The above slide appears to be a series of random lines, at first glance. But it comes from an important speech from the vice chair of the US Federal Reserve, Janet Yellen, on US unemployment patterns.
It describes the so-called Beveridge Curve, which highlights the relationship between unemployment (horizontal axis) and the job vacancy rate (vertical axis). It shows this for the past 3 major downturns:
• 1973-1976 (black line). Unemployment rose from 5% to 9%, but then reduced to 7.5%. Job vacancies fell from 5.0 to 3.4, but recovered to 4.0.
• 1979-1983 (green). Unemployment rose from 6% to 11%, but then reduced to 8.5%. Job vacancies fell from 5.5 to 2.8, but recovered to 4.0
• 2007-2012 (blue). Unemployment rose from 4.5% to 10%, but then reduced to 8%. Job vacancies fell from 3.2 to 1.8, and are now at 2.5
As a result, Ms Yellen worries that
“An exceptionally large fraction of those now unemployed – more than 40% – have been out of work for six months or more. My concern is that individuals with such long unemployment spells could become less employable as their skills deteriorate and as they lose their connections to the labor market.”
Today’s job market is clearly much weaker than in past recessions. This is largely due to the greater influence of short-term pressures from financial markets. Companies fear that share prices will fall if earnings disappoint. And as revenue growth remains slow, they feel they have to cut jobs.
This pressure did not exist in the 1970s and 1980s. Managements were expected to manage for the longer-term, as the blog discussed in an 2007 post in relation to its former company, ICI. Today’s short-termism is instead leading us to a dead-end, where continued job losses risk destroying the skillbase on which future recovery depends.
Sir Maurice Hodgson was chairman of ICI during the 1979-83 downturns. He also pioneered strategy planning within the global chemical industry after his appointment in 1965 as ICI’s first strategic planner.
He suggested there were ’3 very specific questions’ that Boards needed to address:
• Where are we going if we don’t change?
• Where would we rather be going?
• How do we need to change to get from one to the other?
Ms Yellen’s speech highlights the critical need for Boards to once again start asking themselves Hodgson’s important first question.