Institute for Innovation & Information Productivity: Okun's Law: Another Industrial Age Measure Goes Down

Dan Rasmus writes: As further evidence that this recession may lead to a rethinking of economic measures, another, albeit minor, measure of health has proven as frail as the job market it was intended to model. The August 10, 2009 BusinessWeek Executive Summary section (Why Joblessness Is Proving So Stubborn) describes how the measure of joblessness (a mathematical relationship between output and unemployment, under which for every percentage-point decrease in gross domestic product, the jobless rate would rise by half a percentage point) is now off by 1.5 percent, a huge disparity when it comes to unemployment.

The article suggests a lack of labor hording in this recession , over aggressive reductions or a general pessimistic view of future economic growth may be the cause. I think the cause is two fold. First, we have substituted information technology for people in new ways. One example is the plethora of self-service options from airport check-in to online banking and bill pay. The second factor is the fluidity of the workforce. We know that many younger and some older individuals don’t have a desire for long term employment commitments, or at least don’t require one, so the workforce becomes effectively reconfigurable based on need. Why hire and retain people when most of the job reductions can be done by the transitory part of the workforce? If you need people, call Kelly or Manpower and they will fill the slot quickly. This suggests the need for skills maintenance is being pushed to individuals or agencies, and away from hiring firms, thus further reducing costs and need for non-core competencies like training.

These shifts require a new models of measurement, and new economic theories. We are going headlong into a fundamental economic shift and we will find the road rather bumpy because we don’t have a map of the terrain.

Cross posted at: http://danielwrasmus.com/blog.aspx.