Economix: Man vs. Machine

In the epic battle of man versus machine, machines have a growing price advantage.

As I wrote in a story today, companies’ spending on capital has grown much faster than their spending on labor since the recovery began in June 2009. 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.

Source: Bureau of Economic Analysis, via Haver Analytics

Now, many economists will argue that hiring always lags capital spending, which is generally true. What’s troubling is how wide the gap in spending growth is this time around. In the seven quarters immediately following each of the last 10 recessions, equipment and software spending rose on average 15.6 percent, and labor spending rose on average 8.8 percent.

Somehow, capital spending is growing faster and labor spending is growing more slowly than has been the case in almost every previous recovery on record.

One reason hiring has been so sluggish is that equipment and software prices have been dropping quickly, while labor costs have been rising fast.

Again, this usually happens, but has been especially true in the current recovery. Here’s a chart showing the change in prices for compensation and for equipment and software since the recovery officially began in the second quarter of 2009:

Bureau of Labor Statistics and Bureau of Economic Analysis, via Haver Analytics

It may seem strange that the cost of labor is rising so fast. With such a weak economy, it doesn’t seem as if a lot of workers are getting raises. (Are you?)

And technically, employees are not getting much of a raise — at least not in cash. The higher cost of labor is primarily being driven by rising benefits costs and, in particular, rising health insurance costs.

Let’s take another look at that last chart, splitting up the total employee compensation prices into two separate indexes for wages/salaries and for benefits:

Bureau of Labor Statistics and Bureau of Economic Analysis, via Haver Analytics

As you can see, the benefits cost line is quite steep. Even more daunting to employers, it could get even steeper in the years ahead; health care costs are rising sharply, and their costs a year or two from now are very hard to predict.

So it’s no wonder companies are reluctant to invest in new workers when the economy still seems so uncertain.

Article source: http://feeds.nytimes.com/click.phdo?i=8d10e9afb6d9590e6c4a941e84c690fe