Why Falling Unemployment May Spell Bad News for Business Investment

The old maxim that investment rises when unemployment falls might face a setback in the new economy
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Workers apply yellow powder coat paint to a square baler at a factory in New Holland, Pennsylvania.

Photographer: Luke Sharrett/Bloomberg

The standard business investment story goes like this: capital expenditures rise when unemployment falls. That's because employers need to buy machines and other technologies to get the job done when actual workers become scarce. 

The relationship may not work out so cleanly going forward, an Atlanta Federal Reserve business survey suggests. Our first study in this week's research wrap looks at why. We also delve into capital expenditure in developing nations, how low interest rates impact pension plans, and what the Fed really means when it use the term "asymmetric."

Check this column each week for the latest in interesting economic research. 

How tight labor markets could curb investments

Capex in the U.S. hasn't picked up much with economic growth and falling joblessness. Though tight labor markets have come alongside stronger capital investment historically, the results of an Atlanta Fed business survey may bode poorly for the outlook.


While companies cite a variety of reasons for not investing, a lack of qualified workers was a top concern, according to the report. And among growing, profitable and stable companies, "constraints on talent acquisition and retention is easily the largest issue when it comes to investment spending headwinds." More than half of the businesses with revenue in excess of $10 million reported labor constraints as a barrier. 

As unemployment dips and workers prove increasingly hard to come by, this could grow even more problematic. One "intriguing'' thing to consider is that education and workforce development could help fuel investment growth, the authors write.

Can Tight Labor Markets Inhibit Investment Growth?
Available on the Atlanta Fed website
Published Feb. 28, 2017

Investment: Not just a problem for advanced nations

Investment spending growth has been weak the world over, and that extends to emerging economies.

World Bank researchers say the pullback in developing nations probably reflects numerous factors, including a slowdown in foreign direct investment, weaker commodity prices, and mounting private debt. Lackluster growth in advanced economies is also having a spillover effect. This is bad news for countries as they try to climb the development ladder, because it's dragging on potential output and could hamper technological progress, the authors write. 

Weakness in Investment Growth: Causes, Implications and Policy Responses
Available on the World Bank website
Published March 2017

How do low interest rates impact pensions? 

Pension plans in the U.K. that pay a guaranteed level of benefits based on the recipient's salary and length of service could experience funding shortfalls in an era of slow growth and low interest rates, according to a Bank of England blog post. 

There's some evidence this phenomenon is pushing fund managers to search for higher returns, because they've increased holdings of instruments other than traditional bonds and equities, according to the authors. While this doesn't pose a financial stability risk in and of itself, it could fuel risk indirectly: funds’ intensified search for yield could bid up the prices for key asset classes such as infrastructure or commercial real estate, for instance. It could also hasten the demise of defined benefit plans in favor of defined contribution schemes, the authors write, reducing financial certainty for future retirees. 

Low for Long: What Does This Mean for Defined-Benefit Pensions in the U.K.?
Available at the Bank Underground website 
Published March 2, 2017

When Janet Yellen says "asymmetric"...

Fed officials like to say that risks to monetary policy are "asymmetric," meaning that it's tougher to boost growth by cutting rates than it is to slow the economy by raising them.

New research from the Richmond Fed demonstrates just how true that has been, historically. Looking at data from 1959 to 2007, they show a 0.7 percentage point increase in the Fed's main interest rate results in a 0.15 percentage point rise in unemployment, while a rate cut of 0.7 percentage point produces only a 0.04 percentage point drop in joblessness.  

The researchers reached the conclusion that "contractionary monetary policy has a significantly stronger effect on unemployment than expansionary policy." The authors also find some evidence, though it isn't conclusive, that prices have an asymmetrical response to monetary policy. 

Are the Effects of Monetary Policy Asymmetric?
Available on the Richmond Fed website
Published March 2017

Your bossy older sibling was actually born that way. 

An analysis of data from Sweden shows that birth order affects occupational sorting. First-born children are more likely to be managers, for instance, while younger siblings are more likely to be self-employed. Employment rates also decline along the birth-order chain, with third-born children almost one percentage point less likely to be employed than their oldest sibling.

What's going on here? Not clear, but parental investment does differ with birth order, the researchers from the Institute of Labor Economics find. For example, the number of hours per week doing homework declines significantly with birth order, younger kids are less likely to read books, and parents report spending less time discussing school work with their younger kids. 

Born to Lead? The Effect of Birth Order on Non-Cognitive Abilities
Available on the IZA website
Published February 2017

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