Moving the Economy Forward

This earnings season, estimates have generally been exceeded, but it's been done by lowering costs, and revenues have often disappointed. One could make the inference that biggest cost cuts usually come on the labor line. If that's true, it would lend support to the argument that the worst of the jobs recession may be over. If companies are lean, will they hire if business recovers a little? Supposing they do, the next question is where will they hire? Domestically, or abroad?

There are some factors affecting this decision that are in more than the usual state of flux this cycle. First, there is the uncertainty of a government far more favorable to big labor than we have seen in years. Second is the potential of higher labor costs due to health care reform, although there is an argument that the costs may actually fall on the very rich and small business, and that big business may actually get some relief.

But direct labor costs are not the only factor to consider when siting employees. The cost of land, or the rental prices of office, retail and industrial space are also important. The real estate crash is a positive for businesses seeking to add new facilities. Local governments may now be in a mood to encourage job creation through tax breaks and administrative simplification. When considering overseas hiring, views of future transportation costs are a factor as well as the outlook for relative future labor price increases and the dollar.

I've thought for years that nationalization of social costs like retirement advantage mature, slow growth industries, who avoid the full cost of these issues on their older workforces. At the same time, young industries are relatively encouraged, as they are not saddled with any costs but their own. It struck me that this might be one of many reasons the US did well with innovation, while we exported jobs in mature industries to other countries. If we start nationalizing a larger proportion of social costs, do we risk eroding these advantages for new industries?

Since growth is a product of the growth of the labor force times the growth of productivity, how do we get real growth by encouraging mature industries, where it's harder to get productivity growth? As we pointed out in an earlier post on China, the Chinese economy gains substantially when labor leaves the farm and comes into the city to join the industrial work force--that worker's contribution to GDP can triple. without any true productivity increase. It's simply a portfolio effect. The US needs to make sure it can get a positive growth effect from shifts in our labor portfolio. National policies need to encourage this process.