The Reality of Smaller, More Efficient Workforces

The American economy is said to be improving, but we are told that it is a jobless recovery.  Tyler Cowen and Jayme Lemke argue that unemployment will remain high because many companies have learned to live with their smaller workforces even while they experiencing new growth in sales and revenue.

Their argument is that the bigger workforces of the late 90’s and early 2000’s contained a number of unproductive (or minimally productive) employees, but because profit margins were fat it wasn’t worth it to employers to spend time or money to determine who should get cut.

After reading this, one analogy occurred to me. If you used computers in the mid 1990s, you probably recall the frustration of running out of hard drive space.  Innovative uses for computers sometimes outstripped people’s existing hard drive capacity.  I can remember our family discussing what files we could eliminate when we wanted to install a new program.

Today, most people probably haven’t gone through that scenario, except perhaps in cases involving portable hard disks (i.e. iPods, USB sticks, etc) which use more expensive and usually non-upgradable solid state drives.  The obvious reason for this change is that the cost of hard drive space plummeted in the last 15 years. If not for many individuals, then certainly for most businesses, it is now more costly to bother sifting through old files to choose which to delete.  If you run into space issues, then just to upgrade your hard drive.

Cheap hard drive space is the business equivalent of fat margins or “robust profitability.”  And our economy just experienced a huge reduction in profitability.  This happened for a variety of reasons: consumer demand vanished, regulatory uncertainty increased, credit markets failed, etc.

The simple equation for profitability is REVENUE – COSTS = PROFITS.  Revenue is mainly a function of the price you can charge for a good or service and companies are currently struggling to keep prices high as they seek to increase sales.  The other tool they have to boost profits is to control costs, which means squeezing more productivity out of smaller workforces.

Walter Russell Mead argues — and I think most people would agree — that our economy of large, stable companies supporting big workforces for decades has long since undergone a fundamental shift.  Mead believes we need to reconsider how we use the word “developed” when referring to large post-industrial nations.  The past tense form of the verb is no longer really appropriate.

Finding a way to avoid a permanent 10% unemployment rate will likely require everyone — from policymakers to investors to average citizens — to change their expectations; their expectations of themselves, of their employers and of the government.

For ourselves, we need to banish any thought that having a job is a right.  The extended exploratory adolescence that Brian so nicely skewered will be increasingly deadly.

For employers, we should not whine and complain that they don’t immediately begin hiring as the economy recovers.  Many have argued that companies are unfairly sitting on large amounts of liquid capital (aka cash).  Employers should be allowed to pay down their debts, save for future uncertainties and invest in innovation (a path many individuals should consider).

For the government, it should do its best to reverse policies that long ago knocked the US off the top of the list for new Initial Public Offerings and attempt to create an environment that supports innovation.  Obviously many may disagree about how the government should support innovation, but that should be the subject of a different post.

1 Comment

  • Avatar
    February 26, 2011

    Dblade

    The blog Econfuture at http://econfuture.wordpress.com/ covers this in great detail, and it’s not very cheering. Chances are it will only get worse, as automation makes workforces smaller and redundant in fields we never thought possible.