January 21, 2021

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.

DESCRIPTIONSource: 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:

DESCRIPTIONBureau 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

Economix: Core Inflation Rises, but Is Still Low

Friday’s inflation report was mostly as economists expected it to be. Core inflation — which excludes food and energy prices and is a better guide to future inflation — rose slightly less than expected, but only slightly.

How worrisome is core inflation? The Federal Reserve certainly needs to watch it. If it continues to accelerate, that would suggest the Fed may need to raise interest rates sooner than it now plans. But core inflation remains very low historically. Here it is over the last three months, compared with historical trends:

Bureau of Labor Statistics, via Haver Analytics

And here it is over the last year, again compared historically:

Bureau of Labor Statistics, via Haver Analytics

The recent signs of economic weakness remain a much bigger risk than inflation.

Article source: http://feeds.nytimes.com/click.phdo?i=71934cb71b69d7247518c3e34f8a2b3f

Economix: Portugal’s Education Lesson

Another reason not to take to the education naysayers too seriously, via Charles Forelle in today’s Wall Street Journal:

Portugal is the poorest country in Western Europe. It is also the least educated, and that has emerged as a painful liability in its gathering economic crisis. …

The state of Portuguese education says a lot about why a rescue is likely to be needed, and why one would be costly and difficult. Put simply, Portugal must generate enough long-term economic growth to pay off its large debts. An unskilled work force makes that hard. …

There is substantial evidence from elsewhere that education confers broad economic benefits. Ireland was one of the E.U.’s poorest countries a generation ago. But it threw E.U. subsidy money into technical education and remade itself as a destination for high-tech labor, made doubly attractive by low corporate taxes. Ireland is now, even after a brutal banking crisis, among the richest nations in Europe. …

Prof. Hanushek [of Stanford] and a professor from the University of Munich have linked G.D.P. growth with population-wide performance on standardized tests. They calculate that Portugal’s long-term rate of economic growth would be 1.5 percentage points higher if the country had the same test scores as super-educated Finland.

We can all name exceptions to the rule: Bill Gates didn’t graduate from college. Many college graduates have suffered during the Great Recession. Even some people with advanced degrees are struggling to find work or are underemployed.

But the rule remains the rule. Whether you’re looking at countries, regions, states, cities or individuals, those with more education tend to do much better than those with less. Here, again, is the pay of college graduates in the United States, expressed as a ratio of the pay of high school graduates who never attended college:

Bureau of Labor Statistics

As you can see, the value of a college has risen since the recession began in late 2007.

Colleges have a lot of problems, no doubt. But discouraging people from getting more education doesn’t solve any of them.

Article source: http://feeds.nytimes.com/click.phdo?i=823fb37fdbe13ba9a8f6e5dee3182ada