Not your grandpa’s shortfall in aggregate demand

Across the country companies are still reluctant to hire — even though they’ve been doing quite well financially.

According a report today from the Bureau of Economic Analysis, corporate profits rose 29.2 percent in 2010. That is the fastest growth in over 60 years.

That’s from Catherine Rampell.  File under “Hamlet to Horatio.”


So far, so similar to the age-old story of innovation. Doing more with less, and the slack resources are free create something new. Ready, set, entrepreneurial spirit... go!

Can someone who has looked at the data comment on the pace of start-ups? Or is America full of underemployed folks who see profitable companies all around but have no ambition to try to emulate them?

People may jump on me for this. But there are really two issues at hand here.

1) Maybe, just maybe, companies layoff the least productive workers first, as best they can identify them. So those out of a job my not exactly be Randian supermen, but a bunch of losers (ZMPW in MR speech).

New start ups today don't need a lot of dumb labor, its all driven by a few productive people leveraging technology and high end skills. What dumb labor they need they get from China or somewhere.

2) I doubt construction workers are the kind of people looking to start a new business, at the very least start one outside of construction which we don't need.

My father is a construction worker. Through him, I know that the number of companies bidding for public jobs has increased tremendously. Assume that an average of 10 companies used to bid for a job in my town; now that figure reaches 20 or 30. Some companies will even take a job where they know they will lose money, just to further make connections and stay in the market for future private opportunities.

In that sector, at least here, I don't see much growth.

This demonstrates to me that starting a new construction business is likely a poor venture. However it could lead construction workers to develop something small on the side.

But I am confused: Do you mean that starting a business outside construction is something we don't need or that starting another construction business is something we don't need? I agree with the latter, not necessarily the former.

I'm saying that an unemployed construction worker is unlikely to start a software company if there is no demand of construction work but plenty of demand for software.

People develop skills that may be specific to one industry but at least partially useful to other semi related industries. For instance when I decided not to do finance anymore I was able to start work in insurance. Many of the same mathematical and analytical skills applied, even if there were a few industry specific things I needed to learn. In fact, there is a pretty wide variety of professions I have and could get into with my fairly fungible knowledge skills.

By contrast the skills a construction worker learns are at best applicable to other industries in the "knows how to work with his hands" sort of way. However, technology and the existence of a billion Chinese mean we don't really need any of these "working with ones hands jobs", so there is little for the construction worker to do besides start over completely from scratch.

A good point, that the skills learned as a construction worker lead them to industries of a physical nature. I do believe that to be true for laborers. It may be worthwhile to look farther into that idea, though. There are certainly construction workers that follow the typical stereotype of being outside all day, lifting piles of wood/metal, swinging hammers (laborers). But there is a lot that goes on behind the scenes, and much what lies there steps beyond the stereotype.

The foreman must know how to manage the flow of incoming and outgoing resources and also know how to manage the flow of people who handle said resources. Placing drywall people with the bricklayers will do no good. Failing to allocate enough time for concrete trucks to arrive before a pour will leave the job stranded. Furthermore, there are workers inside office buildings who analyze the prints/ building layouts and manage the flow of multiple jobs (the foreman of the foreman).

These people, who you may say are higher up the ladder, are not necessarily the owners, but do actually work for someone. The people skills they possess, managerial capabilities, and possible computer skills (such as CAD) should allow them to move outside the field of construction with some ease.

It will be the beginning of the end, however, when the billion Chinese, with all their technology, are able to entirely replace laborers (a feat I see coming before the replacement of foreman) with robots or some other form of AI. True, we are currently able to manufacture cars almost entirely with robots. But constructing buildings from the ground up is still a very human endeavor.

they aren't reluctant to hire, they've caught a glimpse of the possibility of doing more with less workers. it takes a shakeup for a new equilibrium (made possible by tech) to establish itself.

"Across the country companies are still reluctant to hire — even though they’ve been doing quite well financially."

Why not:

"Across the country people are reluctant to restart working - they've been doing decently well even without a job, so are not really motivated to start, esp. at the prevailing wage"

Companies aren't hiring because they aren't producing.

Real GDP has recovered to early 2008 levels (in other words, we have not had any increase in output in 3 years!) and total employment is 5% below its peak. That is entirely consistent with 2% productivity growth per year. If RGDP returns to its *trend* without employment doing so, then I'll start to buy the zero MP worker theory, until then it looks like an aggregate demand problem and nothing else.

What are the production numbers showing? Are we really producing less gasoline, cement, cars, PC's etc. than 2008?

Alternatively, what if the demand is there but companies are merely satisfying it by producing eslewhere and importing? The GDP plots won't reflect that or would they? GDP calculation confuses the hell out of me!

Real GDP was slightly higher in Q4 2010 than in Q1 2008. That seems consistent with other measurements.

More imports would increase consumption/investment but decrease the net trade category and have no net impact on measured GDP. If aggregate demand were sufficient but companies were only trying to produce goods and services overseas, the dollar's value could fall to equilibrate markets for trade and capital investment.

Industrial production is still about 5% below its prior peak.

I wonder how much of the difference in RGDP can be accounted for by lowered activity of the 5% difference in employment. Point being, ZMP may not have anything to do with GDP from an accounting perspective.

That's plausible, but is there any evidence that would favor the ZMP theory over the insufficient AD one?

This time most profits are from overseas.

The spread between unit labor cost and prices is at near record levels.

It is down from the peak, but by historic standards domestic profit margins are unusually wide.

Labor cost have fallen to some 57% of nonfarm output, by far a historic low. From WW II to 1980 this fluctuated around 66%.

The company I work for is hiring as fast as we can, which turns out to be not very fast. It is very difficult to find high-quality software engineers. As a corollary, the only reason economists take their labor market models seriously is that they've never had to find a real job, much less hire for one.

So software engineer is a "real job" and economist is not? Give me break.

"Across the country companies are still reluctant to hire".
What proportion of the labour force do software engineers (even low quality ones) make up anyway? What does your anecdote add?

How high quality is "high-quality"?

Isn't this the dynamic that was seen with the great depression, except that this time instead of making money off of higher end products and services for wealthier Americans, companies are making money off of products and services for cash-rich foreign consumers?

Can't wait for those bonus checks to executives and the exercising of those stock option grants.

Just wait for trickle down.

Also: when someone makes the statement that "across the country, companies are reluctant to hire", I get a little sick. Companies are not anthropomorphic entities. The decisions of their managers are based on demand or anticipated demand for their products. And, if the manager has slack capacity and no better alternatives for the cash than distributing it, guess what they do.

I've hired people before, been a manager bringing in fresh meat, sat on committees hiring professional peers. Worked at a risk-taking startup. Spent my share of time seeking employment with varying levels of desperation. I can't imagine how that experience gives me any special insight into modelling the entire labor market or how anyone would think so.

Care to explain, Noah, what it is your experience has shown you that a)economists don't already know and b) is not reflected properly in the labor market models. I'm kind of skeptical about the high-quality software engineering market being an appropriate surrogate for the overall labor market.

"I’m kind of skeptical about the high-quality software engineering market being an appropriate surrogate for the overall labor market."

Maybe not, but academia is?

Its emblematic of the fact that labor models just have this giant thing called aggregate labor, without realizing some labor markets have a lot of slack and some are very tight. When you use policy push on the gas there is no guarantee you are going to get rid of the slack, you may just make the tight markets even tighter.

labor models just have this giant thing called aggregate labor,[...]

So none of the search models I learned in first-year graduate macro don't exist? Thirty years ago "macro models ignore agent heterogeneity" might have been sufficient as a criticism, but it's certainly not now. Even back then, the glib response is hardly a real reason to justify dismissing all the academic research. Research isn't everything, obviously, but it's also not nothing.

*So none of the search models I learned in first-year graduate macro exist? OR So the search models I learned in first-year graduate macro don’t exist?

What if at any time you carry ZMP workers for FUTURE expectations? Those future expectations may or may not have any bearing on current demand.

I have to agree with Noah. Where I work, we desperately need people in many roles, but we just can't fill them. This isn't for lack of trying because every week there are big groups flowing through the recruiting process. Part of this is a time issue, so they're working the existing employees as hard as possible and bringing on new ones when they can.

An important issue that economists miss is company culture and management styles. There is no question we could find a bunch of workers tomorrow that have positive marginal profit, but there is a big danger in recruiting "good enough". These types of workers can change the entire office dynamic by just getting by instead of excelling. They also are unlikely to advance in the company or provide the peripheral benefits that are so important. If you can work your existing top talent harder, why bring in a bunch of so-so employees?

There are also obvious dangers in refusing to hire 'good enough' employees and driving your top talent harder. Danger #1, your competitors will hire some of those 'good enough' workers take some of the business you can't handle because you don't have the capacity, and #2 Your top talent will burn out and defect to competitors where they aren't expected to put in consistent 50-60 hour weeks.

Curious If your sector is software engineering too?

Yes, I think a lot of people don't get this. Knowledge workers today build organizational capital, not widgets. A wrong decision made by a so-so employee can be massively unproductive. In coding, for instance, the best programmers may literally be 1000 times more productive then so-so ones. If working with the so-so one or having to use their work slows down the highly productive programmer it may even be a net negative for the company.

Yeah, here's the issue with software engineering. A star coder may be 1000 times more productive than an average coder, but the star coder won't be paid 1000 times the average coder. So, only choosing star coders is like asking around for free lunches, because the company can get more value than they have to pay out.

What we're seeing now is that the star coders are waking up to the fact that the companies are taking this lunch from them and calling it "free." So often, I see it as "We're looking for star coders at average coder wages... why aren't there any?"

The answer is simple. Either the company must raise salaries to attract star coders, find a way to use average coders at average salaries (Are average coders more a problem of the coder, or of the management?), or be out-competed.

I would add that the nature tech sector is probably the portion of the economy is most like the libertarian ideal. Its no surprise people coming out of there tend to lean that way.

At the end of the day most workers cannot be above average. That's mathematics and you can't escape it.
Somehow in the past we did just fine with most workers being average. Yes, even the tech industry, which had a boom in the 90s and filled positions with warm bodies without stipulating that everyone had to be a super star. To be sure, you don't want incompetent workers, and those ones need to go.
But some realism needs to return to the hiring process. Most people will do OK, even if they are not superstars. The biggest danger to the company culture is not the 9-5 guy, but the demanding primma donna who sets everyone else's teeth on edge.

1. Earnings growth expectations has been slower over the past 10 years than for most of the past 60, as measured by the stock market, which is our key barometer for earnings growth expectations. Companies hire new workers when they anticipate growth in the future, not because of past growth, particularly when that past growth has only been catch-up growth. Since stock prices are 16% lower than 2 years ago, is it unsurprising that companies would expect lower rates of growth and thus have fewer employees now than then?

2. What Scott said about more foreign profits.

3. The rise was a quick rebound from very low levels. Look at profit growth over 2 years and it is underwhelming.

In your later years, you get to take it easy, work less, live off accumulated capital.

That is the US economy today: retirement, live off accumulated capital.

Businesses need roads, bridges, power grids, ports, rail roads, water systems, etc, but they don't need them tomorrow if they are abandoning the US, which as a matter of public policy is retired in expectation of debt. Just as the old couple neglects their house as they only need it to have it last only as long as they live, the US and its businesses are only interested in the US infrastructure lasting as long as they remain in the US.

Why waste money on improving the property when you don't even need to maintain it. Paying taxes to maintain the US and make it better for business in two decades, much less a century, when you have no interest in staying in the US, which as a matter of policy is expecting to die soon, is just a waste of profit.

So, the way to exit a nation is to stop hiring, stop paying taxes, stop investing in production, stop planning for a future, and do everything possible to milk it for every dime, while moving production, development, investment elsewhere in the world.

Obviously paying more in taxes or committing to the future by making up the more than two trillion dollar deficit in US infrastructure is a mistake. Let the bridges fall, the water mains break, the levies fail - the US will soon be abandoned anyway.

"Its emblematic of the fact that labor models just have this giant thing called aggregate labor, without realizing some labor markets have a lot of slack and some are very tight."

I would have thought everyone knew that "aggregate labor" represents different labor sectors experiencing different market forces. Wouldn't you think that was more or less definitional of an aggregate model? Do you think this (oh, look the aggregate contains different things!) constitutes news to the people who put the models together?

And there are no guarantees that any economic policy will work as intended. Welcome to reality. If you are looking for guarantees, look elsewhere.

1) Knowing something and ignoring or paying lip service to it because its inconvenient may as well be the same as not knowing it.

2) When you yield the bully pulpit of money creation, those that use that money want some guarantees. That's my savings your devaluing and I want to know why and to what end. When you want to adopt extremely risky and unproven monetary and fiscal policy (like today) you need more then the equivalent of:

Unemployment 2010 > Unemployment 2007
so therefore...
print a lot of money and give it to banksters.

I don't think there is necessarily a connection between doing well financially and needing to hire more employees. Why expand if everything is just fine the way it is?

I think to solve the problem we may need some combination of:

1) Trust-busting: too many markets are controlled by too few entities who no longer really have to compete with each other.
2) Rate hikes: we've had historically low interest rates for historically low time periods, and no one feels the need to actually take out a loan and do anything with it because the expectation has become that the cheap money will always be available.
3) Corporate restructuring: if CEOs of most major coroporations were actually worth the money they're paid they'd be taking their massive piles of capital that can't get any sort of return right now and start experimenting with all sorts of technology and startups. This is the closest to risk-free money they're every going to see, and pretty much all of them are playing it safe. They should be fired and replaced with people who will retool their companies to leapfrog their competition.

I feel like I’m often looking for interesting things to read about a variety of subjects,
but I manage to include your blog among my reads every day because you have interesting
entries that I look forward to. Here’s hoping there’s a lot more great material coming!

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