Reading and watching different things over the weekend, there were a number of stories about the S&P hitting a new all-time high. We are wrapping up another earnings season and corporate profits are at or near record highs.
I also had friends and acquaintances talking about the market and pondering how long the market can keep going. Obviously I don’t know the answer to that question, but for now the usual warning signs that precede a bear market or a recession haven’t appeared yet.
One of things we ended up discussing was what could help the average person feel like they were participating in the strong economy. I didn’t have an answer at the time, but after thinking about it the next day, I thought to myself, “We need more business leaders to think like Henry Ford.”
Henry Ford revolutionized the automobile industry here in the United States by doing two main things. He used the assembly line in production and he tried to pay the workers a wage that was high enough that they could afford to buy a Ford.
While corporate profits have been trending higher, the average wage has been stagnant. The economist in me was thinking, “How long can corporate profits rise if the average worker isn’t seeing an increase in pay?”The demand for goods and services can increase based on a couple of factors—more people working or people earning more money. With the unemployment rate at incredibly low levels, it is unlikely we are going to see a big increase from that standpoint. That leaves the second option which is to see wages increase so that consumers can afford to buy more goods and services.
This is when I started thinking about Henry Ford. Today’s business leaders seem to be more concerned with pleasing shareholders and making the stock price rise. I am not saying that Ford wasn’t known for pushing workers hard, but he also tried to make sure he had an ample market for his products by paying his workers well enough that they wanted to buy a Ford.
Thinking about some companies today, I had to wonder how much they could benefit by paying their workers a little better. I am not advocating for a $15 minimum wage or anything like that. I am suggesting that if Walmart were to increase wages by say 10%, the company would also see an increase in their own sales as their own workers would have more to spend in their stores.
Of course it is more complicated than that and there would need to be some deep analysis on how much would sales increase compared to incremental levels of pay increases for workers. I don’t have a deep insider view of Walmart and I am not picking on the company. I am simply using them as an example. The same theory could be applied to any number of companies—McDonald’s, Nike, and Target all come to mind.
The idea of taking care of workers seems to be secondary to looking out for shareholders. The two concepts don’t have to be mutually exclusive.
With wages stagnating and full employment essentially achieved, it will be hard for companies to grow sales. If sales start to decline, the record corporate profits won’t last for long. In my opinion, for this bullish cycle to continue for a few more years, we will need to an increase in wages. Of course we don’t want them to rise too fast and create higher inflation that is much greater than the current pace of inflation.
There were a few companies that announced pay increases for employees after the tax bill was passed and Walmart was one of them. Some of the other companies were AT&T, Comcast, and Wells Fargo. There were also a number of companies that passed along some of the tax savings to employees via a bonus.
I would love to see a study of how much the companies got back in spending from employees. Did AT&T see a jump in new phone sales? Did Walmart see a boost in TV sales? I am guessing that they did. I think Henry Ford’s way of thinking is still alive and our current business leaders need to revisit it.