Wednesday, March 27, 2013

The World's Corporate Cash Hoarders and Labour Savings

In the aftermath of the most recent recession, job creation seems to be one of the key factors that has not recovered as it normally would, showing stubborn resistant to improvement and, in many nations, record levels of joblessness are being experienced.  In this posting, I am going to look at one reason why so many Americans, Canadians and Europeans are still unemployed and why the period of time that workers are unemployed has not improved much since 2009.

Many experts have noted that the world's corporations are sitting on more cash than they ever have.   Some companies are citing the near collapse of the corporate debt and stock markets during the Great Recession as the reason why they are sitting on mountains of cash, after nearly getting burned, it seems like the prudent thing.  However, analyses show that this corporate cash hoarding has been going on for decades as you will see below.

This is a worldwide issue.  Corporations in Japan are sitting on $2.8 trillion in cash reserves, up a significant 75 percent since 2007.  Estimates suggest that Canadian corporations are sitting on  $600 billion in cash, up 100 percent over the past 10 years.  In 2011, United Kingdom-based non-financial corporations were sitting on as much as £754 billion.  According to Credit Suisse, American companies were holding onto $1.8 trillion in cash in 2011; more than 6 percent of the assets on the balance sheets of American non-financial companies was in the form of cash.   The global situation is similar as shown on the black line on this graphic from a study by Loukas Karabarbounis and Brent Neiman:

Here is bar graph showing the trend in corporate savings levels for 31 countries showing that corporate savings rose in 22 our of 31 countries:

Here is a bar graph showing the trend in the corporate labour share (the share of global corporate income paid to labor) for 39 nations showing that the corporate labour share dropped in 29 out of 39 countries:

Globally, corporate savings rose by 20 percentage points at the same time as the corporate labour share dropped by 5 percentage points between the mid-1970s and the late 2000s or, in other words, corporate savings rose on the backs of dropping payouts for labour.  This conclusion can be drawn because dividend payments to shareholders did not increase by more than the increase in corporate profits and the size of the corporate sector as a whole did not change relative to total economic activity.

Let's look at one specific example.  BAE Systems, a U.K.-based defence, security and aerospace company has £2.1 billion in cash (12th largest in the United Kingdom) but has cut 22,000 jobs in the last three years including 3000 in the United Kingdom.  While the job cuts may have happened in any case, certainly sitting on cash has not helped. 

Unfortunately for shareholders, this cash is not being returned in the same proportion as it is being saved.  Historically, 40 percent to 50 percent of surplus cash (i.e. pure profit) is returned to shareholders in the form of dividends.  In recent years, this has dropped to 35 percent; in fact, the proportion of earnings distributed in the form of dividends for companies in the S&P 500 is at its lowest level since 1900!

While sitting on a pile of cash can be a good thing, it can also work against a corporation since, in a corporate buyout, a company's own cash reserves can be used by an acquirer to fund part of their acquisition, particularly in an all-stock deal.  But then again, we all know who gets rich in corporate acquisitions, don't we?

The growth in corporate cash reserves comes at the same time as corporations around the world have been the beneficiaries of lower and lower tax rates.  Apparently, it's way more sexy to save up those profits than it is to risk investing in new machinery, manufacturing facilities and research and development, activities that create jobs for the world's economy.


  1. Is this figure right? It seems dwarfed compared to all the others!

    QUOTE: "Estimates suggest that Canadian corporations are sitting on $600 million in cash, up 100 percent over the past 10 years."


  2. Sorry John. It's been changed to billion rather than million. Oops yet again.

  3. Great thoughts you got there, believe I may possibly try just some of it throughout my daily life.

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