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Home Publications Blogs Beat the Press Lack of Demand, Not Lack of Confidence, Is the Reason that Businesses are Not Hiring

Lack of Demand, Not Lack of Confidence, Is the Reason that Businesses are Not Hiring

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Thursday, 15 July 2010 04:30

Like the school kid who is always coming up with silly excuses for not doing their homework, corporations always blame the government for their failures. Lately they have been whining that the reason they don't hire more workers is the uncertainty created by government regulations. The Washington reported these complaints on the front page.

While the article did present the views of some economists, there is actually a very simple way to disprove the businesses' claim. The number of hours worked per worker has plunged in this downturn and risen only modestly from its lowpoint. The current average of 34.1 hours is almost 2 percent lower than the 34.7 average in December of 2007, the month the recession began.

If firms would otherwise hire workers but are being discouraged by uncertainty or regulations then the number of hours worked per worker should be increasing, not decreasing. Firms would be working their existing workforce longer rather than hiring new workers. Since firms are actually using their existing workforce less, this implies that the problem is a lack of demand pure and simple.

Businesses pay their lobbyists lots of money to develop stories that will make regulations more pro-business. Reporters should be able to assess these arguments, not just pass along to readers any silly story that a lobbyist can dream up.

Comments (6)Add Comment
Keep Plugging
written by bakho, July 15, 2010 8:19
The lobbyists are busy using the "lack of confidence" argument as a reason to extend the Bush tax cuts.

"Lack of Confidence" is a euphemism for "propensity to spend". Just in time manufacturing philosophy requires that businesses closely monitor their demand and inventories. Businesses prefer to store cash rather than inventory because cash is more flexible and inventories carry a cost for storage and maintenance (and in some cases, expiration dates). Businesses will suddenly have "more confidence" only when demand starts to increase. Most businesses are little influenced by government policy, unless they get a BigG contract to deliver goods and services.
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written by izzatzo, July 15, 2010 10:23
If uncertainty comes from both demand and regulation, it's easy to confuse them.

Working more hours per week allows employers to avoid as much new fixed costs as possible going forward in the face of uncertainty. The common example is use of overtime in the short run instead of hiring more workers, then adding more workers over the long run if demand stabilizes at a higher level, or if regulatory uncertainty subsides.

Since existing demand is weak, using existing workers less is presented by Baker as the opposite of using them more with overtime, to avoid laying them off then having to rehire them should demand recover.

The problem is that claimed regulatory uncertainty can produce the same result. If high unemployment reflects fewer workers hired due to regulatory uncertainty instead of weak demand, then existing demand must be either stronger than claimed or will increase more than predicted going forward.

Therefore strong demand is claimed simultaneous with strong regulatory uncertainty where the latter suppresses the former.

Baker uses less hours per worker to demonstrate that demand can't be strong in the first place, however, the same evidence can be used to claim that even if it was (and is), it's suppressed by regulatory uncertainty, thus less hours per worker as well, but from supply side forces.

It's a circular argument of tortured logic designed to justify two myths, that sufficient demand already exists to reach full employment, and the only reason it can't is suppression from regulatory uncertainty.

That's like claiming that the paradox of thift, with too much saving due to too little consumption, had nothing to do with the disappearance of trillions in wealth, and instead resulted from fear of uncertainty from new regulations since then, as if the marginal impact on income and demand going forward could be anywhere near the huge magnitude of dropoff in demand that started the deep recession.

Like they say, for some their own paychecks depend on making these outrageous claims.
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written by urban legend, July 15, 2010 11:24
But isn't this a case of everyone talking past each other? Sure, the idea that business lacks confidence because of fear of regulation or future taxation is beyond absurd. But there is no demand because consumers have low confidence they can replace the money needed to create the demand -- fearing loss of future income -- while businesses have no confidence in future demand to support new investment because they realize how low the confidence of individuals is.

It seems kike the word "confidence" is being turned into a phony trigger word for a different argument.
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written by Darren, July 15, 2010 6:44
Izzatzo,

A huge stretch to call this circular logic. The theory behind the Washington Post piece was that employers are not hiring is they are worried that new regulation is going to impact their ability to make employment changes as situations change. The piece ignores demand, and if anything implies that demand is strong and is not the real reason employers are not hiring.

Baker points out that if this were true we would see increased hours by existing employees. Since we do not see increased hours on existing employees, it is a safe assumption that demand is not strong enough to support more employees, regardless of potential or imaginary regulation.

Furthermore, if we look at the only industries that are being exposed to new regulation - banking and health care - we actually see growth without significant concerns about the potential regulation concerns.
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written by izzatzo, July 15, 2010 8:37
D, try reading it again. Agree on all points except circular logic, which was carelessly imputed to Baker via prior paragraph, but directed at those claiming regulatory uncertainty.

In essence the corps are claiming sufficient demand exists but with high regulatory uncertainty as well, enough to offset any long term hiring consistent with that demand, but not enough to suppress increases in short run output with existing workers, also consistent with that demand.

Baker correctly points out they would still increase short run output using existing workers because whatever regulatory uncertainty they're talking about would not suppress that decision like it does hiring. Thus there would be higher hours per worker, but there's not, so the demand they claim is there can't be there as well.

If they want to take it further and try to refute Baker completely, the claim would be that regulatory uncertainty is so strong it also suppresses an increase in short run output with existing workers, despite the presence of justified demand.

In that case they would be agreeing with Baker on the evidence of low hours per worker, but for a different reason, and would also need to explain why readily avoidable labor costs are at any more risk from uncertainty at the higher level of output than a lower one, rather than due to a lack of demand.
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written by Queen of Sheba, July 15, 2010 10:15
It is really tiresome, entering the same comment repeatedly to refute business reporters who have no apparent need to fulfill their job description any further than to believe everything they're told by the moneyed interests without having to deal with the pesky details of history, or any semblance of research, or simple logic, or even a cursory look around outside the bubble they inhabit.

I'm going to say this once more, and then I promise not to repeat myself ever again. I own a business. Today I have 12 employees; two years ago I had 22. Because my company's income has shrunk by 40% in the past two years, I will have laid off six of those left by the end of August.

New regulations or no regulations at all, tax credits or not, even if the government paid their full salary, there is no way in hell I would consider hiring even one more employee. There are no customers. The signed contracts I still have with customers will end by Dec. 31st of this year - at which time I will have to lay off another half or more of my current employees, and there are no new contracts in the pipeline. I am currently bidding on two new contracts, but customers refuse to pay my (already discounted) rate, so if I want even a glimmer of a chance at these contracts I will have to settle for payment that will barely cover my expenses.

It's very possible I won't have a business at all come January, because there are a dearth of customers for the products and services of my would-be customers, so they can't hire me at any reasonable rate of pay, which leaves me with no customers. Giving me the "confidence" to keep my business open amounts to one thing: increased demand.

Business reporters would know a lot more about the real world if they ever bothered to skip the cocktail parties and the one-on-ones with bigwigs-with-undisclosed-agendas and actually got out into the real world and started asking questions of real people. Since they don't, the "information" they serve up is, as my grandaddy used to say, worthless as tits on a boar hog.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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