Companies Spend on Equipment, Not Workers
By CATHERINE RAMPELL
Companies that are looking for a good deal aren’t seeing one in
Workers are getting more expensive while equipment is getting
cheaper, and the combination is encouraging companies to spend on
machines rather than people.
“I want to have as few people touching our products as possible,”
said Dan Mishek, managing director of Vista Technologies in
Vadnais Heights, Minn. “Everything should be as automated as it
can be. We just can’t afford to compete with countries like China
on labor costs, especially when workers are getting even more
Vista, which makes plastic products for equipment manufacturers,
spent $450,000 on new technology last year. During the same
period, it hired just two new workers, whose combined annual
salary and benefits are $160,000.
Two years into the recovery, hiring is still painfully slow. The
economy is producing as much as it was before the downturn, but
with seven million fewer jobs. Since the recovery began,
businesses’ spending on employees has grown 2 percent as equipment
and software spending has swelled 26 percent, according to the
Commerce Department. A capital rebound that sharp and a labor
rebound that slow have been recorded only once before — after the
With equipment prices dropping, and tax incentives to subsidize
capital investments, these trends seem likely to continue.
“Firms are just responding to incentives,” said Dean Maki, chief
United States economist at Barclays Capital. “And capital has
gotten much cheaper relative to labor.”
Indeed, equipment and software prices have dipped 2.4 percent
since the recovery began, thanks largely to foreign manufacturing.
Labor costs, on the other hand, have risen 6.7 percent, according
to the Labor Department. The rising compensation costs are driven
in large part by costlier health care benefits, so those lucky
workers who do have jobs do not exactly feel richer.
Corporate profits, meanwhile, are at record highs, and companies
are hoarding cash. Many of the companies that are considering
hiring say they are scared off by the uncertain future costs of
health care and other benefits. But with the blessings of their
accountants, these same companies are snatching up cheap,
tax-subsidized tractors, computers and other goods.
“We had an opportunity to buy equipment at a very discounted
rate,” Mr. Mishek explains of his decision to make bigger
investments in equipment than in workers. “Now that the economy
has turned around a little bit, it made sense to upgrade.”
Hiring has some hidden costs, as well as the expenses of salary
and benefits, Mr. Mishek added.
“I dread the process we have to go through when we want to bring
somebody on,” he said. “When we have a job posting these days, we
get a flurry of résumés from people who aren’t qualified at all:
people with misspellings on their résumés, who have never been in
the industry and want a career move from real estate or something.
It’s a huge distraction to sort through all those.”
Culling the résumés takes three days. Then he must make time to
interview applicants, and spend $150 for each drug test.
Once a worker is hired, that person must complete a federally
mandated safety program, which Vista pays an outside contractor a
flat fee of $7,000 annually to handle. Finally, Vista’s best
employees spend several months training the new hire, reducing
their own productivity.
“You don’t have to train machines,” Mr. Mishek observes.
Usually economists cheer on capital spending, and have supported
Congress’s tax breaks for capital investment, like bonus
depreciation, which lets companies expense the full cost of
purchases immediately instead of waiting several years. That is
because capital and labor can be complementary: a business that
buys a new truck often hires a new driver, too.
But with the rising costs of hiring, companies like Vista are
finding ways to use capital to replace workers whose jobs are
“If you’re doing something that can be written down in a
programmatic, algorithmic manner, you’re going to be substituted
for quickly,” said Claudia Goldin, an economist at Harvard.
To add insult to injury, much of the equipment used to replace
American workers is made by workers abroad, meaning that capital
spending is going overseas. Of the four pieces of equipment Vista
bought last year, one was made domestically. The others came from
Israel, Switzerland and Germany. (“I try to avoid buying Chinese
at the workplace and at home,” Mr. Mishek said.)
Of course the shift to more automated production predates the
Great Recession. And in the long run, better technology lowers
prices, raises living standards and helps workers move into
higher-paying jobs. This was the case with the mechanization of
farming, which a century ago employed 41 percent of the American
“We don’t have 11 million unemployed farmers today because over
time farmers and their children transitioned into different
sectors,” says William C. Dunkelberg, chief economist at the
National Federation of Independent Business. “We don’t usually
have this kind of shock, though, that displaces a lot of workers
Better technologies may eventually offer better job opportunities,
but only if people can upgrade their skills quickly enough to
qualify. That is hard to do in the short run, especially when so
many displaced workers need to be retrained at once.
“People don’t seem to come in with the right skill sets to work in
modern manufacturing,” Mr. Mishek said, complaining that job
applicants were often deficient in computer, mathematics, science
and accounting skills. “It seems as if technology has evolved
faster than people.”
Some economists support policies that might shift the balance away
from capital spending. Andrew Sum, an economist at Northeastern
University, advocates tax incentives for hiring that mirror those
for capital investment. Congress passed a hiring tax credit along
these lines last year, but it was not well publicized, and some
said it was poorly devised. The proposal is reportedly floating
around Washington once again.
Austan Goolsbee, chairman of the president’s Council of Economic
Advisers, and many other economists say the relative prices of
labor and capital are not the real problem. The biggest hurdle is
that companies are loath to invest at all because economic growth
is so slow.
Demand needs to grow for employers to be more comfortable with all
sorts of investments, human or otherwise, Mr. Dunkelberg said.
Consider the booming 1990s, he says: Then, as now, capital was
getting rapidly cheaper relative to labor, and then, as now,
companies were increasing spending on capital more than on labor.
But companies were investing so much money to begin with that
labor spending still grew a lot. With a bigger economic pie, few
cared how the slices were cut.