How Does Innovation Affect Unemployment?

Some recent numbers related to industrial production and the strength of U.S. businesses seemed to indicate that the economic recovery everyone has been hoping for may have gained some traction. Inventories are down, new orders are up and companies seem to once again believe that there is adequate demand to ramp up production of their products. But in the face of that seemingly good news, we hear that unemployment is still sky high and that very few firms are hiring.

As the global economy involves - and especially in technologically advanced economies such as the United States - it stands to reason that companies are going to become more efficient in their processes. As a result, it's likely that companies can maintain or increase their productivity levels while only requiring fewer employees that the same levels of production previously required. Technological innovations and better business practices will naturally make businesses more efficient. And for many types of businesses, greater efficiency results in a reduced need for additional manpower.

This is not to suggest - of course - that innovation and increased efficiency are bad things for the U.S. economy, or even for employment in the long term. But in the short term, especially on the heels of a severe recession, companies that were forced to survive with fewer employees are likely going to try to operate as lean as possible for the foreseeable future. In addition to the technological and efficiency innovations that may have been made to allow for fewer employees and smaller payrolls, there is the fact that sales fell during the deepest parts of the recession.

Companies that lost significant sales revenue during the darkest days of the down turn are naturally going to want to wait out hiring additional employees for as long as humanly possible. Making the cuts to payroll is always difficult, but hiring new employees is always an easy thing to do. Businesses hire new employees based solely on the existing need to do so. Companies only hire when it pays for them to do so, which means that hiring new employees usually equals good times for a company. Now that payrolls have already been cut, shrewd businesses will want to see exactly how much production they can get out of a reduced payroll and see where that leaves the bottom line.

For some companies, they may be more profitable with fewer employees, even if their total production and sales are somewhat off their historical peaks. If companies are getting more value per payroll dollar out of their current workforce than they were before they were forced to make cuts in the first place, then they are likely going to stick with the current structure. Why hurry to add payroll if it is only going to reduce the bottom line? At least, that's the short term view.

In the long term, the same innovations and increased efficiencies that initially stalled new hires and increased employment will result in new hires, smarter business practices and likely higher wages moving forward. Perhaps that is an overly simplistic and optimistic view of the long term impacts of innovation and increased efficiency, but as companies learn to greater return on their payroll investments, they will once again begin to hire new workers. And they will do so with a greater likelihood that the same hires will be able to withstand the next economic down turn, which is always on the horizon.

With the immediacy of the news media and the "instant gratification culture" that we live in, it seems as though the current recession has lasted for several years, when in fact we're only about two years into a significant recession and are already on the upswing toward recovery. Businesses both large and small need time to adapt and overcome the new hurdles that are presented during a broad-based economic recession. As technological and efficiency innovations are developed and implemented, better employment opportunities may result.