Thursday, July 15, 2010

Companies pile up cash but remain hesitant to add jobs

Washington Post article "Companies pile up cash but remain hesitant to add jobs" (July 15th, 2010) claims that whenever companies have profits, they should hire more labor.
Yet all the good news from big business hasn't translated into much promise for jobless Americans, leading many to wonder: If corporations are sitting on so much money, why aren't they hiring more workers?
Presumably, businesses are operating optimally. That they are making profits and "sitting on cash" at this optimal point should not imply in any way that the correct thing to do next is to invest that cash into more labor. It is quite possible that expansion would not make the businesses more money, and even if it did, more labor doesn't always follow an expansion. Corporations may invest more in capital during an expansion, and hire less labor.

The graph below plots the percentage of capacity in use over time (click here to enlarge)

Certainly, companies are not just "sitting" on cash. The economy is quickly climbing to use available capacity productively. Hiring more labor in order to please the unemployed may simply not be the most productive use of a firm's resources, nor the optimal path to growth.

1 comment:

  1. Excellent comment. The reality is that most businesses have a sort of a routine capacity for output based on existing resources and a surge capacity using extra-efforts, overtime etcetera. For most businesses the cost of salaries and benefits as well as the other secondary costs of having employees (HR, other components etc) is their largest cost element. We are coming off times of extreme decline in demand and uncertainty for many businesses. We have a national leadership whose radical policies, massive unsustainable spending, and fully expressed intention to raise taxes to even more punitive levels - all huge sources of uncertainty in future expectations that clearly portent the possibility of future stagnation, stagflation, nationalizations and other threats. In this atmosphere of uncertainty it makes absolutely no sense for businesses to take on the additional liability of having to hire, train, house and equip an increased workforce when you do not know two quarters ahead what horrors the tax or regulatory extremism of the current day will bring. It is far smarter to focus not just on the maximization of profit if all goes well but to approach the hiring decisions with a risk-management mentality in mind, minimizing exposure, shifting expansion overseas in more capitalism favorable environments and using overtime and temp workers as a means to minimize exposure.