Were you curious as to the sector-by-sector breakdown on labor costs as a share of revenue for America’s largest corporations?
Was that the burning question on your mind this week?
No? Me neither, but it’s something to talk about and God knows I like to hear myself talk.
Jokes aside, this is important. Perhaps not as important as it was when pay growth in America was running hot enough to risk a wage-price spiral, but given upward pressure on input costs from tariffs, it’s worth asking if the labor market slowdown might help offset some of that pressure by pushing down wage growth.
I mentioned that in “Why Stocks Aren’t Worried About A Downshifting US Jobs Market,” but I didn’t show you the above-mentioned breakdown. Here it is, courtesy of Goldman’s number-crunchers:
For reference, Goldman guesstimates labor costs by way of headcount and median employee comp which, you know, seems reasonable.
Labor costs eat up about 12% of sales for big-caps and 16% for small-caps. For Info Tech and Comms Services (where the mega-caps live), those figures are 17% and 14%, respectively.
As for the bottom line, Goldman says a 100bps change in labor cost growth translates to 70bps for S&P EPS and 150bps for the Russell 2000.
So, who cares? Nobody. Now get off the computer, go outside and enjoy life, because it’s short. I’m kidding, I’m kidding. Don’t roll your eyes. As noted, the context is the cooling US labor market, where the supply of workers now exceeds demand for labor on multiple metrics.
The price of labor is just like all prices: It moves with supply and demand. The current environment is thus conducive to lower comp costs and therefore higher profits, all else equal.
Hallelujah. And all else is never, ever equal.
When I read Piketty in 2020 – on H’s recommendation – I was amused by the stat that the cost of labor tends to account for 60-70% of profits always and everywhere. I’m amused today that Goldman came within a hair of reproducing that measurement in an entirely different context.
Doing the mental math on the percentages, I see that Goldman has inferred that S&P500 labor takes a roughly 75% share of profits (subject to enormous rounding and estimation error). Good old Thomas is vindicated again.
For our next trick, the Piketty definition of beta will rear its ugly head as we enter a downturn facilitated by AI substituting for labor…
Which book?
Capital In the 21st Century. For a neophyte to economics, it was surprisingly accessible.
Is anyone compiling AI data center costs?
Woah. Employee comp is 75% of EBIT!!! So if there were no pesky employees, profits could be 75% higher!? AI to the rescue!
Tech-land is getting explicit about AI replacing people, no longer skirting the idea but luxuriating in the odious excremential dream of profits without people.
Truth. On the upside, there’s about to be a greater supply of smart potential tradespeople now that software development has been exposed as creative writing. Which is to say: tech is coming first for its own. Customer service is next, but there are plenty of gigs that AI will never touch.