'Jobless Recovery' Looms as Companies Stop Investing

Oxford Analytica looks into the possibility of a “jobless recovery” in a new report. “With some — albeit highly disputed — signs of recovery in the global economy, there is growing debate on what form this might take.”

Both recent experience and economic theory would suggest that a return to growth, at least in the short term, might not be accompanied by an increase in employment.

In 2001, after the burst of the dot-com bubble, recovery was fairly rapid. However, though mature economies already had seen a return to growth by 2002, employment did not recover in the same way. Rather, it continued to lag behind.

Economic theory offers a possible explanation as to why the effect of downturns on labour demand can be extremely long-lived or, in other words, why recovery, in effect, can be ‘jobless’:

• When there is a downturn in economic activity, employment rates fall (ie jobs are lost) and companies stop investing in new technology.
• However, since the innovation cycle is much longer than most downturns in the business cycle the rate of innovation in the economy is not overly affected, new discoveries continue to be made.
• This means that, when demand starts to recover, surviving companies have the option to buy into the latest technology.
• Those that do so soonest are likely to be the most competitive and hence best able to increase productivity.
• For a time, companies can increase production by investing in new technologies, and thus delay re-hiring people.

The question is whether this pattern is set to recur when the world begins to emerge from the current recession. In the past 18 months, investment in technology has stopped almost entirely around the world. However, advancement of technology, innovation, has been as fast as ever.

Preliminary data from the United States show that demand confidence exceeds employment confidence, similar to the situation after the 2001 recession. This suggests that companies will be inclined to invest before they will be inclined to hire. Data from 19 OECD countries show the same pattern, though with substantial variation.

Data on industrial production and capacity utilisation for the United States seem to show a significant over-investment in new technologies in the second half of the 1990s. This highlights a clear difference with the current crisis since the level of investment in high technology in recent years has been on a par with investment in other sectors. However, a jobless recovery could still occur, even without previous over-investment ain technology, if companies can increase production without hiring new labour.

Comments

[Neil459:]

This lends a lot of confidence in the article, "Data from 19 OECD countries show the same pattern, though with substantial variation."

If you have "substantial" variation then how can it be the same pattern. More self serving research crap. Its really amazing how bad writing has become. People don't even bother hiding the lack of real information.

Advertisement masquerading as a news article.

Jul 08 08:34 AM

[optionsgirl:]

"In the past 18 months, investment in technology has stopped almost entirely around the world."

What is your source for this? It's a damning statement, but how do we know it is not just your opinion?

Jul 08 08:46 AM

[TeresaE:]

"Jobless Recovery" in this new no credit, no liar loans, no investment dollar and hidden inflation, truly equates to saying, "customerless recovery."

The difference between this downturn and every other downturn in modern history is simple, and totally overlooked by pundits and experts:

customers.

Companies were still around, credit still flowed somewhat.

This time the companies are closed and credit shut off for any except the government and "too big to fail."

Still trying to figure out how "recovery" will come for my business when my former customers have just disappeared.

Gone, poof.

Funny how the Chinese suppliers don't buy American made products.

Funny how "recovery" will occur with no customers.

Funny how Biden "misjudged the economy" when he had been told, over and over, during his campaign(s) how dire the situation was on the ground.

Jul 08 09:01 AM

[Moon Kil Woong:]

Companies can increase production and productivity but without demand it is all for naught. The only ones getting any consumption is commodities thanks to China's hoarding foray as it tries to transfer it's dollar holdings into piles of iron and copper.

Now China, realizing this is not such a great investment (since there is a lot more iron to mine and no demand to use it on) is trying to force their cost in half by threatening to reneg on their iron ore contracts. Ergo holding one of their suppliers hostage in China.

Jul 08 09:41 AM

[CautiousInv...:]

In addition to possible investments in technology, which based upon lates IT spending surveys looks increasingly dim, the current recovery will be slow in increasing employment due to the depressed workweek and the large number of part-time workers.

As the recovery unfolds, the workweek will expand, part-time employees will be upped to full-time employees and, lastly, new employees will be added to the work force.

Jul 08 10:34 AM

[Mark Bern:]

Some very insightly comments above. Collectively, the comments are better than the article, IMO.

There will be investment in technology. It always happens during the early stages of recovery, it's just a matter of when will the actual recovery begin. But over-investment in technology is not likely this time around. Companies will weigh alternatives.

As pointed out by commentor Moon Kil Woong, demand is a key factor is spurring the economy into recovery and growth in demand is likely to be much slower than in recoveries past. Without adequate increases in demand, investments in technologies may very well result in further job losses well into any recovery. Consumer habits have changed for many and a new "normal" or baseline may have been created for demand. In other words, demand will start from where we are today and grow slowly from there, not jump back to where we were before all the problems hit the economy 18 months ago.

Also, there is so much underutilization of capacity, that business investment in capital goods and plant are not going to happen for several years. It just isn't necessary. Besides the consumer, that is the other major source of demand in our economy. But it just isn't there.

Capacity also exists in human resources as pointed out so well by CautiousInvestor. Businesses will consider expanding the work week or moving part-time employees to full-time before hiring. They will also weigh the cost/benefit of making this move against making additional investments in technology. If technology can be more cost effective, they may cut more jobs. If not, they simply increase the hours of existing employees.

The only increase in demand on the horizon will come from the government. Most of that will be very temporary investment in projects with limited timeframes. We will see very little lasting employment from the stimulus as it is currently configured.

Yes, the probability of a jobless recovery is very high. But the real question is: When will the recovery actually begin and will the unemployed even notice?

Jul 08 11:38 AM

[Tony Petroski:]

We may be in for a "jobless recovery" that is much worse than anything we've seen before--or the time to a recovery that creates jobs may take longer, but I don't see any persuasive arguments in the article.

"Buying technology" isn't some magic force that allows companies to produce with "technology" what they used to produce with labor. As the recovery gets underway, the first response of employers will be to expand the hours of the existing employees. It will also be normal to push the envelope on productivity until there is some pushback from the employees in the form of strike threats, demand for higher pay and demand for new employees. Thus it's understandable that while the company prospects firm up and improve, the "jobless recovery" will be noticeable.

"Technology" can supplant a lot of labor in the manufacturing sector but: 1) So many writers complain that we don't have a manufacturing sector anymore so how badly can the economy be impacted--you can't have it both ways. 2) The computerization of workplaces in the '90's and the internet in the '00's had a positive impact on productivity in the service businesses. Is the purchase of "smartphones" going to send officeworkers to the unemployment line? I realize that technological innovations can impact businesses in unexpected and useful ways, but this is nothing new.

Cheer up, recovery will come.

Jul 08 06:25 PM