How Does Innovation Affect Unemployment

Some recent numbers related to industrial production and the strength of U.S. businesses seem 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 evolves, 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 they can maintain or increase their productivity levels, while requiring fewer employees, than which 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 these are bad signs 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 to operate as lean as possible for the foreseeable future.

In addition to the technological and efficiency improvements that may have been made to allow for fewer employees and smaller payrolls, there is the fact that sales fell during the height of the recession.

Such companies are naturally going to avoid hiring additional employees for as long as possible. They 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 where that leaves the bottom line.

Some companies may be profitable with fewer employees, if their total production and sales are somewhat off their historical peaks. If they are getting more value per payroll dollar out of their current workforce, than before, they were forced to make cuts in the first place, are likely to stay with the current structure. That's the short term view.

In the long term, the same innovations and increased efficiencies, that initially stalled new hiring and increased unemployment, will result in new hires, smarter business practices, and higher wages.

That is an overly simplistic and optimistic view of the long term impact of such improvements, but as companies learn to increase the return on their payroll investments, they will again begin to hire new workers. They will do so with a greater likelihood that the same hires will be able to withstand the next economic downturn, which is 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 it and are already on the upswing towards 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 arise.