The top five performing stocks in the S&P 500 so far this year: AMD, Twitter, Tripadvisor, Abiomed, and Netflix, employ fewer than 22,000 people combined, and it’s just this lack of baggage that appeals most to investors. When stock pickers on CNBC and Bloomberg fawn over Netflix stock, they explain that Netflix can become the Facebook of home entertainment by making customers of most of the half a billion subscribers to broadband Internet around the world. As Barclay’s analyst Kannan Venkateshwarput it when he initiated coverage earlier this year, “Netflix bull case at the core is relatively simple: If subscriber growth is faster than content cost growth over time, it could become one of the most successful media companies.”

It goes without saying, of course, that it will incur no other costs as it scales up to dominate global home entertainment, and that its revenue per employee—already a heady $2.2 million dollars—will only rise from here. And what is true of the market’s high fliers in 2018 is generally true of the companies that dominate the American economy today: they employ far fewer workers per dollar in market capitalization than ever before.

Companies that can’t get around the whole pesky process of hiring and training workers are not faring so well. Executives and investors are complaining about the rising cost of workers and the shortage of available labor, even as average hourly earnings rose just 2.7% over the past year, economy wide. The Wall Street Journal documents the fear that even this very mild wage inflation is striking in the hearts of investors on Wall Street and executives around the country, writing that “Businesses from dollar stores to hotel operators to fast-food chains have warned in recent months that higher labor costs have been a drag on their profits—a potential headwind for the nine-year stock-market rally as it struggles for momentum ahead of the second-quarter earnings season.”

Some executives don’t even believe the numbers. “When we look at cities across the country, there aren’t any places where wages, labor costs are growing at 2%,” Marriott Chief Executive Arne Sorenson complained at a Goldman conference in early June, according to the Journal. “They’re growing at faster rates.” Sorenson may be right that the minimum wage workers he employs are able to garner faster than two percent wage growth, but that is likely due only to the wave of minimum wage increases being imposed in major cities and states that have led to big wage hikes at the bottom of the income spectrum, but have had little impact on wages further up the scale.

As the evidence of the effects of recent increases in state and local minimum wages shows that they have helped and not hurt low-income workers, these studies should calm fears on the parts of well meaning voters who are skittish about the effects of minimum wage laws, and also wake the rest of us up to the reality that not even a sub-4% unemployment rate is going to reverse the forces in the American economy today that make it impossible for folks of average ability, determination and luck to see their economic fortunes expand along with the rest of the economy.

We now live in a world where talented, but lucky, entrepreneurs can secure untold wealth and power with a good idea, good timing, IP protections, and a couple thousand brilliant engineers. This is how Facebook and Google came to dominate online media and it’s how Netflix will dominate the global home entertainment business in a decade. Even companies like Uber, which still begrudgingly pay its army of drivers just enough to keep them on the road, are eager to convince investors that new technology (Self-driving cars! Scooters! ) will rid it of the need of even this burden. So far investors can’t get enough, but it’s tough to see how customers will pay for these new products if they can never expect a raise again.

Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.

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