A persistently high rate of unemployment, particularly youth unemployment, has a polarizing effect on the economy. It’s good for some stakeholders, but bad for others. And on a net basis, the jury is still out on how an under-worked, underpaid generation will affect economic balances over the coming decades.
Harry’s research clearly shows that predictable consumer spending patterns, driven largely by generational demographic waves, have a dramatic impact on the direction of our economy – both in growth and in contraction.
On this basis, hamstringing our next generation of peak spenders is equivalent to choking the golden goose. If 20-somethings can’t get decent jobs, how can we expect them to start families and spend money!? The longer this generation goes underemployed and underpaid, the deeper they’ll withdraw into a penny-pinching miser mentality, instead of fueling economic growth as they’re expected to do by buying cars, houses, potato chips and milk.
On the other hand, a high-unemployment rate is actually a boon to Corporate America. Job seekers have a weak hand when asking for a decent wage from a new, potential employer. Hiring managers have little incentive to raise wages, knowing that for every one applicant who requests more than is offered, there are 100 more applicants willing to work for practically anything.
Having the upper hand, Corporate America has been able to cut compensation costs to the bone… in turn, boosting profit margins.
Here’s a chart showing a simple calculation of corporate profits (before taxes) divided by U.S. Gross Domestic Product (GDP):
After the dot.com bubble-bust cooled the economy into 2002, corporate profits mended quickly, increasing from 4% to nearly 12% of GDP. Then, the 2008 credit crunch once again decimated corporate profits, sending the ratio back down to 4%.
Again, corporations dug in their heels and made the necessary right-sizing moves to reduce costs amidst anemic revenue growth. Corporate profits made a quick, V-shaped recovery to 11% of GDP.
Improving corporate profits can be supportive of broad economic growth. It’s certainly better than a rapidly rising stock market in the absence of associated corporate earnings. But if profitability gains are had on the backs of an entire generation of would-be spenders, it’s only a matter of time before a broke and jobless Echo Boom generation creates a major drag on the economy.
A balance must be found between sufficiently strong corporate profits and sufficiently low unemployment. We’re clearly not there yet. And until this imbalance is resolved, the sustainability of economic growth is questionable.