Stock Buybacks Aren’t Holding Back Worker Wages
(Bloomberg Opinion) -- As the pandemic fizzles out, share buybacks are rising again, with big companies like Alphabet Inc. and Apple Inc. leading the way. That’s bound to lead to more calls for legislation to ban or limit corporate stock repurchases. But although they’re demonized in the popular imagination for benefiting shareholders while constraining wages and economic growth, there’s just no evidence that buybacks are bad.
In the 2010s, companies bought back their shares at unprecedented rates. An analysis by economists Kathleen Kahle and René M. Stulz found that while buybacks averaged about 19% of corporations’ operating income from 1971 through 1999, that number jumped to about 34% from 2000 to 2019. And buybacks accelerated in the 2010s, going to almost 42% of operating income. So the trend can’t be explained by the mere fact that companies were making more profits.
This trend kindled a lot of ire, especially on the political left.
Both Senator Elizabeth Warren and President Donald Trump, as well as other leaders, proposed to ban the practice. In fact, stock buybacks were illegal until 1982, since they were seen as a form of market manipulation, and they were briefly banned again in 2020 under the CARES Act as companies received billions in government pandemic aid.
But this anger toward buybacks was based on a theory of corporate decision-making that might not be right. Standard corporate finance thinks of a company as a sort of tank full of money — customers put money into the tank, and workers and suppliers take money out. Investors, who own the company, sometimes put money into the tank, and sometimes take it out.
The basic idea is that if a company doesn’t have enough profitable projects to invest in — new products, new markets, or whatever — then investors will take money out of the tank so that they can invest it elsewhere. Payouts like dividends and buybacks are thus seen as an alternative to companies investing in growth or efficiency. As the reasoning goes: if the money used for buybacks hadn’t been returned to shareholders, companies would have used it to expand, and that expansion would have raised wages and hiring. That’s why opponents of buybacks think they come at the expense of workers.
This basic theory does help explain some corporate decision-making. But it doesn’t seem to be very good at explaining the actual relationship between buybacks and corporate investment. Kahle and Stulz find that companies that have made payouts to their investors since 2000 have decreased their capital spending at the same rate as companies that didn’t make payouts. Meanwhile, economists Joseph W. Gruber and Steven B. Kamin looked at the relationship between buybacks and investment across countries, and found no correlation.
So it looks as if in recent decades, companies don’t really decide whether to invest each dollar or return it to shareholders as the textbooks would suggest. When companies want to give shareholders money, they do so, and when they want to find the money to make capital purchases, they generally find it elsewhere (i.e., they borrow it from lenders instead of reducing returns to shareholders).
If the link between buybacks and investment is weak to nonexistent, then the link between buybacks and wages must be weak as well. In fact, that’s exactly what we saw in the mid and late 2010s. Buybacks soared to their highest point ever, but wages also grew at their fastest rate in decades:
This wasn’t a story of rising pay for chief executive officers pulling up the average; in fact, wage growth in the late 2010s was fastest at the bottom of the distribution.
If buybacks stole money out of workers’ pockets, we probably wouldn’t be seeing that happen. Of course, it’s possible that if buybacks had been banned, companies would have raised wages even more. But there are reasons to doubt that’s how it would have shaken out. Companies have proven over the years that they’re just fine sitting on piles of cash; forcing more money into the tank doesn’t mean more will be put into workers’ pockets.
Also, the fact that capital spending was generally weak in the 2010s even as wages rose shows that business investment isn’t the only driver — or even, perhaps, the most important driver of higher wages. Policies like minimum wage increases probably have a lot to do with it, and tight labor markets created by high aggregate demand can boost wages even if they don’t prompt companies to make capital purchases.
So as buybacks come back into vogue, we can learn from the experience of the late 2010s. Forcing companies to keep more of their earnings doesn’t seem like an effective way of raising pay for workers. Instead, we should focus our attention on other levers.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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