TECHNOLOGY AT WORK

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68 Citi GPS: Global Perspectives & Solutions February 2015 Because digital technologies can substitute labour for capital, productivity improves while wages do not Furthermore, digital technologies make it easier to substitute labour for capital. Although such substitution helps productivity, it does not boost wages. Instead it merely enhances the capital share of income, leading to a higher concentration of wealth. As a result, while income inequality is on the rise, the concentration of wealth is also striking. According to a recent study the wealthiest 0.01% of American families now control 11.2% of total wealth: about the same share as back in 1916, which is an all-time high. 103 The relationship between wealth and income inequality across countries is however far from intuitive. In some countries like America, both are high, whereas places such as South Korea exhibit both low wealth and income inequality. Countries such as Switzerland and Denmark, on the other hand, have relatively low levels of income inequality, but also the highest levels of wealth inequality in the OECD. 104 Perfect equality may not be desirable. Financial gain is important to spur risky entrepreneurship and innovation. This means, as Arthur Okun famously argued, that societies must make trade-offs between equality and efficiency. Nevertheless, extreme inequality can also lead to inefficiencies. Not least since income inequality tends to translate into inequality in wealth, health, and exposure to crime. Economic inequality often results in political inequality, which is a concern Furthermore, as highlighted in the recent book by Daron Acemoglu and James Robinson, Why Nations Fail, economic inequality often results in political inequality, where: “those with great wealth and easy access to politicians and policymakers will try to increase their power at the expense of society. That sort of hijacking of politics is a sure-fire way of undermining inclusive political institutions, and it is already under way in the US.” There are thus good reasons to be concerned by the rise of inequality. Automation, Inequality and the Equity Market Robert Buckland Chief Global Equity Strategist 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. 105 We also show the same calculation for the MSCI EM Asia index, on which we comment more later. 103 Saez and Zucman (2014). 104 The Economist (2014b). 105 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. © 2015 Citigroup
February 2015 Citi GPS: Global Perspectives & Solutions 69 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 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 60,000 US EBIT / Employee EM Asia EBIT / Employee 14% 13% US EM Asia 50,000 12% 40,000 11% 10% 30,000 9% 20,000 8% 7% 10,000 03 04 05 06 07 08 09 10 11 12 13 6% 03 04 05 06 07 08 09 10 11 12 13 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. Lower rates of unionisation in the US could be a reason for the deteriorating bargaining position of US workers while the shift of lowskilled manufacturing is another important driver 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. 106 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. 106 For a summary of the current debate around the labour share of GDP, please see Giovannoni (2014). © 2015 Citigroup
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