EC More Socially Desirable Firms Gain Strength From Normalization Of Monetary Policy

If the Fed raises interest rates and marginal companies are pushed into struggling for survival, is this a bad thing? Won’t we lose jobs? Won’t wages be hurt? Well, the question is… Are the healthier companies (those that can better survive a higher Fed rate) willing to make employees happier?

Well, we now have a study that supports the view that healthier companies are more likely to have happier employees. And I safely assume for the moment that happier relates to better pay. What did the study find?

“Companies that employees report to be a good place to work have significantly outperformed the S&P 500 over the past six years… Since 2008, the S&P 500 has returned 121%, but the companies that employees rate well have returned 218.5%.” (source WSJ)

These more profitable companies are the ones that would easily survive a normalization process of monetary policy… And the employees are much more satisfied.

Even though the source article from the WSJ offered some explanations for this condition, labor economists have been aware of this condition for a long time. Beatrice Webb and her husband wrote about it over a hundred years ago. Here is a quote from a paper by Bruce Kaufman.

“Apropos labels today are “low road” vs. “high road” employment systems.”

“This duality comes from a combination of technological, institutional and human features. A consequence of assuming heterogeneity in factor inputs and production sets is that firms have different cost curves and, given a uniform market price for the good, different levels of profit. As a useful generalization, some firms are very technologically advanced, have efficient managements, and operate at a larger minimum efficient scale. These firms earn above normal profits and, for human motivational reasons, share some of their rents with workers. On the other end of the same product market are undercapitalized, small-scale, and poorly managed firms with higher cost curves that put them in a constant struggle to stay in business. Here, instead of sharing rents, these firms stay in business by taking it out of workers in the form of wages and conditions below the competitive social cost level. The Webbs characterize the worst of these firms as sweatshops and note, “the bottom of the industrial army…. suffers not from great capitalists but from small masters”.” (Kaufman 2013)