Why Job Losses Can Be Good News for Investors

LONDON -- Most investors are also workers. They typically have jobs or have retired from one. Yet investors and workers often have different interests in mind, and this distinction is important, because what's bad for workers may be good for investors.

One example is job cuts. These are awful news for the affected workers, but they can be great news for investors. That's because they demonstrate that the employer is responding to competitive pressures by controlling its costs. These cuts should increase its profits, or at least reduce its losses, unless they are excessive and disproportionately reduce the quality of the company's products.

Workers versus consumers and investors
The interests of workers are often diametrically opposed to the interests of consumers. That 5 pound pair of jeans in your local Tesco (OTC: TSCDY) that was made in Bangladesh represents work that has been lost to Britain. So British workers lose out because the jobs have been exported, but consumers gain because they can buy cheaper jeans.

The problem is that many people, especially politicians, seem to think that businesses' first responsibility is to provide jobs. It is not. A business only creates jobs because it needs labor. So if a company can cut its costs by either substituting capital for labor or adopting a more efficient production process, then it should do so. These savings can then be split between the owners of the business and its customers in the form of bigger profits and lower prices. This often leads to situations where highly profitable companies are vilified for cutting jobs, as when Diageo  (NYSE: DEO  )  closed its Kilmarnock bottling plant earlier this year and moved the production to Fife. The result was an overall net loss of jobs and an increase in output per worker.

Self-service supermarkets
The supermarkets are a prime example of businesses that are increasingly substituting capital for labor by increasing the number of self-service checkouts in their stores.

Every time I visit my local Sainsbury  (LSE: SBRY.L  ) , there seem to be fewer people manning the tills, while more people are going through the self-service checkouts. Once it becomes cost-effective to use robots to move goods from the warehouse onto the shelves, this will produce a wave of job losses as well.

Most companies are doing it
For most of its life, Renishaw  (LSE: RSW.L  ) , the Gloucestershire-based engineering firm, made everything in Britain. But it eventually reduced its costs by moving some production overseas, and last year it expanded its facility in Pune, India, which was opened in 2008.

However, some companies are now bringing work back from overseas, because rising foreign labor costs have made overseas production uncompetitive. While wages in most countries are lower than in Britain, the difference is not enough in some cases, after allowing for the higher productivity of British workers and the extra costs of controlling a production process that's in another country.

If you'd like to see the effects of this, you may want to watch the BBC 2 television program The Town Taking on China, which shows how the Liverpool-based cushion manufacturer Caldeira is moving jobs back to Britain from China.

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Tony owns shares in Diageo and Sainsbury. The Motley Fool owns shares of Tesco. Motley Fool newsletter services have recommended buying shares of Diageo and Tesco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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