Friday, November 6, 2009
CEO Primacy and Unemployment
The new jobs report came out this morning and its very disconcerting. The headline unemployment number jumped to a 26 year high of 10.2%. It came on the heels of yesterday's news that productivity is surging. The surge in productivity means that US corporations are wringing more efficiency out of their labor force.
That may sound good, but what it means is that corporations are brutally cutting hours and slashing jobs to the bone to maintain profitability. As the Financial Times puts it "The US experience contrasts sharply with that in Europe. . .where companies cut back on employment and hours much less than their US counterparts, resulting in lower unemployment but worse productivity." In fact, hours worked is still in a free fall: "Total hours worked in the economy fell 0.2%. The average workweek was steady at a record-low 33 hours."
I previously highlighted the employment ratio, in my post "Runaway Unemployment?" That number too remains in a free fall. As the Brookings Institute states: "The current recession has also seen the steepest decline in the employment-to-population ratio in the modern era. Since the peak of the last economic expansion in December 2007 the percentage of Americans who hold jobs has fallen 4.2 percentage points, dropping from 62.7% to 58.5% of the population 16 and over." The upshot of this is that Americans are faced with a historic and rapid deterioration in the labor market.
This is consistent with my argument for years (starting in 2005 in the St. John's Law Review) that American corporate governance law devolved into a system of CEO primacy over the last two decades, as a result of CEO political power. I recently argued that CEO primacy drove the current subprime crisis by allowing CEOs to ring up profits and bonuses today at the expense of huge risks in the future. The last thing on the minds of CEOs was any concern at all for the well-being of the system that empowered them and allowed them to thrive.
Today, I posit that CEO primacy naturally leads to higher unemployment because CEOs can boost short term profits by brutally cutting employment which will enhance their "performance" compensation. The fact that cutting too much may lead to higher expenses down the road is irrelevant to CEOs. The fact that brutal employment cuts destroy the commons of consumption is even more irrelevant. As I wrote in 2006, without any effort to durably support consumption, CEO primacy will consume itself in a massive crisis of buying power.
CEO primacy is destroying American capitalism.