One graph tells the story:

 

Think about that for just a minute. Unemployment is over 8% and yet unit labor costs are almost back to their all time high. If the goal is to reduce unemployment the obvious way to do that is to reduce the cost of employment. For whatever reason, that isn’t happening. Why not? What this really means is that productivity isn’t rising fast enough and it just so happens we got a report today on that as well:

Nonfarm business sector labor productivity decreased at a 0.5 percent annual rate during the first quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The decline in productivity reflects increases of 2.7 percent in output and 3.2 percent in hours worked. (All quarterly percent changes in
this release are seasonally adjusted annual rates.) From the first quarter of 2011 to the first quarter of 2012, productivity increased 0.5 percent as output and hours worked rose 2.8 percent and 2.2 percent, respectively.

So why is productivity dropping? Over the long term, productivity is inevitably linked to investment and that is the ultimate answer. A poorly educated/trained workforce might raise costs by requiring more training. Or the rise in health care costs to implement Obamacare might be having an impact. Both of those explanations are a function of investment. In the case of training, our investment in human capital hasn’t been paying off as it should. Education reform would seem to be in order. In the case of healthcare, regulation is a major factor inhibiting investment. Again, deregulation seems the obvious answer. Technology has reduced costs in every industry except these two which also happen to be two of the most regulated industries in the country. Is it possible that there is a connection?

What does this mean for us as investors? It seems to me that corporate American ought to enjoy those historically fat profit margins while they last.