A local firm recently hired a sales manager who had worked for many years for a California company. It was a good company, and he had been the heir apparent to its aging CEO. But when the company found itself in financial difficulties and had to seek a partner, he was left standing when the merger music stopped. The new owners had their own ideas about management succession. They were in. He was out.
He had trouble finding work and was unemployed for months. Within weeks of getting a new job, however, he purchased a new car and enough new shoes, shirts and pants that they got noticed. He and his wife moved into a different, bigger house. They took in a Seahawks game. Life was good again.
It’s amazing what the prospect of a regular paycheck can do for consumer confidence. Not only will we spend on the consumer goods we need or want, we also are again willing to finance purchases with installment loan debt.
And if there has been a period of unemployment before the new job and regular paycheck, people like the sales manager exhibit classic spending patterns of what economists call pent-up demand.
Economists are hoping for exactly that type of effect as the economy continues to grow, jobs become more plentiful and people start seeing regular paychecks again.
The economic data spilling out over the past two weeks has been very positive. Consumer confidence is up. New home sales are up. Personal income is up. Personal consumption is up. Even the manufacturing sector, which has been singing the blues for years, is improving. The Institute for Supply Management reports that its manufacturing index for January was 63.6, up from 63.4 – and by their measurement system anything over 50 indicates expanded activity.
Economists are trained to worry about good news. And some economists are finding the solid growth in business investment very troubling. While it’s great that the business sector is showing such confidence in the economy, it’s definitely not great when firms seem willing only to spend money on machines, equipment, computers, and buildings – anything but new people.
Throughout the economic recovery, job growth has been sickly at best and alarmingly absent at worst. Even in December, which was a good month for the economy, the unemployment rate went down. But employment – that is, the total number of jobs – went down, too.
We’ve heard the list of reasons for the lack of job growth so many times they sound like “the usual suspects.” Productivity gains, overtime, overseas outsourcing, self-employment and even illegal immigrants have been blamed. But in this economy, there is more speculation than actual reasons. There is little evidence to back up such claims.
There is one other possibility: It may be an inside job.
Maybe we did it to ourselves. For years, the direct, indirect and imputed costs of hiring someone have been steadily creeping up. And in order to light a fire under the economy, the Federal Reserve has pushed interest rates down so far that the real cost to business of borrowing money for equipment and stuff is at record lows – sometimes, considering tax incentives and other factors, close to zero.
So which will it be? Should a business decide to get new computers whose costs are going down, or hire new people whose costs are going up? You can do the math on that question.
Management’s preference for machines over people is as old as the Industrial Revolution. People cause problems. And their effectiveness in the workplace requires significant levels of management skill – more than just turning the switch to “on” each morning.
Capital investment does have a positive employment effect in that jobs are created in the businesses that produce the equipment. And the new jobs create other new jobs as the newly employed spend their money. Hopefully, the spending won’t take too long a time to percolate through the economy.
In the long run, maybe we can do something about the real and perceived costs of hiring. But if you don’t have a job, waiting for the long run isn’t very appealing. In the short run, it would seem that the thing that would make labor more competitive with capital would be an increase in interest rates. That would make business spending on equipment more expensive and make hiring people, by comparison, more attractive.
If the timing isn’t perfect, however, the same rise in interest rates that would help with jobs could short-circuit our economic recovery. And that shows just how delicately balanced our economy is at this time. We are an $11 trillion enterprise balanced on a decimal point.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101,” which appears monthly in The Snohomish County Business Journal.
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