I’ve debated, both online and on TV, the tightness of the labor market with my fellow Bloomberg contributor Conor Sen. We both agree that as the labor market tightens wages will rise. However, Conor has tended to see this a negative for overall growth. The squeeze in companies profit margins will hamper their ability to expand and in some cases even cause them to contract or go out of business.
I’ve tended to see it as a positive. Relative profits will decline. Labor’s share of national income will rise. However, these two developments will cause more workers to enter the labor force and companies to invest in labor-saving technology. These two effects, in turn, will lead to more jobs and higher productivity, boosting overall output.
Target’s results last quarter lean in the direction of more growth. CNBC reports
Target‘s refurbished stores with more open layouts and the launch of several exclusive home furnishing and apparel brands are helping lure more people to shop there.
However, a decision to hike employee wages weighed on profit margins during the fourth quarter…
* Adjusted earnings per share: $1.37 vs. $1.38 expected.
* Revenue: $22.8 billion vs. $22.5 billion.
* Same-store sales: 3.6 percent growth vs. an increase of 3.1 percent.
CEO Cornell said he aims to make “2018 a year of acceleration in the areas that set Target apart — our stores, exclusive brands, and rapidly-growing suite of fulfillment options.”
Revenue and store performance were both higher than expected, but profits were lower than expected because of wages increases. Target’s response to that is to accelerate investments, in the hopes of further increasing revenue.
This also fits into my hopes for tax reform. Bonuses were nice and I think the investment incentives from lower marginal rates are real, however, what really matters is cash flow. We are about to enter a period where the business environment is going to suddenly become much more competitive for U.S. companies. They will be pushed to raise wages and increase investment at the same time and sans tax cut, many would find themselves unexpectedly cash-strapped.
Tax reform should offer relief just when companies need it, allowing them to increase investment without rapidly increasing prices. That, in turn, gives the Fed room to hold off on raising rates, and allows the recovery to continue growing strong.