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.
