Producing more, hiring less

April 19, 2012
By: Eric Lundin

We’re still slogging through the jobless recovery, and while slowly falling unemployment took many by surprise in 2010 and 2011, I guess most of us have resigned ourselves to looking for reasons. There isn’t much else we can do.

Before we look for reasons, let’s look at the trend.

If we go back six decades (yes, I realize the world was a very different place then), it’s clear that the unemployment rate used to drop pretty quickly after it peaked. It often fell by more than 30 percent within 12 months of hitting a peak.

  • Oct. 1949 to Oct. 1950: 7.9 percent to 4.2 percent (a 47 percent drop in a year)

  • Sept. 1954 to Sept. 1955: 6.1 percent to 4.1 percent (a 33 percent drop in a year)

  • July 1958 to July 1959: 7.5 percent to 5.1 percent (a 32 percent drop in a year)

During the 1970s and 1980s the unemployment rate fell slower, between 15 and 25 percent within 12 months of the peak. The U.S. economy wasn’t quite what it had been; the world was a more competitive place; the U.S. was shifting from being a creditor to a debtor nation; and countless other reasons were at play.

The most recent time around was much worse. After unemployment peaked at 10 percent in Oct. 2009, it seemed essentially stuck. By Oct. 2010, it had fallen a whopping half a percentage point.

What’s going on here?

In his blog “Producing more versus hiring more,” my colleague Tim Heston cited a one-two combination: New equipment and better strategies. Referring to manufacturers, he wrote, “They bought new, more productive machines, and they’re working smarter, thanks to lean manufacturing, Six Sigma, theory of constraints, and other improvement methodologies.”

They sure did. During a recent trip to California, I got some insight from fabricator Ross Liberty. He pointed out to me that under Section 179 of the U.S. tax code, the depreciation for capital equipment was accelerated in recent years (the so-called “bonus depreciation”) to encourage manufacturers (and construction companies, publishers, and everyone else who uses capital equipment) to purchase new equipment. Liberty’s explanation was straightforward: when depreciation is not accelerated, a machine usually is discarded after years or even decades of service, and it is replaced with a modern and much more productive machine. Over time, every company becomes more efficient, capable of doing much more, usually with fewer people. The bonus depreciation greatly accelerated this process. Liberty went so far as to guess that some manufacturers may have purchased machines that they didn’t really need; they figured that the bonus acceleration might come to an end, so it was better to make a capital investment sooner rather than later.

It would be a stretch to say that bonus depreciation caused the jobless recovery, but surely it contributed to it.
Eric Lundin

Eric Lundin

FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-227-8262