Colin W. Kingsbury is the president and co-founder of HRM Direct, a leading SaaS provider of applicant tracking and onboarding systems to mid-sized organizations. Colin brings a lifetime of experience from both in and outside of the software industry, having previously held positions in product management, software engineering, sales, and as a newspaper journalist with expertise in knowledge automation, and has consulted on technology and business practices for Northrop Grumman, Boeing, General Electric, and the US intelligence community. Full Bio

If, as Ambrose Bierce wrote, “War is God’s way of teaching Americans geography,” then recessions may do much the same for the study of economics. The story of why the “Great Recession” has been unusually long and deep has so far centered almost entirely on banks, mortgages, exotic three-letter acronyms, and the Federal Reserve. It’s a story that puts the financial sector at the center of everything–which seems to have worked out well, at least for banking executives.

But there’s an alternate view being advanced by one economist, Professor Arnold King, that defines the problem largely in terms of human capital, and in the process illuminates the challenges that will only grow more acute with time.

The Great Recession’s Recovery as a Human Capital Problem

Kling is a former staff economist and consultant at the Federal Reserve and Freddie Mac, and an early successful dot-com entrepreneur. He calls his story of the recession “Recalculation” and several of its key principles may sound familiar to HR and recruiting leaders:

1.  Economic activity–and the jobs it creates–is becoming much more specialized. The neighborhood mechanic has been replaced with specialized vendors including collision-repair shops, where skill sets (e.g. welding and painting) have become more differentiated over time.

2.  Demand for skills is constantly changing with both the introduction of new technology (PC helpdesk tech vs. typewriter repairman), and the development of new patterns of organizational specialization (HR manager vs. EEO officer).

3.  One of the central “calculation problems” that the economy faces, as a system, is to match workers with jobs where their skills can create value for employers. As skills become more specialized, that matching problem becomes harder.

Another important element of the Recalculation story comes from George Mason University economist Garett Jones, who Tweeted,

Screen shot 2010-08-02 at 7.05.36 PM

Bringing Recalculation Even Closer to Home for the HR Practitioner

An easy way to understand Recalculation and the human capital issues of the Great Recession is to think of an HR manager responsible for orientation of new employees. When he replaces trainers in classrooms with an online training system, he’s creating what economists call “organizational capital,” which is capable of generating value for the company on its own.

This concept is critical because in a recession, companies can scale back investment in creating new organizational capital without a direct reduction in output. Likewise, while a recovery in demand will require a company to re-hire workers responsible for production, capital investment–whether in office space or workers creating organizational capital–is often delayed until it’s clear that demand will be strong for more than a quarter or two into the future.

Kling believes that this recession has been unusually jarring because it is driven by more than a simple buildup of excess inventories. In the classic view, recessions occur when demand drops across the economy, and excess inventories accumulate as companies make more product than consumers want to buy. However, this view assumes that the primary problem is weak demand: fix that and we’ll go back to buying new cars and houses just like we were in 2006, and all the carpenters and auto workers will get their old jobs back.

But, if those patterns of consumption don’t return, then a “Recalculation” needs to occur:  companies and entrepreneurs need to find new areas of business to replace the old, and the workforce as a whole shifts from skills favored by the old areas of demand to the new ones just opening up. The challenge, for businesses and employees alike, is that during a recession it is much more obvious what isn’t valuable than what is.

The Road Not Taken

I find Kling’s theory interesting both for illuminating the road not taken and highlighting some of the paramount management challenges businesses will face in the future. Every recruiter knows that job reqs are becoming more specialized, and most companies have dozens if not hundreds of jobs that only a tiny handful of people really know inside and out. But if, as Andy Warhol said, “In the future, everyone will be world-famous for 15 minutes,” then similarly, those employees will find the useful life of those invaluable skills to be much shorter than their career.

Likewise, companies could stand to become much better at understanding the nature of their organizational capital. As talent-management professionals, we understand that layoffs deprive the company of future potential, and create opportunities for competitors to out-innovate us as the economy recovers, but the systems and vocabulary used to articulate this often remain inadequate to the task. This is no small challenge, but broad economic trends suggest that companies which succeed at this may reap huge competitive advantages as talent and organizational capital become more specialized.

Last, it may seem obvious to human resource managers that any economy-wide understanding of unemployment and recovery needs to take aspects of workforce planning and organizational development into consideration. In fact, these are largely alien to the discussions driving policy over the past two years. Instead, we have been treated to a story almost exclusively of the banking system. It is not the first time HR has been missing a seat at the table, but this time, we are in distinguished company.

Read previous post:
In The Know v 1.25

In The Know v 1.25: Brands, Jargon and Targeting Five links to accelerate the value your HR delivers.