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Unemployment Today: The Marginal Efficiency of Capital

Originally posted: December 21, 2009 on TrishMcFarlane.com

Tonight I was reading and started thinking about the marginal efficiency of capital.John Meynard Keynes

It’s probably obvious that I was not reading the latest copy of Vogue or one of the tabloids.  I actually came across the 1936 book ‘The General Theory of Employment, Interest, and Money‘ by John Meynard Keynes.  In his time, his economic theories were quite controversial.  But, after the Great Depression, Keynesian economics began to gain favor and had prominence up into the 1970’s.  The book itself it quite fascinating to read if you’d like a look at marco-economics.  It puts forth the idea that unemployment rates can be lessened if you stimulate the economy with increased government spending.  With the Obama administration in place, it is again a source of guidance for digging out of our current economic situation.

As I was reading, I focused on one particular chapter regarding the marginal efficiency of capital.  To oversimplify this aspect of this particular theory, the marginal efficiency of capital is the relationship between the prospective yield of  a capital asset and the replacement cost.  So in terms of applying this to human resources, it is the relationship between the work you personally can perform and the benefit you provide compared to the cost of the employer to replace you.

I’m wondering how the current economy is affecting this relationship.  It could go a couple different ways:

  • The cost to replace you could be less because with unemployment so high, there are more available candidates to fill your role.
  • The cost to replace you could be more because even though there are an overabundance of candidates, employers are finding they are not candidates with the right skills.

So, what do you think?  Are you seeing that replacement cost for workers who leave has increased because there are few candidates with the right skills?  Or are you finding the opposite, that there are plenty of candidates who can fill the openings, so the replacement cost is relatively low because people are willing to work for less?  Let me know in the comments.

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