Why An Improving Economy Alone Won’t Fuel An Employment Recovery

On Thursday, October 19, 1967 The New York Times published the following, from an Interview with Herman Kahn, who was predicting that tourism would be the biggest industry in the United States.

By the year 2000, people will work no more than four days a week and less than eight hours a day. With legal holidays and long vacations, this could result in an annual working period of 147 days worked and 218 days off.

This is a good example of why I consider myself an anti-futurist. This kind of rhetoric makes headlines (in 1967) but it looks pretty foolish in 2010. Underlying Kahn’s prediction was an assumption of redistribution that was vehemently rejected in this week’s election.

Rather than predict the future of employment in America, let me provide you some thoughts about the underlying issues the “jobless recovery” should be raising, and suggest some paths forward.

On the redistribution front, 2009 saw a $1.2 trillion deficit.  That is a big number. Until you look at corporate profits, which hit $1.5 trillion in 2009 according to the WSJ. I am not advocating for redistribution, but I am pointing out that wealth is not the issue. A key factor is the future is how the public and private sector decide to reach an accommodation, if they decide to reach an accommodation. There is no rule saying they must.  You can see, however, why the US government is going after business taxes: it is the only pool of money around that is liquid enough to make a difference.

So why isn’t the private sector just stepping up to help out by hiring people:

People want cheap stuff. Those with jobs want inexpensive goods and services. If we start bringing back low wage manufacturing jobs from China and elsewhere, they won’t be low wage jobs anymore, and the price of goods will go up, which will further fuel unemployment as people won’t be able to afford to buy goods at a reasonable rate. Services have a bit more flexibility in pricing because they are often local, but they are also often discretionary, so less cash, means less discretionary spending.

Quarterly results. Corporation have no incentive to look at big pictures except as it serves their interests. They are holistic and systematic in their thinking only to the degree that it elevates their profits. We must remember that corporations are profit machines. They are not in the business of doing good, except where positive PR is seen as a way of increasing positive perceptions, and therefore profits. Along with this goes automation. Corporations will always maximize efficiencies for the economic system in which they exist. If they were rewarded for full employment in America, people would be working.

Today, companies are rewarded for efficiency and productivity, most importantly for shareholders, who expect the productive use of money in order to maximize shareholder return. People are expensive. They get sick, they need to be motivated and retrained. They leave and new people have to be trained. So corporations choose to automate all that they can: from manufacturing facilities to business processes. If they don’t need a person doing a job then they will stop using a person and replace him or her with software or hardware. In the current economic system the effective use of automation is not only desirable, it is mandatory from the competitive standpoint. The only other option is outsourcing to inexpensive labor markets, and most of that outsourcing comes in the form of things that people can’t yet automate– but as automation becomes an option, those jobs will be lost as well. What the advocates of “traditional American business” don’t understand is that you can’t rally behind deregulation and lower corporate taxes and expect companies to hire. They do not need people to grow, and again, their job is not to employ, but to make profits for their shareholders. More profits will results in dividends to a few, perhaps expansion into new markets, but few if any jobs in America.

What are some of the things we can do to encourage companies to hire:

Quadruple Bottom Line Accounting Companies are rewarded for financial performance. They are only required to report on financial performance. Imagine if firms were also asked, or started in droves deciding to report, the impact of their citizenship efforts, their human capital investments and their sustainability profile.

Investors and consumers could then decide if citizenship efforts were more than PR or ways of pushing products or services into emerging markets for longer term gain. Did the citizenship effort actually payoff in increased wealth locally? Were people healthier, better educated? Did the firm fund a photo op or a positive, long term change where they invested?

Imagine if you are investing in two firms. One has been around forever and its employee profile looks just as old. Little investment in continuity. Lot’s of bets on baby boomers staying healthy. The other firm makes the same thing, but it is composed of a rich, diverse population of people who are all engaged in reciprocal mentoring and other programs to ensure that the knowledge of the business, its markets and its customers, remains fresh, and is transferred to each new employee effectively. The later firm also has lower rates of sick leave, but longer vacations – both of which result in higher employee satisfaction in a standardized knowledge economy survey. Which firm do you invest in?

Finally, imagine that sustainability has a framework for reporting, and firms must report on the entirety of the business, from manufacturing waste to greehouse gases to energy use. New Scientist (Search Engine Power)recently published the findings of James Clarage, a physicist at the University of St Thomas in Houston, Texas, who estimates that each Google search “has the same energy cost as turning on a 100-watt light bulb for an hour.” We think of software as being more environmentally sustainable than hard manufacturing, but if Google had to put statistics like this in their annual report, they might be forced to innovate someplace other than in code because people might think twice before searching, which would start decreasing ad revenue. Thus a holistic view effects behavior beyond the core business of profits and might drive employment in other areas where innovation is required.

Consumer Regulators We are already seeing a  rise is public engagement in the dialog about which companies to do business with. This is likely to increase over the next several years. It is unclear if the movement will be just be annoying to corporations, or if movements like the Tea Party movement pre-sage a more activist consumer stance. If people become more activist, they will start pairing their Internet outrage with choices of where they spend their money. If large corporations start seeing a decline in profits based on negative perceptions in the market, they will change their behavior. Unlike Kahn, I’m not going to state emphatically that this will happen, but it is a possible route to change in corporate behavior. Other aspects of consumer regulation include trickle down transparency, which means that firms force other firms in their value-web to be transparent because they have chosen to be – and more scrutiny on affiliations: if a firm is doing business with a firm whose reputation has been tarnished, they may more actively disassociate with that firm between consumer action and the acceptance of trickle down transparency. They won’t be able to afford to stay associated with shady operations. BTW, this all works for politicians as much as it does for businesses.

Innovative lock-in. There will be a curve crossing moment, and I don’t know when that will be, when highly automated firms realize that they have locked themselves into a way of doing business and the automation is making it hard for them to adapt to emerging business models. The most adaptive element in a business is its people, not its automation. Brains have a way of accepting change and rewiring themselves much more efficiently than algorithms or processes. So firms that remain people-centric, if they can afford to be over the short term, may well find a long term competitive advantage.

Knowledge Economy. Knowledge is easy to distribute, but it isn’t easy to create. America has done a great job over its lifetime to create a base of entrepreneurs and leaders who create new things, develop new ideas, that create new demand. In the knowledge economy, these new things may well be disconnected from the nation however, because demand for knowledge is as global as the demand for goods. American has not yet embraced its ability, at the policy level, to create economic differentiation for knowledge. Some know how to leverage knowledge, but it isn’t policy. We are still focused on industrial policy and manufacturing, and the accompanying issues of energy and transportation. Firms that start figuring out how to get the need for knowledge outsourced to America will help create new markets and new jobs, because even some of what we consider mundane knowledge, isn’t mundane in emerging markets. Colleges and universities have known this for a long time. Its high time we start investing in an economic model that rewards selling knowledge within the framework of the larger issues discussed in this article.

Boutique Goods and Services. Along with the knowledge economy can come some very innovative goods and services that offer high, innovative value to their customers. These are goods and services with a high percentage of specialized knowledge to drive their design and implementation. Lamm Industries, for instance, makes a very high end pre-amp for audiophiles (Lamm originated the product in the Soviet Union, BTW). It is the company’s unique knowledge of sound, not their mass manufacturing knowledge, that creates their value. Government investments that help people unleash American knowledge on the world stage would  be one element of a new economic model. Rather than asking large companies to employ people, let people figure out how to start their own businesses. And I don’t mean dry cleaners and donut shops, I mean businesses that reflect their passion and their knowledge, whatever that may be.

A true sustainability revolution. I have already mentioned an environmental scorecard as part of corporate reporting. A true sustainability revolution would encourage firms to look holistically at their businesses, well beyond the motivation of quarterly results, to create roadmaps across their functions that would call for sustainability. One of those areas is business continuity, and a key to business continuity is creating a sustainable ecosystem of workers and consumers that keep the business afloat for the long term. Current consumer economics often force companies to sub-optimize for the short term, which puts their long term viability at risk (just look at GM or CitiGroup or AIG). The lack of a framework for understanding sustainability it is broadest definition means firms focus on what they need to focus on—as they say, “stick close to their knitting.”  If their knitting was part of a larger fabric, which information technology can help expose, then they would be inclined to be more holistic, especially if regulatory bodies and consumers reinforced this perspective.

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If we continue to look at issues quarter-by-quarter, through the lens of the industrial age, we will create large, efficient organizations that need fewer and fewer people for them to achieve their goals. And if they can’t sell their inexpensive goods to a displaced American consumer, they will sell it to emerging markets (which is where ad spending is moving).   American workers need to start thinking as global as the corporations who have abandoned them. HBR is now discussing these issues (see Wealth and Jobs: The Broken Link). Perhaps others will to. Our future depends not on prognostications, but on actively reimagining our structural foundations for employment and our economic assumptions. The good old days won’t return because we wish them, and the fanciful days of redistributed wealth based on automation will never arrive. We need to deal with the reality we have, and create a new economy that will perhaps, once again lead the world by being so disruptive and innovative it will take others decades to catch up. While the emerging markets attempt to create 1950s and 1960s American style economic frameworks, let us invent an America for the 21st Century. We must at least state that goal, because harkening back to our past is good for no one.