Thursday, March 4, 2010

Unit labor costs collapse, a portent of increased hiring

This is worth highlighting: unit labor costs fell last year at the fastest rate since records began to be kept in 1947. The flip side of this is that the productivity of labor increased 5.8% last year, which is also an impressive number. What this all means is that companies got lean and mean and much more efficient last year. Profit margins are up, and sales are increasing. This is very likely to translate into increased demand for labor over the course of the year. Labor got a lot cheaper last year, so the demand for labor is likely to rise. This is good news all around.


Jake said...

Your logic may be backwards. You are saying labor demand will increase because labor is cheap. It seems to me that labor is cheap because there is no demand.

Benjamin Cole said...

Yes, this represents real increases in living standards, when productivity goes up.

These huge increases in productivity are also anti-inflationary.

It may be that American businesses are better managed than ever. We seem have to developed a "business culture" in the last two generations, in which the purpose of life is to run a business and make money.

I will leave to others to ponder the deeper meaning of this (if any), but for now I think it means that productivity gains will be the norm for a long, long time.

Adding to the positive brew is the large VC community created in the last 20 years, and the web, which speeds technical data globally and instantly. There is also a proliferation of R&D engineering outfits globally as well.

The outlook is really positive globally, of only our government would follow minimum standards for economic management. The US is not, unfortunately.

brodero said...

I don't know if you can create the chart but if you could invert the unit labor cost chart and place it over a chart of the 3 month moving average of the monthly payroll change. It is uncanny. I shows businesses have a lot of room to hire at these costs. Thanks for the observation.

Donny Baseball said...

Let me respectfully disagree (and agree with Jake)...this is a backward looking metric that captures two facts, companies have "over-fired" and primarily gotten rid of their dead wood (least productive employees) while sales have ticked up. I do not think that the unit labor cost of the margin hire is this low. That is not to say we get some hiring but I think it will be restrained - companies are skittish and after a certain point, they'd just be bringing back the dead wood, which they likely won't consider. I see 8% unemployment as a structural barrier for at least 3 years.

alstry said...


The need for labor is evaporating as technology we spent years developing is finally being adopted and applied.

No more video stores as videos and music delivered online.

No more bank branches as banking going online.

Manufacturing is becoming less labor intensive compounded by fewer people working buying less manufactured goods.

It is just the beginning as the post office will lay off hundreds of thousands as we move to digital mail and text messaging.

Now the question is what are we going to do with the tens of millions of unemployed and billions of square feet of vacant retail space.

If Detroit is any indication, expect a lot of green space growing in the very near future.

septizoniom said...

perhaps marx was right

Benjamin Cole said...

Believe me, I sympathize with laid off workers, and earnest engineers etc who had spent lifetimes working, and are tossed out overnight.

But higher productivity is an unalloyed good.

Even without free trade, Detroit probably should employ fewer people every year, as productivity goes up. It takes fewer and fewer workers per car produced--leaving other workers left over, to other productive efforts for society.

I do wonder if a mercantilist policy would have been better for America, as it seems to have worked so well for China, Japan and Korea. Classical economical training will tell you no, mercantilism is bad, the real world world say yes it is good.

alstry said...


Our system was structured for an Industrial Age and NOT Digital Age.

By becoming more efficient, firing millions of workers, we have destroyed the revenues to government and now revenues are insufficent to cover the current government structure and obligations.

Further, we built an industrial economy dependent on government spending massive amounts of dollars. Without government spending, we would not have much of a GDP.

Volker is the only mainstream person to identify the structural deficiency....time will tell how this plays out...but the rioting has spread to Portugal.

Scott Grannis said...

Jake: to be sure, demand for labor has been weak. But by firing people and increasing overall productivity significantly, businesses have improved their profit margins. With sales increasing, businesses will soon have to hire more people; you can only squeeze existing resources so much. I want to emphasize the title of this post, which is that big productivity gains are a portent of new hiring. It's coming. I would also note that big productivity gains usually occur following recessions, and it is a normal part of the business cycle. But this time around businesses have worked extra hard to cut labor costs and boost productivity, so the payoff is likely to be that businesses are going to be in a strong position soon and new hiring will be easier.

alstry said...


The was reason we had big productivity gains was due to government's $2 Trillion dollar deficit....we never had anything close in the past.

If the life support is pulled, we will likely see sales evaporate, if we keep borrowing at this know the rest.

Scott Grannis said...

productivity gains, no matter how large, have nothing whatsoever to do with the federal budget deficit. If anything, a large deficit makes the economy less, not more, efficient.

alstry said...

Your perpective only worked when we were a production surplus economy, once we morphed into a consumer deficit economy, the rules changed.

Now we have $55 trillion of debt that mathematically can't be paid back.

If the government is buying goods, whether directly or indirectly, such through entitlement payments or transfer payments, it creates demand that otherwise wouldn't be there.

In The Great Depression we had food lines, today we have digital food lines in the form of food stamps. Providing those food stamps creates demand that otherwise would never exist.

Same with purchases of military hardware, or government purchases of technology.

Benjamin Cole said...

I do have a question, I would like SG to respond.

Our financial system collapsed at the end of the Bush Administration. Since then, we have had no reforms, either regulatory or free market-inspired. Obama has done nothing, either positive or negative, aside from silly posturing on exec pay.

So, we have the same financial system that collapsed only two years ago. If investors cannot have security in the financial system, they will not invest, or at least with gusto.

What should be done at this point? Would you eliminate the FDIC? The SEC? Fannie and Freddie? Let free markets rule?

Keep things the same?

Or go back to Glass-Steagal, and increase reserve requirements for banks?

It seems we are doing nothing.

Scott Grannis said...

At the risk of over-simplifying things, I would say that the near-collapse of our financial system had little or nothing to do with a lack of regulation, so the fact that we have not yet had regulatory reform does not mean that we are vulnerable to another collapse.

The problems that led up to the 2008 crisis were many, and most involved government institutions (Freddie and Fannie) and policies (CRA, deduction of mortgage interest, non-recourse loans) that introduced fundamental distortions into the housing market. Freddie and Fannie were the ones who took on excessive leverage since they were backstopped by the taxpayer. The banks were left holding securities whose decline in price was aggravated by mark-to-market rules that amplified cyclical trends.

The banking and financial sectors of our economy are very unlikely to make the mistakes of judgment that contributed to this financial crisis.

In my view the government should worry more about fixing misguided policies than about re-regulating our financial sector.

Jake said...

scott- you made the comment:

"I would also note that big productivity gains usually occur following recessions"

this is actually incorrect. big productivity gains usually occur DURING recessions as companies squeeze out excess (which i agree is a good thing for corporates and longer term, for society).

we have seen this with a rebound in profitability which has occurred not from the top line, but reduced expenses feeding through to the bottom line.

the issue (in my opinion) with your outlook is that it requires aggregate demand to re-emerge to increase the top line. as alstry points out, we've already spent trillions of dollars but still only see a bounce off lows and overall levels WAY below previous trends.

my HUGE question. where will this aggregate demand come from? you mention business hiring which feeds into wealth create, which feeds into spending. but with so much excess capacity still in the system i see an issue with the first part of that cycle. throw in a strengthened dollar (thus overseas labor becomes even cheaper), i just don't see it...

i hope i am wrong...

Public Library said...

Scott you blame the issue on FNMA, FHMLC and beleive the banks will not fall into the same trap again.

Sadly this could not be further form the truth. We are now in a government debt bubble and the banks are the largest players in the game.

We had a corporate bubble in 2001, and private and financial bubble in 2008, and we shifted the load onto the sovereigns.

When the feeding frenzy starts, the banks will have nowhere to hide.