There are two ways an economy can grow:  it can increase the amount of work by its labor force or by increasing the productivity of its labor force.  Only by increasing one of these two things can an economy truly grow.  In the past 8 years, the US economy has grown significantly according to the GDP numbers that are published by Bureau of Economic Analysis.  Has the US labor force grown?  Not really.  Has productivity improved?  Not really.  So how has the economy grown so significantly?  I call it the paper growth of the 21st Century. 

All economic data have been pointing to a slowdown in the past decade, especially in the past year.  The response by the Federal Reserve and the US government has been to do whatever necessary to ensure that the GDP continues to increase.  The result has been short-sighted pumping of liquidity into the market to produce apparent growth without substance.  With interest rates so low, companies borrow money for the sole purpose of buying back stock to increase short-term stock prices and reward its executives.  There is no productivity gained with much of the borrowing.  This defeats the purpose of low interest rates and only serves to create a larger bubble.  And the more significant consequence is that companies are burdened with more debt in an economy that is shrinking, with no productivity gained to cover the interest payments.

But at least the executives will get their bonuses because of the increases in stock prices.

This type of growth serves the sole purpose of increasing the income gap between the wealthy and the rest of the country, digging a deeper hole for the economy.  Nearly the entire country is worse off than it was 8 years ago.  Income has not grown for many people, prices have increased significantly, and personal wealth in the form of real estate has dropped significantly (a large share of many Americans' wealth is in their home).

Excluding the top earners in the US economy, Americans on average have seen nearly a decade of stagnant wages.  Most of us are worse off than we were 8 to 10 years ago due to, in many cases, lower wages coupled with higher prices (for homes, food, gas, cable, etc.).  The structure of our labor markets and capital markets are the cause of this problem.  In short, our market for labor is inefficient, meaning it takes a long time for prices (wages) to adjust to supply and demand.

• Lower to middle workers have little to no bargaining power when it comes to wages.  Only the highest earners have bargaining power.  If a mid-level worker counters a job offer, it is extremely rare for the company to accept the counteroffer.  In nearly all cases, the company will simply say no to increasing their offer, leaving you to either take or leave the offer on the table. 


• There is poor information on salaries, making it more difficult to now the market rates.  In addition, there is little uniformity in job descriptions and responsibilities, and salary information is one of the most confidential information a company holds.  Without accurate information, workers have less bargaining power.  The opposite is true for executive level positions.  Information is available to the public, so candidates for the highest level jobs have information to use in the negotiations.


• The extreme emphasis on quarterly earnings pressures companies to continuously cut costs or hold them flat...in many cases this translates to layoffs or insignificant pay increases for mid to lower level positions.


• In years that companies perform well, upper level workers receive performance-based compensation and bonuses.  When the company performs poorly, salaries are rarely cut for the upper level.  For lower to mid-level jobs in good years, salaries are the same or slightly higher.  In down years, jobs are eliminated, and in many cases, hired back later at lower rates.  Many companies do not have performance compensation plans for lower or mid-level workers.


• Our society discourages an open market for low and mid-level employees.  Workers seen looking for new jobs are regarded as obstinate and lost causes.  Job searching needs to be conducted secretly, and often it is not feasible to leave work during office hours to travel to an interview.  Conversely, when a high level executive position becomes available, it is almost expected that qualified candidates bid for the position.


• Boards of Directors or compensation committees are assigned to make sure upper level candidates accept the job offer, leading to exorbitant salaries.  Lower and mid level positions are determined by either finding the lowest-priced qualified candidate, or by finding the lowest price that any of the qualified candidates will accept.


• When a company hires a position, it interviews multiple candidates within a short period of time to determine the best candidate at the best price.  It is normal for an offer to be made when several qualified candidates are found, so if one does not accept a low offer, there are still other qualified candidates.  When a job seeker looks for a job, often it is over a period of months or even years, so there is little opportunity to compare offers from several positions or several companies. 


• Workers are highly discouraged from leaving a company with fewer than a few years of service.  Most companies see this as a strong negative for a job candidate, limiting the potential for workers to find the highest paying position. 

Undoubtedly there are many more factors than those listed above that cause inefficiency in the US job market.  These are barriers that if not eliminated or surpassed will lead to increasing income inequality and years of stagnant wages for lower and middle class workers. 

 

Successful businesses grow, resist difficult times, and pay lucrative compensation to its owners, shareholders, and employees.  For successful personal financial management, I recommend treating your life like it is a business.   Think of yourself as the owner of your business, your family are the shareholders (and possibly employees), and your goal is to maximize the returns to all of the stakeholders.  Most people will find that if they follow these guidelines, they will avoid many of the financial problems that a great number of people face.

• Create and manage a budget and follow it strictly.  Do not spend more than you have, and make sure your plan allows for a net profit to be invested in the future.  If your budget shows a net loss, you should either cut costs or increase revenues.
  
  


• Invest if the future of your family.  Use your profits to spend on items that will benefit your family in the future...education, training, investments, assets, etc.


• Maximize your revenue.  Always look for additional revenue streams to add to your business (life), such as selling on e-bay, advertising on a blog, a part-time job, investments, etc.


• Successful businesses improve gross margins with purchase discounts and rebates.  Don't pass off discounts and rebates that may take some time, but will increase profits.


• Don't be afraid of leverage, as long as you can pay the interest, and ensure that the borrowing is for an asset that will either increase in value or provide income greater than the interest (such as a house or business).


• Always look for ways to cut costs and pay the lowest prices.  Your purchasing department should compare prices from various vendors and choose the best bargain on all purchases.


• Do not add to your payroll if you cannot afford it.  Make sure you carefully consider all of the costs and benefits to adding to your family.


• Make sure your employees are happy...make sure you spend on vacations and other ways to improve the well-being of your family.


• Hedge your costs.  Well-managed businesses hedge the major costs of materials that they need to operate.  For a family, they typically include fuel (oil), food, home costs, energy, telephone, etc.   Hedging is usually best to do when costs are low and you can "lock-in" low prices (ie, now might not be the best time to hedge fuel costs, since oil prices are at record highs).  A way to hedge costs could include investments in ETF's that track commodity prices, energy companies, etc.