Today's Wall Street Journal and Financial Times front pages' declare that the U.S economy lost 2.5 million jobs last year -- the most since 1945 -- and the unemployment rate hit 7.2% in December. As an optimist, I'd like to take a quick look at the bright side of this horrible news by asking the question: why have so many jobs been lost? My answer: three reasons.
1. The fundamentals of the economy are weak and companies are adjusting expenses consistent with projected revenue reductions (after all, Wall Street only rewards profits).
3. Smart executives are using the credit crisis and talk of a depression as an excuse to get rid of underperforming, redundant and overvalued human capital.
The bright side comes from #3. The fact is that most large companies are extremely inefficient, and most executives know it. Most large companies could probably produce the same results (maybe better) with only half of the employees they currently have. I've heard that all of the value of a company truly comes from the top 10% performing employees.
But for a myriad of reasons (morale, fear of lawsuits, bad press, etc.) big companies can't fire people. However, the doomsday news surrounding the credit crisis has presented smart executives with a market oddity (or what they might call, an opportunity). They can, more or less without consequence, massively reduce their headcounts and, conversely, massively improve the efficiency (and eventually profits) of their organizations. Job losses are a side effect of economic cycles. Profits decline and companies cut jobs, then profits increase and companies hire.
Because of #3, which isn't a part of every cycle (at least not to this extreme), this cycle should complete itself much quicker than it normally would. That's is, profits declined, companies ruthlessly slashed jobs -- more than they have since 1945 -- profits will increase (that much faster) and companies will begin hiring (that much faster). Predicting what the economy will and won't do is ways a bad idea but I do think the above is legitimate. Combining these realities with the bailout and the new administration, it'll be interesting (and hopefully exciting) to see where we go from here.