Economic Improvement and Job Creation
In the wake of the continued slide in jobs, I continue to be asked about the relationship between the economic recovery and the continuation of job losses in America. It seems that if we are in the middle of an economic recovery, we should logically see gains in the number of jobs.
Unfortunately, history has shown us that gains in the number of American jobs occurs very slowly, over an unusually long period of time, even as an economic recovery gains speed. For many unemployed Americans, that will continue to look for jobs over the next twelve to eighteen months, it will continue to seem that the economic recovery is passing by without them.
As an economy begins to slide, companies cut back in stages. Many of the early stages of cuts seem to be easy to cut. Sometimes businesses have under-producing departments or less efficient product lines. A severe economic downturn makes decisions regarding these departments and divisions easy.
As an economic downturn transitions into a recession, businesses feel an even greater need to cut back but few easy decisions are available. More importantly, employees quickly recognize the possibility that they may be the next employee let go. Employees begin to work harder, staying longer hours and offering to do more.
In addition, businesses generally have a rate of productivity improvement that doesn't slow down during an economic downturn. In fact, while factory utilization and equipment productivity may decline, worker productivity tends to improve significantly. All this combines to reduce the demand for additional employees. Businesses become more demand flexible and can postpone the hire of additional employees for a period of time.
As we look into 2010, the severe U.S. recession of 2007-2009 will certainly have a rebound in business activity. Unfortunately that will not immediately lead to additional job creation for many months and even years to come. Government efforts to "create or save" jobs tend to be very poorly thought out and even more poorly executed. There is no reason to believe that this time will be different.
In the long run, economies move towards equilibrium. Government incentives, stimulus bills and monetary stimulus can incentivize an economy away from equilibrium periodically. However, the further away from equilibrium the economy moves, the more dramatic and difficult is the snap back towards balance. In the United States, we have been offering incentives that accelerate growth in our economy--low interest rates, tax credits and job creation stimulus. Eventually, the economy will move to equilibrium and the price will have to be paid.
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