New York Times economics reporter Catherine Rampell provides a wonderful graphic presentation of business spending on equipment and software vs. labor since Q2, 2009 in her ‘Economix’ piece Man vs. Machine.
Rampell points out, “Spending on equipment and software has risen 25.6 percent in the last seven quarters, while companies’ aggregate spending on employees has risen only 2.2 percent.”
She points out that the gap between hiring and capital spending is wider than any other post recession recovery and puts her finger on the reason. “One reason hiring has been so sluggish is that equipment and software prices have been dropping quickly, while labor costs have been rising fast.”
While total compensation costs have risen 3+%, equipment and software prices have fallen by 2+%.
Some of the compensation increase is a hike in the cost of benefits (healthcare). However, Rampell misses the fact that the federal minimum wage was increased from $6.55 an hour to $7.25 an hour in 2009. Also during the boom, a number of states passed laws to index their minimum wages to an amount exceeding the federal minimum. For instance in 2009, a law was passed in Alaska keeping the minimum wage in that state 50 cents above the federal level. Nevada’s minimum wage is indexed to inflation and the minimum jumped 70 cents a year ago from $7.55 an hour to $8.25.
So while the private economy preforms the miracle of lowering the price for goods, the state, by force, keeps the cost of labor high.
The result will be high unemployment for many, many years.
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Minimum Wage and Healthcare, they might be the half of it. How about immigration crackdowns? How about unemployment benefits where the government pays people not to work? How about disability legislation? What about the mountains of other paperwork just to hire employees? These real costs add up and what they add up to is fewer people keeping jobs and longer times people need to spend to find jobs. How about 1.6 trillion in new federal debts? Do you think the private sector would use some of that capital to try new business ventures? And then there is the constant increase in the police state making simple transactions increasingly difficult.
According to Hayek’s Ricardo Effect, high labor costs spur investment in labor-saving equipment and increase employment in the capital goods sector. That is what we have been seeing and what we can attribute the mild recovery to. If the Ricardo Effect were taken into account, the multiple rounds of stimuli and QEX’s had no effect.
The problem is that the massive job losses in housing and autos are overwhelming the Ricardo Effect and it will take a while to recover those lost jobs.
nice informative post, thanks for sharing.
very very interesting.
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capital gold
Great Article, the content is recognizable for me (from the Netherlands). Same “problem”
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