Job Crisis: Machines Over Manpower

Bloomberg Businessweek | July 29, 2010 | 5:00PM EST

The recession, economists say, technically ended in mid-2009. A year later the unemployment rate is still stuck above 9 percent, and it may take until 2012 for it to reach 8 percent, according to a survey of economists by Bloomberg News. The general explanation for this stubbornly high rate is that companies face an unprecedented era of uncertainty, with questions on the impact of health-care reform, the strength of the real estate market, and the cost of financial regulations all remaining unanswered. Until companies get clarity, they will be reluctant to hire new full-time employees.The job crisis could be seen another way: as a continuation of a trend that started 20 years ago. Before 1990, recessions in the U.S. followed a similar pattern. The downturn would end, and companies would start adding jobs in a little more than two months, according to the National Bureau of Economic Research. In 1990-91 hiring began outpacing firing three months after the end of the recession. It took seven months after the 2001 recession’s technical end before hiring trends turned positive, and 27 months before companies hired in large enough numbers to cut seriously into unemployment. This time the lag is even longer.

Economist Allen Sinai, who runs the consulting firm Decision Economics, has an explanation for this emerging pattern. He sees the capital-labor ratio—total capital invested as a percentage of hours worked—as the key to the puzzle. Capital spending boosts productivity and, in the short run at least, often eliminates the need for extra workers on the factory floor or in the office.
When the ratio rises, it shows companies are spending more on labor-saving machinery than on workers. From 1990 to 2008 the overall capital-labor ratio, which includes investments in factories and other buildings, increased by 29 percent, according to the Bureau of Labor Statistics. The ratio for capital invested in equipment and information processing rose much faster. The information-processing ratio, for example, shot up 310 percent from 1990 to 2010. “Companies find the all-in cost of U.S. workers—salary, benefits, training—very high,” says Sinai. “So if you can find substitutes for people, it’s cheaper.”

The stock market plays a role, too, says Sinai. By 1990 the doctrine of maximizing shareholder value had gained wide acceptance at publicly traded companies in the U.S., and executive compensation was by then firmly linked to boosting the stock price. “Stocks always respond positively when head count is permanently reduced,” says Sinai, “because profits are then expected to come in higher. We are the only country where the mantra of maximizing shareholder value is so intense.” Sinai figures that reducing the role that stock options play in compensation could make executives less likely to shrink payrolls so much. Until these pay incentives are changed, and until U.S. workers become less expensive, high unemployment could be a chronic problem.

The Bottom Line: The recovery in hiring is elusive. Companies are finding that buying equipment is cheaper than adding people.



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