FALLING unemployment is due to firms substituting labour for the capital they cannot acquire from the financial sector, monetary policymaker Ben Broadbent said in a speech yesterday, dismissing the idea of a hidden recovery.
“In more normal times, the three per cent drop in output since mid-2007 would have been associated with an eight per cent decline in the number of jobs,” the Bank of England official claimed. “Instead, despite a contraction in the public sector, employment has risen slightly over the last five years,” Broadbent added.
If firms were hoarding workers, employment would be flat – instead it slumped, then enjoyed a booming recovery, Broadbent argues.
Though demand has adjusted significantly since the crash, firms have not been able to quickly adapt, he says, because lenders cannot quickly reallocate capital among sectors.
He points to diverging output and prices and profits across sectors as evidence that there may be unexploited opportunities for a sectoral shift in the economy. Firms are trying to adapt, but since they cannot get enough capital, they are employing more workers. This trend could also explain the productivity movement, he says, as employees work in areas they are not specialised in.