Sunday, September 11, 2011

The Opaque Future of Jobs

An increase in productivity is a good thing, right?

For the consumer the answer is undoubtedly yes. Increased productivity means the price of an item should go down. But the answer is less clear for jobs.

Literally, productivity measures how much you get from how much you put in. If I took three hours to build a chair a month ago and today I can do it in two, and produce the same result, my productivity increased. But it also means I now only have two hours worth of work.

What if economy wide all carpenters similarly increased their productivity? The price for chairs would probably drop. In normal times this would cause a few more chairs to be sold, and may also encourage chair-building companies to expand their workshop and produce new products.

But the economy behaves differently in a time of crisis. Consumers bogged down in debt become frugal and, rather than buying more chairs when the price drops, they may choose to use that savings to pay down their mortgage or credit cards. As a result, that expansion the workshop considered might just be put on hold until consumers are more willing to spend. Also, in this crisis economy, the shop may find it difficult to secure a loan to finance an expansion.

In the end, some of those carpenters with an extra hour of time on their hands could lose their jobs. A company cannot afford to pay idle employees and if expansion is discouraged by a lack of demand or a lack of business credit or both, some of those employees will likely find themselves in an unemployment line.

Over the long-term this may prove beneficial. Those unemployed carpenters will be able to shift to new dynamic industries or start their own businesses. But until that time, it will be tough-going for both the individuals and their community. Those carpenters may no longer pay their house payments causing the credit situation to worsen; and, they will more than likely stop buying as much stuff, exacerbating the problem of anemic demand.

I wonder to what extent this phenomenon describes the US today? We have witnessed some recovery but one without many added jobs. Will this situation constitute a new normal of high unemployment for the foreseeable future?

Send me your thoughts.

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