The booming stock market is part of the inequality story, but is it associated with automation? Automation is a key driver of productivity growth — the amount of output produced per worker. In turn, productivity is the key driver of long-term economic growth. Economic growth is the key driver of long-term corporate earnings per share (EPS). And finally, EPS growth is the key to long-term stock market returns. Equity investors have been clear beneficiaries of the economic gains associated with automation.
That’s the long-term story. But can we find evidence that accelerating automation is proving especially beneficial for shareholders right now? And are workers losing out as a result?
Whether technological innovation is driving capital substitution for labour is notoriously difficult to measure. One potential measure is the progression of profits relative to the number of company employees. We have aggregated both for the non-Financial listed US companies represented in the MSCI US benchmark.104 We also show the same calculation for the MSCI EM Asia index, on which we comment more later.
102
Saez and Zucman (2014).
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The Economist (2014b).
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This reflects the largest (often multinational) companies that dominate the US stock market. It closely tracks the S&P benchmark. Like the S&P, it omits the employment decisions of smaller unlisted companies which are important drivers of the US payroll data.
Because digital technologies can substitute labour for capital, productivity improves while wages do not
Economic inequality often results in political inequality, which is a concern
Robert Buckland
The dominant US-listed non-Financial companies generated EBIT (i.e. earnings before interest and tax) of $1.3 trillion in 2013, up from $600 billion made 10 years earlier. These same US blue chip companies employ 24 million workers, up from 18 million in 2003. That’s a much bigger increase in EBIT (+119%) than number of employees (+31%). As a result, the ‘profits productivity’ of the US stock market has risen sharply. EBIT per employee is up from $32,000 in 2004 to $53,000 in 2013 (Figure 51).
Figure 51. Non-Financials EBIT/employee ($) Figure 52. Non-Financials EBIT margin
Source: Worldscope, Factset, Citi Research Source: Worldscope, Factset, Citi Research
Perhaps this reflects the impact of automation. US workers are being replaced by increasingly sophisticated machines. These machines don’t take sick-leave. They don’t ask for pay rises or take holidays. They don’t go on strike or demand better working conditions. Even the tax system is tipped in favour of machines — capital expenditure (capex) is tax-deductible in most countries. Hiring more workers usually involves paying more payroll taxes.
We can find plenty of evidence to suggest that the bargaining position of US workers has deteriorated in recent years. Listed non-Financials EBIT are up 119% since 2003, but hourly earnings in US manufacturing are up only 22%. Profit share of GDP is up, wages share of GDP is down. Academic studies have attributed some, but not all, of this to automation.105 Lower rates of unionisation are also seen as a reason. Globalisation, especially the shift of low-skilled manufacturing jobs to Asia, is seen as another important driver. Overall, these factors seem to have been more helpful for shareholders than workers. Despite a lacklustre economic recovery since the financial crisis, US non-Financial profit margins are back around pre-crisis highs (Figure 52).
We can then break the US market down by sector. Figure 53 shows that in 2013, with the oil price above $100/bbl, the Energy sector generated the highest income per employee. This highly profitable, automated and capital intensive industry earned $200,000 per employee, up 78% since 2003. Of course the subsequent collapse in the oil price will now be putting intense pressures on sector profits. Other industries which have seen a sharp increase in profitability per employee, perhaps indicating intensifying levels of automation, include Telecoms, Information
Technology and Materials.
105
For a summary of the current debate around the labour share of GDP, please see Giovannoni (2014). 10,000 20,000 30,000 40,000 50,000 60,000 03 04 05 06 07 08 09 10 11 12 13 US EBIT / Employee EM Asia EBIT / Employee
6% 7% 8% 9% 10% 11% 12% 13% 14% 03 04 05 06 07 08 09 10 11 12 13 US EM Asia
In the past 10 years, US-listed non-Financial companies have seen a 119% increase in EBIT but only a 31% increase in number of employees
Lower rates of unionisation in the US could be a reason for the deteriorating bargaining position of US workers while the shift of low- skilled manufacturing is another important driver
Towards the bottom of the profitability/employee ranking are the two Consumer sectors, although it is interesting to see that Consumer Discretionary (which includes Retail stocks) have seen a sharp rise in employee profitability (+71%) in the past 10 years. This may indicate a rising level of automation in a traditionally employee-heavy sector.
Figure 53. US listed non-Financials: EBIT per employee (%) Figure 54. US listed non-Financials : Employees vs. Capex
Source: Citi Research, Factset, Worldscope Source: Citi Research, Factset, Worldscope
While we can identify shifts in employee profitability, the very different nature of each industry will be reflected in very different levels of capital or employee intensity. Figure 54 shows that the Energy sector accounts for 32% of total capital spending by US non-Financials. But it only employs 12% of workers. Of course, the booming oil prices (until last year at least) will have boosted jobs in the US Energy sector, but it has boosted capex by much more.
By contrast, Consumer Discretionary employs 31% of workers but spends only 14% of total capex. If the capex/employee relationship is some indicator of current levels of automation, we might expect the US Consumer Discretionary sector to offer more opportunities to replace workers with machines then Energy.