What Does Jobless Recovery Mean?
A jobless recovery is when the economy returns from a slump but the unemployment rate doesn’t decrease.
How the Jobless Recovery Works
When the market worsens, businesses lose money because their sales decrease. Because of this, they need to change by raising prices, getting a more significant part of the market, or cutting costs. It’s hard for most businesses to raise costs and get a more significant market share, even when the economy is doing well. Most businesses will choose to cut costs to stay in business during tough economic times.
Workers’ wages are one of the most significant costs for businesses, so when there is a slowdown, many companies will have to lay off workers, outsource jobs to cheaper workers, or invest in robots. This “formula” leads to jobless returns in the first place.
There is no promise that those companies will change their minds and hire back the people they fired during the slump once the economy gets better. Workers may feel “left behind” by the growing economy because their incomes may not have increased, even though company earnings and gross domestic product (GDP) may have increased.
When the unemployment rate doesn’t rise at the same rate as GDP, more jobs are available.
Example of a Jobless Recovery
Let’s say you run a business that makes and ships industrial goods. You have a plant with 25 machinists, a distribution center with 50 warehouse workers, and an office with ten administrative workers. The three sites have a total salary cost of $3.6 million, which is $1.25 million for one, $1.75 million for the other, and $600,000.
The $20 million in sales that your business makes gives you a 20% gross profit margin. Before taxes, you have a return of about $300,000. This is after paying for rent, salaries, and other costs.
The following year, unfortunately, the economy went into a slump, and sales in the first month were 25% lower than they were in the same month last year. You think that if things keep going the way they are, you will only make $15 million. It’s possible that this could cause a huge loss and put the company out of business, which would mean that all 85 workers would lose their jobs.
Because your lease agreements lock in your rent costs, you can only raise prices, get more customers, lower your running costs, or lower your salary costs.
After realizing that raising prices or market share won’t be possible in this economy and that running costs are already as low as they can be, you decide that the only way to save the business is to drastically cut staff costs.
For that reason, you buy five industrial robots and fire 22 of the machinists. The three remaining machinists with the most technical knowledge will now be in charge of running the robots. You think that the savings will add up to $1 million a year once you add up the cost of keeping the new robots running.
Then you make the same changes at the warehouse, removing 35 jobs and adding 15 rob-savings, saving another $1 million a year. Finally, you hire a low-cost contract company to do seven of the ten routine tasks, which saves you about $300,000.In total, you have saved about $2.3 million on salary costs.
After five years, sales have slowly gone back to where they were before the slump. Of course, the total number of employees is still about the same as it was before you cut wages so much. Since your company is now making a lot more money than it did before the recession, you have no reason to go back on the changes you made and hire the people you fired.
Apply this example to all of the thousands of businesses in the US. You can see how an economic recovery can happen without a rebound in employment, known as a “jobless recovery.”
Conclusion
- A jobless rebound is when the economy is getting better but unemployment rates aren’t going down at the same rate.
- When companies invest in technology and outsourcing to cut costs, they don’t hire back the people they fired, which can lead to a jobless recovery.
- When the unemployment rate doesn’t rise at the same rate as GDP, more jobs are available.
