According to a recent article in the Wall Street Journal “American companies have spent the past decade investing too little in technology for a simple reason: They could get away with it.” Now the bill is about to come due.
In a late August article in the Financial Analysis & Commentary section the editor makes the point that when a company invests in tech, the payoff comes down the line when it won’t have to shell out as much on salaries. If labor costs are expected to rise, tech expenditures will be made in labor-saving technology. If labor costs remain low however, it will have less of an inclination for tech investment.
The Journal goes on to make the point that labor costs have been well contained in recent years due to the rise of China as a low-cost manufacturing center, and the severe downturn that followed the financial crisis. As a result, companies have been paying out less of their revenues to workers. In fact, according to the Labor Dept., salaries reached a record low 58% in Q-1/2012, compared to nearly 63% a decade earlier.
With less incentive to invest in labor-saving tech, and all-time low labor costs, companies have never had it better in terms of profitability. That’s about to change.
Chinese workers are being paid more, and wages are rising quickly. Meanwhile, U.S. job gains are whittling away at unemployment, making it harder for companies to expand workforces to meet rising demand. What’s more, a large wave of older workers is crossing over into retirement. There may be less slack on the labor market than previously thought.
Spending less on both labor and technology boosts earnings (at least in the short run) and has created profit margins which, as a share of GDP, haven’t been this wide since the 1960s. As the journal points out: “Squeezing workers and keeping a lid on spending isn’t something companies will be able to sustain. “ Says Bank of America economist Ethan Harris, “They’ve kind of eaten their own seed corn.”
Meanwhile, productivity gains are registering their slimmest gains in 20 years. Given the reduced investment in technology the past few years, a rise in spending on newer tech investments appears inevitable. As the Journal concludes: “… it is likely in the years ahead that U.S. companies will be shelling out more on labor and technology investment. That signals better times for workers – which helps consumption – and opportunities for companies in the business of developing and building technology. But it could be a very long time before profit margins are so wide again.“