Rising business investment could signal a shift away from lower-skilled workers. If so, it would be the latest domino to fall following COVID-19 and the government's response. It would also be a warning that America will likely see an even more prolonged absence from its workforce by those least able to afford it.
The U.S. already faces an employment conundrum: high unemployment but record job openings. May’s unemployment rate was 5.8 percent, well above its pre-pandemic 3.5 percent rate in February 2020. If today’s low workforce participation rate matched its higher pre-pandemic level, the unemployment rate would be 8.4 percent — 45 percent higher. Simultaneously, the latest job openings report showed a record 9.3 million vacancies.
In economic terms, America’s labor market is not “clearing” — workers and employers cannot agree on wages. The reasons for this disconnect could be many. Workers and openings could be mismatched on locations, industries or skills.
The most common general explanation is that either workers’ wage demands are too high, or employers’ wage offers are too low. Today’s current post-COVID-19 version is that high unemployment benefits or child care unavailability is prohibiting many from returning to work.
High investment by business could indicate that employers have decided to step into the employment impasse and shift away from lower-skilled — and now increasingly expensive and unavailable — workers. If so, this would mean a fundamentally restructured post-COVID-19 economy.
A recent Politico story noted that “corporate investment in computers and other information technology is the biggest the U.S. has seen in decades… up nearly a quarter from the same period in 2019.” Federal Reserve data also showed enormous jumps in real gross private domestic investment in 2020’s third quarter (86.3 percent) and fourth quarter (27.8 percent), with 2021’s first quarter only dropping slightly (3.4 percent) from these earlier leaps.
Of course, investment is good. Resulting productivity increases are the only way to achieve real economy-wide gains. However, if businesses are signaling a shift from now expensive and unavailable low-skilled workers, it could result in long-term consequences for those removed from the workforce.
Businesses could see logic in such a shift. During the pandemic, consumers deserted many businesses, such as restaurants and movie theaters, that employed large numbers of low-skilled workers. These businesses could feel that former customers are not going to return in pre-pandemic numbers or consume their services in the former manner.
Businesses also could believe that low-skill workers are not just currently more expensive but will become so over the long-term. Flush with government relief cash and enforced pandemic savings, consumers may be willing to accept businesses’ shifting of higher labor costs — temporarily. Yet, their looser post-pandemic purse strings are unlikely to last and could leave businesses holding the bag.
Higher wage rates for low-skill workers will prove impossible to pass along indefinitely. Yet once hired at higher wages, workers are unlikely to readily accept a retrenchment. Businesses could also be viewing the growing calls for a higher minimum wage, plus government-mandated benefits that will only raise their cost of operations.
Inflation concerns could also be a factor. If overall price increases are indeed inflation, then replacing low-skill workers with capital equipment now is astute. A one-time purchase becomes a fixed cost that businesses could amortize in depreciating dollars — the real cost thereby falling over time. In contrast, today’s low-skill workers at higher wages will prove a rising expense as they demand wages increase to match inflation.
For low-skill workers, a business shift away from them would add to their already difficult circumstances. Teenagers (9.6 percent) and workers without a high school diploma (9.1 percent) have the highest unemployment rates. If, like the overall unemployment rate (taking into account the lower workforce participation rate), the real rates are 45 percent higher, then these are astronomical levels.
And low-skill workers’ unemployment rates likely could be even higher. It is reasonable to assume that the drop in workforce participation is greater among these groups already experiencing the highest unemployment.
The result would be that those most in need of working, not just for the wages but the training, will be even less able to do so. This outcome would be following over a year’s absence from the workforce for many.
If this outcome has indeed followed from high unemployment benefits, then it will be a painful irony. A government response designed to temporarily help the most vulnerable will have prompted a longer-term employment shift away from them.
J.T. Young served under president George W. Bush as the director of communications in the Office of Management and Budget and as deputy assistant secretary in legislative affairs for tax and budget at the Treasury Department. He served as a congressional staffer from 1987 through 2000.