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« The Alarming “Sense Of Pauperization” in France | Main | Serial Government Defaults In The Eurozone »
Wednesday
Dec052012

Making Heroes of Those Who Slash Jobs

Wall Street makes heroes of CEOs who slash jobs. Especially of those who parachute into the executive office. The more people get axed, the better. The knee-jerk reaction can be phenomenal. Citigroup’s massacre of 11,000 souls caused its stock to jump 8% before tapering off a bit.

By the irony of coincidence, we also learned that wages adjusted for inflation had dropped 1.4% in the third quarter—a continuation of the brutal 12-year-long real wage decline that has hollowed out the middle class, pushed many people into the lower classes, and devastated the poor, though it has largely spared the top 5% [The Pauperization of America].

Other big US corporations already bathed in layoff glory this year. In May, H-P announced 27,000 job cuts, about 7% of its worldwide workforce. AMR is still trying to figure out how many people it will axe, maybe 11,000. In February, PepsiCo picked up some brownie points with plans to slash 8,700 workers, after J.C. Penney had said it would shed 5,500 workers.

Citi, the third largest bloat bank in the US by assets and the recipient of multiple bailouts by the government and the Fed, wasn’t a trailblazer. Its 11,000 planned layoffs bring the worldwide tally of 30 big banks to 171,000 since early last year, according to a Reuters analysis—and that doesn’t include the job cuts at innumerable smaller banks and brokers. The new CEO, Michael Corbat, had to show the world that he wasn’t lagging behind, that he was on top of it, that he was doing something. So he fired off a broadside rather than continue plinking at 150 people here and 3,000 there.

The announcement was successful—though the stock’s intraday high of $37 was just a reminder of where it had been: $557 in December 2007, before it fell of a vertigo-inducing cliff. On that chart, the movements over the last few years are barely perceptible squiggles.

In its press release, Citi said that it would undertake “a series of repositioning actions” that would “reduce expenses and improve efficiency.” The result would be “streamlined operations and an optimized consumer footprint.” But it would cost some serious money, or rather “repositioning charges” of $1.1 billion. When implemented in 2014, revenues might drop $300 million per year, but it would hopefully save $1.1 billion per year.

The wishes of a bank that has gotten way too big, unwieldy, and unmanageable. And dangerous. But instead of attacking its real problems, it introduced new jargon into the corporate lexicon: “repositioning actions” for job cuts and the corresponding “repositioning charges.”

There was talk in the press release of improving “productivity”—the passion of successful businesses. Which brings us back to the irony of coincidence: the release of the Productivity and Costs report by the Bureau of Labor Statistics: productivity jumped 2.9% during the third quarter.

Getting work done for less keeps companies alive in a competitive world. It preserves jobs—those jobs that didn’t get slashed in the process. It was a good report. Fed governors will slap each other and the Chairman on the back: hourly compensation rose 0.9%, so that workers feel as if they made a tiny bit more and are thus content, but it’s a form of deception as inflation once again outpaced their wage gains. Real wages dropped 1.4%.

For the vast majority of American workers, real wages peaked around the year 2000 and have since declined significantly, though nominal wages have risen, just not as fast as inflation. When the Fed speaks of inflation as a “target,” it aims at the earnings power of American workers—and it has been hitting it with stunning accuracy. The Fed has its reasons: declining real wages raise corporate profits and makes labor in the US more competitive with labor in countries like Mexico or China.

A competition that takes place more in the executive’s mind than in Mexico or China. He or she decides where to source components, where to invest and build plants and train a workforce, where to partner with suppliers. Many factors figure into this equation, prominent among them the cost of labor—and the curious fact that cutting headcount charms Wall Street more than creating American jobs.

Particularly interesting in this scenario is that the top 5% are just about back at their real wage peak, with the top 20% getting closer. But the remaining 80% are drifting ever lower (excellent graph by Doug Short). To maintain their standard of living and consume enough to keep GDP positive, as everyone expects them to, the bottom 80% have to borrow from the future—which the Fed, the great enabler, encourages them to do with their Zero Interest Rate Policy.

With ugly consequences, however, not only for consumers suffocating under piles of debt but also for life insurance companies; ZIRP demolishes their predicable return on investment and bleeds their reserves. So, during the off-hours on Sunday, when even astute observers weren’t supposed to pay attention, the National Association of Insurance Commissioners approved new rules that would allow life insurance companies to lower their reserves—at the worst possible time—having already forgotten all about the financial crisis. Read.... “Future Generations Have To Deal With The Financial Carnage”.

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Reader Comments (3)

I guess we should copy France and make it illegal to fire anyone.

If you're going to recapture manufacturing jobs from China you have to increase profits/employee. You either make your employees more efficient (cut jobs and make more $/employee) or you cut wages - or a bit of both. Either that or keep hemorrhaging jobs overseas. The American middle class lived way beyond its means for a long time. Now the pendulum is swinging the other way.

I see the extravagant executive pay as a failure of checks and balances. Citi shareholders rejected the proposed compensation package in April but unfortunately such votes are nonbinding. In essence, the owners can say "We reject this pay proposal" and the board can ignore it. So if that happens to you as a shareholder and you continue to own your shares look in the mirror for the root of the problem.


What do you suggest as alternatives?
December 5, 2012 | Unregistered CommenterJB McMunn
@ jb McMunn

You wrote, "I guess we should copy France and make it illegal to fire anyone."

Citi is bankrupt without taxpayer bailout. Is preservation of jobs too much to ask in return? FU and wipe your brown nose.
December 5, 2012 | Unregistered CommenterBob
As far as banks are concerned they looked way too big. Internet iso shops but also simply this non productive sector was too big as a percentage of the economy. Hard to think that the marginal part had really much added value for society as a whole. Looked more that they use their monopolistic-like position to increase business.
Looking at the wagesstructure in the sector and compare it to the rest of the economy all over the board bank staff and executives looked to be substantially overpaid.
My conclusion is competition is still not properly working in the sector but it is better than before. But still a lot to be done.
Seen from there staffnos as well as pay are still way too high.

. The Western world has as JB mentions lived years way beyond it means. Lending grow rapidly at often several times economic growth. Another point being that the Western worker has benefitted from the virtual monopoly the West had on producing high added value goods. And subsequently the Western worker had 'pricing power'. These times look to be gone. Now the world's labormarket is flooded with semi-talented people. And that simply brings wages down. Huge supply (probably even oversupply) prices go done.
Very difficult to reverse as the infrastructure to built a new reindustrialisation on is simply partly gone as well.
The West is simply in need of a huge rebalancing act in which it likley will lose part of its wealth.

However it looks to be a perfect storm.
Deleveraging at the same time. Read a big negative stimulus As the problem has been 'solved' earlier by borrowing effectively the last 2 decades.
Aging hitting in. Less workers/contribitors and rapidly risisng receivers, higher healthcare etc costs.
Governments simply unable to keep that sector under control. Could have been a way to compensate it partly, but it is not it has become an extra drain on middleclass income.

Companies become or better have become truly global. They simply have to look at the bottomline. A US company simply cannot afford anymore to make several years losses while its Indian or Chines counterparts make healthy profits.
Companies can relatively easily move. Western workers are far more mobile. Places were people can live a Western or similar level lifestyle are rapidly growing. Local staff in many before backwaters is now of a proper quality. You can move easily from a to b as a company when necessary. And as I see it that will happen more often. Which makes heavy laborprotection or 50% taxes on companies simply elusive. They will simply move part or whole of their business. And if not you wil not be able to compete (like we see in France now).
Their shareholders demand that from them no real connection witht he business. Just a short term financial one.
Also meaning a structural move from higher level work from the West to the rest and with low growth simply worrying.

The West's future looks pretty dim imho (livingstandards will still be higher, but growth will be very low or even negative).

On the issue of the 5% doing well. It is probably the result that the power is shifting from worker to capital. In the East it never has been different. And effectively labor gets more powerful. In the West through worldwide competition the earlier also monopolistic (laborunion) position is over. Western labor got competition. Even to the level that the supplyside looks completely overcrowded. With millions graduating from universities all over the world.
Donot see higher taxes as a solution. The US having somewhat more room for that. But say Europe companies and the real talent simply will walk and with them the bulk of the good paid jobs.
December 5, 2012 | Unregistered CommenterRik

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