Procyclicality and emphasis on employment

March 6, 2023
by Noriyuki Morimoto

From the outset, the market principle embraces cyclicality. When prices fall, demand increases and prices stop falling. Such automatic adjustment of demand through price fluctuations, or from the other side, automatic adjustment of prices through demand fluctuations, is the essence of the market principle.

Nowadays, however, the autoregulatory action of cyclicality is not always functional. It is common to see instances of procyclicality, i.e., when something falls, it keeps falling further. While cyclicality is driven by a force to return to equilibrium, that force does not work in procyclicality, and imbalances accumulate.

When procyclicality appears, that is where the market principle stops functioning. If we wait for a spontaneous recovery left to market forces, we could be plunged into a serious crisis. Therefore, in order to reverse procyclicality, the government will have to work proactively.

Procyclicality is indeed troubling. It is an irony, or rather an insoluble conundrum, that in a well-developed free market, the aggregate effect of each company and financial institution being managed correctly and acting correctly results in a very large loss, that is, an outcome that is not correct at all. That is why we need a functioning government. However, as a function of government, there are limits to relying on aggressive fiscal measures. The expansion of fiscal spending will eventually cause serious harm, both through bloated budget deficits and through the inefficiencies of an oversized government.

In the economic activities of a company, what serves as a measure against procyclicality is to keep people employed. This is because the rapid adjustment of employment by firms during recessions is the primary cause of procyclicality. The employment adjustment functions more as a cause of the recession than as a consequence of it.

So, what is the relationship between workers and shareholders in maintaining employment, and how can we determine whether management is responding in the right way? Procyclicality would be mitigated if the company sought to secure jobs even against the short-term interests of shareholders. But that is unthinkable in the dimension of individual company management. It should be considered as an issue of society, of the structure of corporate governance, or of employment-related legislation.

Such policymaking is precisely the function of government. So, can government functions change the code of conduct of private companies? Employment is, in essence, people. The extent to which we regard people as a market component is a philosophical question.


[Category /Human Capital Investment]

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.