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The Other Side of Record Margins: Good News for Job Seekers

By Morgan Housel - Apr 20, 2013 at 5:30PM

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Liz Ann Sonders on the economy.

Some say corporate profit margins are at record highs (though there's debate on that claim). That's going to ding profits, and then a stock index like the S&P 500 (^GSPC 1.86%) will fall, they say.

But there's another side to the story. Profit margins are high because companies have shed such a large part of their workforces and pay such measly average wages. Margins will fall, therefore, when companies begin to hire more and raise wages. That should be good for the economy, and thus stocks. Great, even.

In an interview last week, I asked Charles Schwab chief investment strategist Liz Ann Sonders about the jobs-margins relationship. Here's what she had to say. (A transcript follows.)

Liz Ann Sonders: "Labor, as a share of GDP and as a share of corporate profits, has gotten down to about as low as it typically gets. You even saw it in the most recent jobs number, which the headline was not terrific, but the hours worked number was pretty good.

So when you see the constraints now in productivity, the fact that the labor share of corporate income is relatively low, you look at hours worked going up, it tells you we should be getting close to that point in the cycle where the next step on the part of businesses is actually adding to workers. But you're right, part of the reason why margins have been so strong is because businesses have been at least trying to squeeze as much as they can out of the workforce that they have. So yes, that would be, in essence, certainly good news for the underemployed or unemployed."

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S&P 500 Index - Price Return (USD) Stock Quote
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