So why aren’t businesses hiring?
For a number of reasons actually. Some numbers tell the story:
Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department. A capital rebound that sharp and a labor rebound that slow have been recorded only once before — after the 1982 recession.
Demand has increased enough that business is producing at least as much as it was before the recession, according to the NYT, but businesses aren’t hiring. Why?
Well, in lean times, headcount is the first casualty. Layoffs are the rule. That’s the fastest way to reduce the bottom line and either cut the losses being suffered to a manageable level or eek out a profit.
But, you say, once the recession is over, shouldn’t they rehire? Well, like all markets, not if the cost of the commodity is too high (labor) and an acceptable alternative is available (equipment). In this case that appears to be software in many cases.
So – business cuts back during bad times, finds it can either get along without the extra headcount or finds a technological alternative (equipment) and when a level of prosperity returns, doesn’t hire (although I’m not sure I’d agree a proper level of prosperity has returned at this point, but I think it is clear that much more employment was expected by now, which is why we see the word “unexpected” appended to every down employment report).
Why is this happening? Well in addition to the above, there’s an added problem that is often ignored or not mentioned. Government tax policies. In the case of equipment buying, the government has incentivized such purchases to the detriment of another – namely employment (labor).
With equipment prices dropping, and tax incentives to subsidize capital investments, these trends seem likely to continue.
“Firms are just responding to incentives,” said Dean Maki, chief United States economist at Barclays Capital. “And capital has gotten much cheaper relative to labor.”
Indeed, equipment and software prices have dipped 2.4 percent since the recovery began, thanks largely to foreign manufacturing. Labor costs, on the other hand, have risen 6.7 percent, according to the Labor Department. The rising compensation costs are driven in large part by costlier health care benefits, so those lucky workers who do have jobs do not exactly feel richer.
There’s your choice as a business – lower prices and tax incentives to purchase software and equipment or higher labor costs for workers. If the machine can do the job, the business doesn’t have to pay healthcare, payroll, payroll taxes, etc. In fact, the machine gives them a bottom line write off on their tax bill. It’s a no-brainer.