Wednesday, November 25, 2009

Why Unemployment Lags In The Economic Recovery

Obama's stimulus bill is taking a hit, again, because unemployment is not dropping in spite of other improvements in the economy.  Unemployment did not increase as rapidly as the economy slowed down, either.  Many employers tried to weather what they hoped would be a shorter recession since the cost of restaffing when business resumes is significant, especially because rehiring would introduce new employees who must be trained.

Many companies were forced to shutdown when the economy collapsed and many of them will not reopen as their pre-collapse business is assumed by their competitors who were able to survive through the collapse.  When the pre-collapse business volume resumes, fewer companies will be needed to satisfy the demand.  The total employment of these companies will be less than the pre-collapse employment for a couple of reasons.

Economy of scale allows companies to produce more with fewer employees.  When the typical business doubles its volume it usually can do so without doubling its employment.

A second factor, which contributes to the lagging employment, is that the companies that survived did so in part because they made changes that reduced their overhead and production costs.  These companies learned how to survive with fewer employees and less overhead.  As the business volume recovers many of these companies are able to meet their pre-collapse business volume with fewer employees.

New businesses will be required to reduce unemployment and the unemployed must be retrained to do different work.  New business will come in part from new Green industries.  Developing the new technologies will create new jobs.  New businesses resulting from the new technologies will require new employees.

We should expect unemployment to lag the rest of the economy.  The stimulus was focused on maintaining state and local government employment in spite of decreases in state and local tax revenue.  The stimulus was also focused on directly stimulating the economy through infrastructure improvement projects.  Although these projects do not create permanent private sector employment, they do put money directly into the economy through the workers employed and the construction materials required.

I'm pleased with the rate of recovery of the economy.  We shouldn't expect a complete resumption of the old business as usual.  Survival required permanent change and the changes are incomplete.  If we allow our government to stimulate the development of new technologies through tax incentives and spending, the needed changes can be made and will be made sooner and America will be better in the end.

Hang in there.


Kansas Bob said...

Good insights Joe. I wonder if the global nature of the workforce contributes to the slow recovery of employment as well.

I am hopeful that in 2010 we will see a lower unemployment rate and a few of my unemployed friends will find jobs.

Happy Thanksgiving!

Joe said...

Bob, I probably shouldn't have said that I'm pleased with the rate of the recovery as if there is not a long way to go and a great number of families suffering with unemployment.

Our unemployment problem would not be so challenging if it had resulted only from a slow down in spending. The loss of so many direct and indirect auto industry jobs won't be solved by consumer spending. The labor has to be retrained to fill jobs in industries that currently don't exist.

It's not unlike the labor moves from agriculture to manufacturing and again from manufacturing to service.

Like it or not only the government can both ease the pain of the unemployed and accelerate the pace of the transition.