MAKING SEN$E -- September 3, 2010 at 10:30 AM ET
Paul Solman Explains: How Is a Jobless Recovery Possible?
Name: Mohammad Khan
Question: I have a hard time understanding "jobless recovery." If there are few jobs and businesses are suffering, how are the Wall Street indicators (DJIA etc.) recovering from lows just two years ago?
Paul Solman: The Dow Jones Industrial Average of 30 giant and supposedly representative companies is more than 50 percent higher than when it hit bottom after Lehman Brothers. Thus the question.
The answer, I think, is both simple and important to understand. Stock is an ownership stake in a company. If the company becomes more profitable, any share of it is worth more. Period. It has nothing to do with how many people the company hires.
In fact, as we all know, companies laid off workers in droves during and after the crisis. At first, it didn't help profits any, as the world stopped buying and sales sank. But, gradually, inventories were depleted and firms had to start making more stuff. In addition, our government and others (including China's) poured money into the global economy to goose demand. All of this made for higher sales.
But -- and this is the BIG "but" -- companies did not start rehiring workers. They made do with trimmed-down workforces. (We'll have a story tonight on the NewsHour about worker burnout that looks at a few of the repercussions.)
And therein lies the answer to your question, Mohammad. Greater sales + lower employee expenses = GREATER PROFITS. Which is just what U.S. firms have been reporting all year.
Shares of stock, as I said, represent a claim on the pro-rated slice of those profits. That is, you own 1000 shares of a company, say, with a million shares outstanding -- trading publicly -- and your stake represents one one-thousandth of the profit; you own 100,000 shares and you've got a claim on 10 percent of the profits, and so on.
No wonder, then, that as companies become more profitable, the value of their shares goes up. And that happens regardless of how many total jobs are -- or are not -- out there.
Now eventually (the thinking goes), a "jobless recovery" will peter out, as unemployed workers dampen demand, which would presumably translate -- eventually -- into lower sales and lower profits. But suppose, mainly to be provocative, that America can get by with 15 million fewer workers -- permanently. And that the Americans who remain in the workforce can buy enough to keep the economy humming. In that case, you could conceivably have profitable companies AND high unemployment, theoretically even forever. A truly jobless recovery.