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Do companies benefit from recessions?

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Andrew Kelly / Reuters / File

(Read caption) An unemployed Bobby Byrd takes the blood pressure of a passer-by on the sidewalk in Manhattan's Lower East Side May 4, 2011. Medically trained by the Red Cross, Byrd takes blood pressure for donations as a source of income after having been unemployed for several years. Does high unemployment make some companies stronger as workers lose bargaining power?

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A somewhat odd theory has recently been posted on various left-wing blogs (for example this one) that goes something like this.

High unemployment weakens worker's bargaining powers, helping to reduce wage demands and therefore all else being equal boosts corporate profits.
Recessions and weak recoveries from recessions means unemployment.

Therefore, companies benefits from a weak economy, and the politicians they back will therefore deliberately try to weaken the economy.

This might seem at first glance like a good syllogism, but it really isn't since the first premise is misleading. While it is true that weaker bargaining powers for workers will reduce labor income relative to corporate profits, that is not the main effect of recessions on corporate profits. Falling capacity utilization (which increases fixed costs relative to sale) and falling margins because of weak demand will seriously depress profits in a way that greatly overwhelms the positive effect for companies from stronger bargaining powers relative to workers.

This chart used to prove their point does nothing of the kind, because by using 7-year averages they will at all points include both recessions and booms. This means that it will mainly describe structural rather than cyclical changes. If you look at specific years, you can see that profits as a share of national income tends to fall during recession, while share of national income that goes to workers rises.


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