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Getting The Labor-Capital Balance Right
July 27, 2012 | 7 comments | includes: ARGT, FXI, SPY
The macro background matters for shareholders. The last four decades have shown a remarkable shift in the balance of power between capital and labor as a result of the decline of unions and the globalization of the economy. At first glance, it seems obvious that this shift in power balance heavily favors capital, and therefore shareholders. But as the following examples demonstrate, the reality is a little more complex than that.
Countries can, if anything, be too friendly to capital. One could argue that this is the case in the U.S., where the growth and stability of the economy is hampered by that. More familiar are situations where countries are too friendly to labor and too hostile to capital, as the example of Argentina shows. Perhaps the most interesting case is that of China, were growth is very rapid, but neither capital returns nor wages are attractive and the country is geared toward maximizing growth, not capital returns.
The more general lesson is that in the presence of a global savings glut, the role of labor not just as a production factor but as the most important source of demand has been underappreciated. In the end, that will benefit capital and, thereby, shareholders as well. [Read on here]