How Recessions Prompt Long-Term Stagnation

A blog about business and economics.
May 1 2012 10:28 AM

How Recessions Prompt Long-Term Stagnation

Short business cycle downturns like the ones the United States had in the 1950s and 1960s shouldn't have any real long-term consequences even if they're severe. But prolonged spells of mass unemployment provoke things like the current trend of European employers reducing investment in skills training since if there's going to be a surplus of potential workers and a deficit of potential customers, high-investment firms are going to lose out unless they hit incredible home runs.

The same logic should apply to "hard" capital investments as well. When I was in Paris last fall, I was interested to see that Parisian McDonaldses have computer kiosks where customers can place orders without taking up the time of a human cashier. Rival fast food chains like KFC and Quick didn't yet seem to be using this technology and McDonalds was only employing it to a limited extent. If France was facing a high-demand tight labor market scenario for the future presumably McDonalds would double-down on this bet and rivals would either match their productivity-enhancing capital investments or else be displaced by McDonaldses high productivity model. But instead France has had, and looks scheduled to continue to have, a long period of depressed demand and elevated unemployment. Firms have little reason to spend money insuring themselves against workers quitting in search of higher wages and little reason to believe that increased output will actually be purchased.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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