What is a jobless recovery?
A jobless recovery is a period in which the economy recovers from the recession without reducing the unemployment rate.
Unemployment recoveries can be caused by companies’ reaction to the recession by reducing the workforce, for example by outsourcing the workforce and investing in automation.
Key points to remember
- A jobless recovery is a situation where economic recovery occurs without a corresponding improvement in unemployment.
- This can happen when companies have invested in automation and outsourcing to reduce costs.
- Once the recession is over, companies that laid off workers during the recession may find themselves more profitable than before, which means that they cannot choose to rehire their workers.
How jobless recoveries work
When the economy contracts, businesses suffer from lower revenues. In response to this, they have to adapt either by increasing prices, gaining market share, or reducing costs.
For most companies, raising prices and gaining market share is difficult at best, and even less so when the economy contracts. For this reason, most businesses will choose to cut costs in order to survive a difficult economic period.
One of the biggest costs for businesses is workers’ wages, so it is inevitable that many businesses will respond to a recession by laying off workers or shifting jobs to cheaper workforces (i.e. say outsourcing).
As the economy eventually picks up, there is no guarantee that these companies will reverse their decisions and re-hire the workers they laid off during the recession. Workers may therefore feel “left behind” by the growing economy: although corporate profits and gross domestic product (GDP) may have rebounded, workers’ incomes may not have increased .
At the aggregate level, we know that a jobless recovery has occurred when the unemployment rate does not increase with GDP.
Real example of a jobless recovery
Suppose you are the owner of an industrial manufacturing and distribution company. You have a factory employing 25 machinists, a distribution center employing 50 warehouse workers and a head office employing 10 administrative workers. The total cost of the payroll for the three facilities is $ 1.25 million, $ 1.75 million and $ 600,000, respectively, for a total of $ 3.6 million.
Your business generates $ 20 million in revenue and has a gross profit margin of 20%. After covering the cost of pay, rent and other expenses, you end up with a pre-tax profit of around $ 300,000.
Unfortunately, the following year, the economy went into recession and the first month generated revenues 25% lower than they were the same month last year. You expect that if the trend continues, you will generate revenue of only $ 15 million. If it is not controlled, it would result in a very large loss and would likely bankrupt the business, resulting in the loss of its 85 jobs.
Because your rental costs are fixed due to your rental contracts, your only option is to increase prices, gain new customers, lower operating costs or reduce salary costs.
By determining that increasing prices or market share will not be possible in the current economic environment and that operating expenses are as low as they already can, you conclude that the only way to maintain Living business is to aggressively reduce salary expenses.
To do this, you buy five factory robots and fire 22 of the machinists; the other three machinists are those with the highest technical skills, who will now be responsible for operating the robots. You think the total savings will be $ 1 million a year, after factoring in the cost of maintaining the new robots.
You then make similar changes to the warehouse, cutting 35 positions and introducing 15 new robots, which generates another $ 1 million in annual savings. Finally, you outsource seven of the 10 administrative jobs to a low-cost outsourcing provider, resulting in savings of approximately $ 300,000. All told, you have reduced salary costs by about $ 2.3 million.
Five years later, incomes have slowly returned to pre-recession levels. However, your total number of employees is still roughly the same as it followed your aggressive cuts in payroll. In fact, your business is now much more profitable than it was before the recession, which means that you have no incentive to reverse the changes you made and re-hire the laid-off workers.
If you multiply this example among the millions of businesses that exist in the United States, you can begin to understand how an economic recovery can occur without a recovery in employment levels, resulting in a recovery without employment.