Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blog Worthwhile Canadian Initiative.
Recessions are times when the usual economic policy agenda is set aside: we quote John Maynard Keynes - "In the long run, we'll all be dead" - and implement policies that we know cannot be sustained. But is dangerous to defer to this maxim for too long.
In the very short term, we usually treat productive capacity as fixed, and worry about making full use of it. But it doesn't take very long before the plausibility of that assumption deteriorates. Capital depreciates, and probably faster than you might think.
According to a recent study (pdf), the average service life for machinery and equipment - the sort of capital that is most closely associated with improvements in technology and productivity - is about ten years. Service lives are much shorter in sectors such as information technology, where equipment becomes obsolete well before it wears out. With an average rate of depreciation of 25 per cent and with no new investment to replace it, more than three-quarters of today's capital stock will disappear within the next five years. If insufficient attention is paid to investment, the problem of excess capacity will be quickly transformed into one of a dilapidated stock of productive capital.
Turnover in the labour market is almost as rapid. In a previous Economy Lab post, I noted that the typical flows in and out of employment are much larger than the net flows. Roughly a quarter of a million people enter and leave the workforce each month; the net change in December was an increase of 22,000.
These are not all the same people going in and out of unemployment: roughly half of those employed have been with their current employer for five years or less. Even among workers 55 and older, 40 per cent have had the same job for ten years or less. The data from the 1970s are similar, so this mobility is not a new phenomenon.
Surprisingly little of the economy of 2016 is currently in place. Most of the equipment that will be in place five years from now has yet to be purchased, and half of the workers who will be using it have yet to start in their jobs. Although the Canadian economy has still not completely recovered from the recession, it is important to not be too preoccupied with the present. The future may be closer than you think.
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