A Scary Economic Truth

Last week, I spoke with a entrpreneur I’ve known for a few years. He launched a data mining and services firm which today employs six full-time people. I asked how things were looking, and he replied that they were growing fast and could double in size this year.

I then asked how many jobs they might add and he replied, “Uh, probably none.”

Double revenue growth. Zero job growth.

How? The business is scalable and they built it that way.

And then it hit me – isn’t that what all entrepreneurs want? A business that minimizes expenses to maximize profitability? Why add staff – most companies’ largest expense – if you don’t have to? Why not build a business that requires as few people as possible?

With technology’s capabilities today (and increasing capabilities for tomorrow), more and more jobs will get squeezed. And it’s only being exacerbated by an educational system that isn’t keeping up, as explained in a recent New York Times column.

I wonder how well our new economy can simultaneously support the creation of companies and jobs like it used to.

Maybe it is indeed a great time to start a business. Maybe it will remain that way for a long time.

8 comments

  1. adeyemiking

    Interesting observation Raman – but haven’t we seen this before with improved automation & mechanization in manufacturing? I believe those businesses were able to scale up with the same or fewer people while the economy maintained a relatively low unemployment rate. Somehow the people replaced by the mechanization were able to find jobs – probably at the startups that provided the automation.

    However, I do see your point, as the economy starts to recover, maybe the small businesses that we’ve come to rely upon to create jobs may not do so and – yes – that is scary.

    • Raman Chadha

      Thanks, Ray. Yes, we have seen this before so it will be interesting to see what happens this time around. I suppose the big question is, as the information age created jobs displaced by the industrial age, what will be the next “age”?

  2. gtibalde

    Thanks Raman. Insightful stuff!

    While this doesn’t take care of the problem, we also have to think of the flip side of the technology equation in that providers of goods and services can produce more at less cost, therefore, leading to a more affordable standard of living.

    This only holds true if we can manage inflation, which at the moment we clearly are not. But if we can do that, this lower cost of living scenario helps at least a little.

    A reality like this also requires the workforce to have a different mindset in two areas: 1) less of an all-or-nothing type of mentality (i.e., maybe having a few part-time jobs instead of one full-time) and 2) the willingness to cut back on luxuries, the prices of which often don’t get affected by cheaper throughput from better technology.

    Now what to do with a workforce with many part-time jobs and no benefits. A whole different discussion for another day . . .

    All in all, agreed that there is no rosy picture here, but there are multiple moving parts.

    Thanks for the opportunity to provide feedback!

    • Raman Chadha

      Great point, Glen. I think our society is making progress towards #1 but #2 may take a long time, if ever at all. At least one of the benefits of the credit crisis is that people have less ability to rack up credit card and home equity debt for unnecessary purchases.

  3. Ryan Evans

    Hey Raman – Good post and interesting observation. I don’t think that more and more jobs are getting squeezed, it’s just that the type of jobs are changing. The technology that creates efficiency is created by someone who presumably has a job. I’m not sure that fatter margins are sustainable over the long run as new competitors enter the market. Likely the owners will have to reinvest those profits back into the company to stay ahead of the competition. But even if technology allows businesses to grow with less headcount, the money (whether revenue or profit) still goes somewhere. Maybe the owners spend profits on vacations or fancy cars. It still takes jobs to create those services. Just my two cents.

    • Raman Chadha

      Yes, you’re right, Ryan. What we’re seeing, as a result of the credit crunch and recession, is that businesses are simply socking away their cash. Look at corporate balance sheets these days or talk with seasoned business owners. They’re holding onto their cash and finding places to invest or spend it. Yes, that will create jobs but I think it’ll be incrementally fewer than it used to be in the “good ol’ days.”

  4. Paul Maurer

    Raman, good observation. One that is described well in the recent book, “The Great Stagnation” (sold as an e-book on Amazon) Though the author, Tyler Cowen, takes a dim view of this phenomenon, i.e. that the growth in the technology sector is eliminating many more jobs than it creates (think Craigslist and all the newspaper classified jobs it eliminated). Therefore reducing real GDP growth and squeezing government revenues. However, I’d like to believe that the Internet, for one, is only just beginning to yield new revenue and productivity possibilities, which should eventually create new job opportunities (Google and new advertising jobs). Of course, I’m an optimist!

    • Raman Chadha

      Thanks for pointing that out, Paul. We do forget that the Internet is really only a 15 year-old economic phenomenon. I’d love to see some data on how many jobs the Internet has helped create/sustain.

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