March 3, 2013

Charles Lawton: Evolving view of worker expense slows job growth

The fundamental challenge of our time is job creation. Why, more than three years since the official end of the last recession, is our level of employment still below the pre-recession peak?

The answer, I think, rests largely in the changing ways business has come to view "the job."

Most announcements of major new economic activities boil down to two numbers -- a big investment number and a new jobs number.

Central Maine Power will spend $1.6 billion upgrading electricity lines; Great Northern Paper will spend $10 million rehabilitating a paper mill; Summit Natural Gas will spend $200 million building a network of natural gas transmission lines.

These big investment numbers are always accompanied by projections of the jobs that will follow -- some short-term jobs building the capital assets being created and then long-term jobs putting these assets to work (hopefully) over their useful lifetimes.

The problem with these descriptions is that they mix two different time perspectives.

The big investment number represents a one-time, up-front cost for an asset whose success will (or will not) be determined over some expected useful life -- five, 10, 30 years.

The jobs number, in contrast, is almost always described in terms of short-term expense--- $15 per hour, $800 per week, $50,000 per year.

Once made, the investment is a fixed cost. Jobs, in this traditional formulation, are a variable cost that can be raised or lowered according to the good or ill fortune of the project.

Increasingly, however, jobs have come to be viewed as a fixed rather than a variable cost. This means that, rather than considering a new job as a possible $40,000 annual expense, it has turned into a $1.2 million investment decision.

How? Take that starting pay and benefits package, increase it by 5 percent annually to reflect expected increases in cost of living and benefits, project it over a 25-year working career, and the $40,000 per year becomes a $1.9 million projected cash expense. Discount that at 3 percent annually for the time cost of money, and the net present value of that new job becomes $1.2 million.

This quick and dirty analysis puts the short-term job and the long-term capital asset in the same time frame.

If the $10 million investment in a rehabilitated paper mill creates 200 jobs, that investment in physical capital pales to near insignificance beside the $250 million investment in human capital that a 25-year working life for those 200 workers implies. Even assuming a 10-year working life, the implied human capital investment is still nearly $90 million.

This view of "the job" as an investment in long-term human capital rather than a temporary wage agreement with a single individual is, I think, the primary driving force behind both the sluggish job growth of the current economic "recovery" and the recent buzz surrounding the idea that robots are an increasing threat to replace humans in the workplace that will reduce job growth even more.

So what does all this mean for Maine? Must we become Luddites and storm the factory gates with sledgehammers in hopes of saving human labor? Or will we all simply have to pin on our plastic nametags, smile and practice saying, "Hi, may I take your order?"

On the contrary, I think we must simply recognize that employment decisions are long-term rather than temporary, that people need to think in terms of careers rather than jobs and that careers are the outcome of our personal investments in our own human capital.

The future prosperity of our state and our nation depends on workers being less the passive, dependent variables in the equations of economic activity and more the owners of their own human capital to be built up and deployed according to their own dreams and plans.

Charles Lawton is chief economist for Planning Decisions, Inc. He can be reached at:

clawton@planningdecisions.com

 

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