I lived with a Japanese family outside Kyoto in the late 1990s. The father of the house worked long hours. He’d come home and his wife would present him his slippers and then dinner. In the evening, he’d smoke pungent cigarettes, and we’d discuss everything from politics to Japan’s loss of confidence after the Second World War. He was engaged, interested in the world and interested in life.

I saw him again in 2006. We visited for the Japanese New Year and ate Okonomiyaki (Japanese pizza). The change in him could have not been more startling.

He was made redundant some years back. He’d been trying ever since to get another job, to resume his position as a respected salaryman. But the economy in Japan, struggling with deflation, low growth, low wages, and a tight employment market had hit him hard.

He was a different man. It was like the life had been sucked out of him. A once voluble character, he barely had anything to say.

It is a sad thing to see someone’s fascination with life disappear. And there are important lessons in the world of money. The best thing an economy and a business can do is to provide meaningful work and opportunity. To allow people to rise to the occasion. To fulfil their potential.

Of course, many economies fail dismally at providing this. Youth unemployment in Spain has been over 30% the past few years. In many parts of Africa, unemployment for all working age people runs at well over 20%. Your opportunity to reach your potential depends a lot on the lottery of your birth.

Or your ability to move to where your talent can be realised. This is what is driving some of the largest migrations of people throughout history.

US jobs resurgence

Through March, the US added 196,000 jobs. Unemployment sits at 3.8%, the lowest since the 1960s. Here’s where the jobs were added:

Source: CNBC

US jobs continue to advance, NZ declines

The Kiwi dollar is weaker after the US jobs data was posted earlier this month. An expected US slowdown doesn’t appear to be happening. Instead, the slowdown is happening here.

A weaker Kiwi dollar makes us poorer in global terms. It’s harder to buy overseas assets — like offshore shares or imported items like cars.

Last quarter (ending December 2018), unemployment in NZ rose to 4.3%, with 10,000 more people unemployed.

That’s 10,000 more people who want jobs, unable to find them. 10,000 more people left in unhappy situations like my friend in Japan.

Pro-business versus complacency

Love or hate Trump — and there does seem to be only two distinct camps — the guy runs a pro-business approach to government and work. He’s slashed the federal company tax rate from 35% to 21%. Including state taxes, that brings US average company tax in at around 25.7%.

Yet, that’s not the entire story. Many states like Texas, Nevada, Washington, and others levy no state corporate tax at all, meaning businesses pay only 21%.

What did Boeing (Washington) do after the Tax Cuts and Jobs Act? It added nearly 9,000 more people.

CEO Dennis Muilenburg said Boeing’s ability to invest in the next generation of aircraft is ‘all enabled by tax reform.

Enabling investment creates jobs.

Unfortunately, New Zealand company tax sits on the wrong end of the OECD tax scale:

Source: TaxFoundation.org

In addition to cutting business taxes, the Trump administration has eliminated more than 176 regulations, many of which impact on business. A series of executive orders requires government agencies to eliminate at least two regulations for each new one.

Ask anyone in business. Here in New Zealand, we seem to be adding more regulations. And we’re running high rates of tax and increasing compliance on business. We’ve just had the Tax Working Group report, which recommends a capital gains tax on businesses.

Meanwhile, to keep up the illusion of economic growth, we’ve been running some of the highest per capita rates of immigration in the OECD. The target appears to have been net population growth rather than the highly selective focus on talent shortage that is needed.

Change is promised, with a lower target of 45,000 people net, 60% to come from skilled and business streams. The target so far has not been met. [openx slug=inpost]

Why is company tax so important?

If you’ve run a business before, you’ll be familiar with a profit and loss statement. From your total revenue, deduct your expenses, including salaries and wages. At the end of the year, you’re left with net profit.

Say you have a 100k surplus. Here in NZ, the government takes 28%, leaving you 72k to invest back into capital projects. Make 100k in Ireland, the government takes only 12.5%, leaving you 87.5k to reinvest. Year by year, availability of funds to accumulate and invest can make a big difference.

In Boeing’s case, a tax cut meant they could up Dreamliner production from 12 planes a month to 14.

New Zealand is also far from the world’s major markets. It suffers from poor rates of business investment. Company tax could be used to boost the economy.

But it probably won’t happen. The Tax Working Group Recommendations report recommended neither reducing the company tax rate nor introducing a progressive company tax rate. Little wonder. A review of the member profiles of the Tax Working Group finds plenty of political, legal, and accounting talent — but no small business owners or entrepreneurs.

Last year, it was small business owners who generated more than two-thirds of NZ job growth.

What can we do as investors?

Look for growing companies in growing economies. Diversify globally as needed.

Growing companies employ more people. When I’m analysing a company to buy shares in, one of the first things I look at is the career vacancies page on their website. If they’re actively recruiting, it’s one sign that their business is growing and what they produce is in demand.

Of course, inability to fill job vacancies can also be a concern if an industry is constrained by lack of skilled workers.

Investing for income, I like businesses with large employment bases — wherever they may be in the world.

If you run a business that does not require a high degree of labour skill but is hiring large numbers of workers, you’re in a good space. You can more easily hire the people needed to grow your business and at reasonable cost. And all those people are exposed to your business and product daily.

McDonald’s [NYSE:MCD] was the world’s fourth largest employer when statistics were run in 2015. With 1.9 million workers across its network (including franchisees), it sits behind only Walmart, the US Department of Defense and the People’s Liberation Army of China.

Alongside growth of 2x in the stock price over the past five years, McDonald’s has also paid an average dividend of 3% per annum.

It has recently acquired a 10% stake in Kiwi tech firm Plexure [NZX:PLX] that provides a discount and loyalty app to the business. By embracing such tech, plus AI (artificial intelligence), health and vegan options, McDonald’s appears to be a business with the size and scale to take advantage of trends and potentially grow further.

And as a stock, it has some defensive qualities.

Despite decline in Japan, McDonald’s now plans to triple its Japanese locations to 300 by 2022. In 2017, McDonald’s Holdings Japan saw net profit increase 4.5 times.

Of course, investing in McDonald’s has risks, especially as nutrition and diet trends continue to evolve.

Can it evolve fast enough?

My friend near Kyoto certainly enjoyed a burger. In or out of work, a Big Mac can be economic comfort food.

Tell us how you’re seeing the job market here in NZ. You can reach us on [email protected]


Simon Angelo

Analyst, Money Morning New Zealand

Important disclosures

Simon Angelo owns shares in McDonald’s Corp [NYSE:MCD] via wealth manager Vistafolio.