The Bush administration experienced a weak jobs recovery from 2002-2007 and the Obama administration is facing even stronger headwinds in 2009-2010.  Are there structural factors that are more important than the widely discussed business cycle and macroeconomic policy factors?

On the labor supply side, the growth of internet based job applications processes has greatly improved the effective supply of high quality candidates for all positions.  This increases the expectation of firms of finding great fit candidates.  On the other hand, until recently workers had inflexible wage expectations due to worker experience, pride, assets and family income alternatives.  The decline in family housing and investment assets together with the greater experience of long-term unemployment has recently increased the willingness of potential employees to be flexible in seeking work.  Human resources departments remain reluctant to greatly reduce hiring wages in fear of turnover, legal and internal equity challenges. 

Extended unemployment benefits reduce the incentive to find work for some individuals, but this has a relatively minor labor supply impact.

Much greater structural changes have been experienced on the demand side of the equation.   Perhaps most important has been the ongoing growth in labor productivity, which has reduced the effective demand for incremental employment.   Increased staff flexibility in working long hours has also reduced the demand for peak-time or just in case workers

Firms have become more aggressive and experienced in downsizing employee groups as dictated by business conditions, thereby reducing the demand for labor.  This could eventually result in greater future employment demand, since the expected future cost of maintaining partially productive staff is reduced.  It appears that this cost reduction has been offset by a greater awareness that hiring an employee is a long-term investment decision.  Firms that have been trying to rework the employment bargain from one of life-time loyalty to one of “fair dealing” remain very reluctant to plan for future downsizing, so they have set higher new staff addition thresholds, subject to the sensitivity analysis once reserved for major capital investments.

Firms have also become more aware of the all-in cost of hiring.  Health care benefits costs per employee have increased significantly, especially as a percent to wages for hourly and entry-level jobs.   Internet application processes have increased hiring costs for many firms.  The level of firm-specific training required for break-even in many jobs has increased.  With better models of hiring, firms are less willing to hire “good enough” candidates who do not fully meet all functional, industry, character and culture needs, resulting in positions which remain open for longer periods.   Overextended managers have less incentive to add permanent positions.  Firms are also less likely to invest in entry-level professional staff positions due to the higher turnover and lack of investment returns.

Labor force reductions have escalated in the last decade.  Downsizings are conducted when indicated, even in times of plenty.  Marginally productive or engaged staff members are moved up or out sooner.  Employees in obsolete functions see their jobs eliminated.  Protected functions or industries are quite rare today.   In a labor intensive business world, firms are more aggressive in pairing staff.

Productivity improvement projects have become less labor investment intensive.  Much improvement comes from getting more value out of the existing resources.  The declining role of physical capital creates fewer tag along positions.   Firms have learned to manage peak seasons and major projects with less incremental staffing.    Information technology investments had stimulated some new forms of project and analytical staff needs in the last 30 years, but that demand is flat today.  Firms have adopted standard process and project management templates that reduce the demand for new positions to accompany IT investments.

Firms are now fully aware of the use of contractors, part-time staff, consultants, outsourcing and imports to fill most functions.  The need to hold partially employed staff is greatly reduced.  Many processes have been re-engineered specifically to allow outsourced resources to be used to accommodate peak demands.  

Finally, overall business investment has been weak in the post Y2K period.  Firms have learned to manage inventories much better.  They have installed significantly higher project hurdle rates based upon their experience with project failures.   The lower market cost of capital has been a very minor factor outside of industries like real estate and banking.   Through productivity improvements, the effective capital stock has increased without as much new investment.  Sensitivity to the risks of change has caused firms to reduce the number of minor investment projects.

Business investment has been especially weak in the last 3 years, with firms freezing capital expenditures until the overall economic climate is resolved.  This includes fiscal, monetary, trade, tax and regulation policies.  The credit crunch has reduced hiring by small firms.

In general, firms have become much more effective in managing their capital, inventory, technology, brand and labor resources.  Many of these changes in the last decade have reduced the demand for labor.  Some of these changes may have a long-term impact on the minimum or natural unemployment rate, while others will cycle through business profits to business investment to increased labor force demand in the long-run.