NEW YORK (CNN/Money) - Companies keep playing safe when it comes to hiring new workers. But when it comes to shelling out cash on new equipment? That is a different story.
In fact, by the end of the third quarter capital spending was nearing the level it reached in late 2000, and judging from the fourth quarter results we've recently seen at companies like IBM, the old high-water mark may have been cleared.
It's hard to square this with some of the typical reasons given for the weakness in the labor market, which has only recently shown signs (and intermittent ones at that) of improvement. The notions that companies have held off hiring because they are uncertain that the economy is recovering, because they still need to shore up their balance sheets or because they already have more production capacity than they need are less-than-convincing in the face of rising capital spending.
So maybe something else is going on here. Maybe given the choice between shelling out money for a machine and hiring an employee, companies are opting for the machine.
There's ample evidence for why this might happen. Rising healthcare and benefits costs have led to a steep increase in the cost of labor. In the past five years, the Employment Cost Index has gone up 21 percent.
The cost of equipment is another story. The price index for capital spending on equipment and software has fallen 9.2 percent. (It's maybe not quite as stark as it seems, since the Commerce Department adjusts its numbers for rising quality in equipment.) Merrill Lynch analyst Steve Milunovich points out that tech, in particular, has become a highly deflationary business, with customers getting 30 percent more functionality out of their purchases every year.
"The problem is that labor has basically priced itself out of the market," said Northern Trust chief U.S. economist Paul Kasriel. "We had a very sharp run up in compensation costs in the late 1990s. People got too expensive and they're still too expensive."
Making it even easier for companies to opt for spending on capital over spending on hiring, Congress, in a measure that enjoyed bipartisan support, upped the depreciation allowance businesses can write off on new capital investment. It was all part of the "Jobs and Growth" program, of course.
Still, while he believes the competition for capital between workers and equipment has intensified due to the escalation in employment costs, Morgan Stanley chief U.S. economist Richard Berner points out capital equipment and labor are not perfect substitutes for one another.
"You still need both to run your business," he said. "Strong growth means that they will both pick up."
But given the dynamic that is in place, it may be that capital spending will continue to outpace employment, leaving the unemployment rate higher than we'd like for longer than we might otherwise expect.