The Rebound that Stayed Flat

by Andrew McAfee on January 5, 2012

I’ve been working to draw a graph that compares employment trends since the end of the Great Recession with other important trends in the economy, and also with earlier periods. Here’s what I’ve come up with (click on the graph for a bigger pdf version, and click here for a spreadsheet with the graph and all its data):

Recent economic and employment trends

Using data from the invaluable online resource FRED (and with the help of an equally critical real-world resource, my RA Noam Bernstein), I’ve plotted the trends since 1995 in US GPD, total corporate investment in equipment, and total corporate profits from non-financial companies (and also for all companies, including financial ones). I set the January 1995 value for each of these equal to 100 to allow comparisons across them over the years.

I also plotted the US employment-population ratio, or percentage of working-age people who have jobs (the axis for this line is on the right-hand side of the graph).

The overall impression I get from this graph is one of divergence over time. There’s a steady, slow-growing black line in the middle. This is GDP growth, climbing along at a bit less than 3% per year. Then there are a couple volatile and quick-growing graphs that wind up well above GDP. These are profits (blue) and investment (green), both of which are about 2.5 times as high in mid-2011 as they were at the start of 1995. GDP, meanwhile, increases by only about 50% over that period.

And then there’s the employment ratio (red), which declines by almost five full percentage points over the same period, from 63% of the population to 58.1%.

When I look at this graph I see evidence of the computer age everywhere. After the recession of 2001 ended profits came roaring back and equipment investment eventually started ramping up sharply, but the employment ratio increased only between September of ’03 and December of ’06, the most frenzied time for both the construction and financial industries.

And since the Great Recession officially ended in June of 2009 GDP, equipment investment, and total corporate profits have rebounded, and are all now at their all-time highs (non-financial profits are near their historic high). The employment ratio, meanwhile, has only shrunk and is now at its lowest level since the early 1980s when women had not yet entered the workforce in significant numbers.

So current labor force woes are not because the economy isn’t growing, and they’re not because companies aren’t making money or spending money on equipment. They’re because these trends have become increasingly decoupled from hiring — from needing more human workers.

As computers race ahead, acquiring more and more skills in pattern matching, communication, perception, and so on I expect that this decoupling will continue, and maybe even accelerate. This doesn’t mean that companies are about to stop hiring altogether; there are still plenty of things that humans alone can do. But it means they’ll need to hire at an ever-lower rate, compared to how quickly they’re growing, making money, or buying equipment. Because America’s working age population will continue to grow for at least the next few decades, I predict that the employment ratio will not start to trend upward in the coming years. If anything, I think it’ll decrease.

Do you agree? If not, what trends do you see that will cause the employment ratio to increase? What force(s), in other words, will be more powerful than the technology improvements we’re going to see? Leave a comment, please, and let us know.

  • http://twitter.com/DDMikeWard Michael Ward

    Do you have any way of tracking total personnel employed by companies that constitute the profits and investments lines?  Would be interesting to see if there is a corresponding decline in total personnel to mirror the Emp/Pop ration line (which would further bolster you argument that increased computer use/utility is a driving factor) or if the personnel line is staying flat (which I think would suggest outsourcing as the driving factor).

  • http://cmsreport.com Bryan Ruby

     Since the late 1800′s technological improvements and automation has existed to require less workers  for the same task than it took the previous generation. I don’t think the influence of “computers taking jobs” is any different this time around. What is different though is there is no new industry or new market for those skill unemployed workers to go to this time around. President Obama wasn’t just proposing green technology to be be “green” but also was hoping to develop a new job market. That doesn’t seem to be a real option for the US at the moment. If you’re unemployed what industry do your retrain yourself to get a job? 

  • http://twitter.com/jmancini77 John Mancini

    I think the US employment lag in the face of GDP growth is also reflective of the globalization of the workforce and the global increase in talent that can be much more easily accessed via ubiquitous bandwidth.

  • http://www.facebook.com/mbirk88 Max Birk

    Well.. In my opinion your analysis isn’t quite coherent. As you see in the graph the employment-population ratio indeed declines, but mostly in times of crisis such as in september 2001 and during the financial crisis starting in spring 2007. After the attacks in 2001 the employment-population ratio rises after a short period of time and declines shortly before the next big crisis (probably an early warning of the financial crisis?). So the way I see it you have to wait for another period of time before you can really draw conclusions from your data. 

  • http://twitter.com/mikej77 Mike Johnson

    This is a brilliant presentation and exactly indicates what we see.  Up until the crash there were two major trends.  Outsourcing of manufacturing induced companies to not renew their capital stock with computer driven machines and processes.  They were cautiously hoping to muddle along.  The crash caused layoffs and forced a decision as to make an effort to remain in business or not.  Those electing to remain in business replaced idled employees with new equipment so people were not called back and when production resumed profits soared.  No one involved will forget this lesson having had it taught to them in a very hard way.
    Secondly the “finance industry” was pursuing a labor intensive personal service model with low productivity and very high costs multiplying losses.  This model has been abandoned with the result that 100,000s of positions are eliminated.  Finance involves entirely abstract symbol manipulation and is headed as close to 100% as possible.  This is shown by very large expenditures in new IT equipment.
    With computer power continuing to follow Moore’s Law we are technically positioned to automate administration and services as earlier CNC equipment eliminated machine operators.
    One other point is that many factors contribute to site selection for new facilities with labor being just one so we do see some employment returning to the US as devaluation cuts compensation rates.

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