In short, the middle-skilled jobs that once formed the ballast of the world's wealthiest middle class are disappearing. They are being supplanted by relatively low-skilled (and low-paid) jobs that cannot be replaced either by new technology or by offshoring - such as home nursing and landscape gardening. Jobs are also being created for the highly skilled, notably in science, engineering and management. For the remainder of the workforce, including college graduates, it is both increasingly hard to find a secure job and tougher for those who do find jobs to be paid in line with inflation.
Most people know that median US income has declined sharply since the late '90s. Fewer are aware that real incomes also fell sharply in the same period for those with degrees. Only those with postgraduate qualifications, particularly PhDs, saw net gains (for some, spectacular).
The jobs crisis has many worrying manifestations, of which three are worth highlighting. Perhaps the most troublesome is the waning dynamism of the market. People used to describe the US labour market as Schumpeterian, after the Austrian neoclassical economist who depicted the cycle of "creative destruction". Jobs might be lost rapidly in a downturn but were swiftly reallocated to more productive sectors when economic growth resumed. That is not now the case.
According to McKinsey, the consultancy, it took six months for the US economy to recover its pre-recession jobs level after the 1982 downturn. Following the 1991 recession, that had risen to 15 months. After 2001, it took 39 months - meaning that the economy required almost the full business cycle to regain the jobs total bequeathed by the previous one. Following the Great Recession of 2008, McKinsey forecast that the economy would take 60 months to reach the pre-downturn jobs level. That now looks optimistic. In December 2007, the US economy employed 146 million people. Four years later, it languishes at 140 million. At the current rate of job creation it will take another two and a half years to regain 2007 levels - taking the replacement cycle to as much as 78 months. This is destruction minus the creativity.
Even that understates the problem, since in that time the population will have risen by more than 10 million.
"I know companies that employ senior engineers whose only job is to find ways to reduce the headcount," says Mr Carl Camden, chief executive of Kelly Services, a booming staffing agency based in Michigan. "The name of the game everywhere is to reduce permanent headcount and we are still only at the early stages of this trend."
The second problem stems from the first - America is employing a decreasing proportion of its people. At the start of the recession, the employment-to-population rate was 62.7 per cent. The rate is now 58.5 per cent.
Last month, unemployment fell from 9 per cent to 8.6 per cent. On the surface, this looked like a welcome leap in job creation. In reality, more than half of the fall was accounted for by a decrease in the numbers "actively seeking" work. The 315,000 who dropped out of the labour market far exceeded the 120,000 new jobs.
According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent. Some have moved from claiming unemployment benefits to disability benefits, and have thus permanently dropped out of the labour force.
Others have fallen back on the charity of relatives. Others still have ended up in prison. In 1982 there were just over 500,000 in jail; today there are 2.5 million - more than the combined population of Atlanta, Boston, Seattle and Kansas City, according to the Economic Mobility Project of the Pew Centre, a Washington-based think-tank.
Finally, a growing share of whatever jobs the economy is still managing to create is in the least productive areas. Of the five occupations forecast by the Bureau of Labor Statistics to be the fastest growing between now and 2018, none requires a degree. These are registered nurses, "home health aides", customer service representatives, food preparation workers and "personal home care aides". Manufacturing is nowhere in the top 20, and such jobs cannot replace the pay and conditions once typical of that sector. "The food preparation industry cannot sustain a middle class," says Mr Dan DiMicco, chief executive of Nucor, one of America's two remaining big steel companies, whose company motto is "a nation that builds and makes things".
The tides are not with Mr DiMicco. According to a study this year by Mr Michael Spence, a Nobel Prize-winning economist from Stanford University, and Sandile Hlatshwayo, all net job creation since 1990 has been in the "non-tradable sector". Between 1990 and 2008, the US added 27.3 million jobs, of which almost every one was in services. Almost half were in healthcare or the public sector - both areas in which productivity growth is virtually zero. Conversely, manufacturing's impressive productivity growth has tracked its shrinking headcount. If there is an explanation as to why middle-class incomes have stagnated in the past generation, this is it: Whatever jobs the US is able to create are in the least efficient sectors - the types that neither computers nor China have yet found a way of eliminating.
That trend is starting to lap at the feet of more highly educated American workers. And, as the shift continues, higher-paying jobs are also increasingly at risk, argue Prof Spence and Ms Hlatshwayo.
Taken together, these reforms would have an impact - but few believe they would transform the picture. "The truth is that we don't know how to fix the US labour market - we are in uncharted territory," says Mr Peter Orszag, Mr Obama's former budget director, now a vice-chairman of Citi.http://www.todayonline.com/Commentary/EDC111214-0000008/Is-America-working
"It would help to spend more on retraining and on infrastructure and to have a more rational immigration system. But these would not transform the situation for the middle class. It is not yet clear what could." THE FINANCIAL TIMES LIMITED
We are in uncharted territory, indeed.
He’s not the only one to take notice of the dire situation. Joseph Stiglitz recently published a much-discussed article in Vanity Fair called “The Book of Jobs” putting forth an alternative hypothesis of the causes of the Great Depression. Most economists just look at monetary flows, interest rates, stock markets, etc. – and forget there is a “real” economy with real goods and services and actual human beings doing stuff that underlies the money economy. Stiglitz actually takes a look at what was going on in the real, not just the money, economy, and argues that it was a structural change in the economy, rather than cyclical boom-and-bust, that was the underlying cause of the Great Depression. The soaring productivity of the agricultural sector caused farm incomes to fall and farm workers to be sidelined, leading a spiral of deflation. Farmers and workers borrowed to keep up their standard of living for a while, leading to speculative bubbles which eventually burst. The knock-on effects of depressed farm income and unemployed workers caused the larger economy to crumble as incomes fell across the board.
What’s interesting is how a “mainstream” economist (a Bank of Sweden prize-winner) is finally looking at the Technocracy argument of the 1930s – that soaring productivity sidelined large amounts of workers, destroying the purchasing power needed to sustain the economy. The technocrats didn’t just look at agriculture – productivity was soaring in industry as well. Technocracy literature of the period contained tons of statistics demonstrating how much productivity improved leading up to the Depression, and how much fewer workers were needed in major industries (manufacturing, mining, construction, etc.). They argued that the very fundamentals of the economy had changed – so much so that the price system was no longer a valid way of economic distribution. Stiglitz, of course, isn’t willing to take that leap. Still, it’s an interesting development.
Stiglitz argues that what World War 2 allowed us to do was to transition from an agricultural to a manufacturing economy, and that was the engine of the expansion of the Middle Class. This was essentially a massive government spending program to create a shift that the private sector was unable to do. He says:
Government spending unintentionally solved the economy’s underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing. Americans tend to be allergic to terms like “industrial policy,” but that’s what war spending was—a policy that permanently changed the nature of the economy. Massive job creation in the urban sector—in manufacturing—succeeded in moving people out of farming. The supply of food and the demand for it came into balance again: farm prices started to rise. The new migrants to the cities got training in urban life and factory skills, and after the war the G.I. Bill ensured that returning veterans would be equipped to thrive in a modern industrial society. Meanwhile, the vast pool of labor trapped on farms had all but disappeared. The process had been long and very painful, but the source of economic distress was gone.
Stiglitz forgets to note that the manufacturing base for much of the rest of the world was either destroyed (Germany, Japan), inaccessible (Soviet Union) or nonexistent (China, Latin America, Southeast Asia).
He seems to imply that we need to do the same thing again in the age of deindustrialization to shift from a manufacturing to a ??? economy. The question marks are my own, because, as with all the economists I hear from, they seem to have no idea what the “new” economy is going to be. The service economy is what he talks about - but as the Luce article above so correctly points out - you cannot sustain a middle class on food service jobs. The service economy is a sham. And besides, who the hell needs that many services anyway? Are we going back to the days of butlers and chambermaids like Downton Abbey? Stiglitz concludes:
Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much. The Fed played an important role in creating the current conditions—by encouraging the bubble that led to unsustainable consumption—but there is now little it can do to mitigate the consequences. I can understand that its members may feel some degree of guilt. But anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one. What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.
Despite his innovative thinking at the beginning of the article, sadly Stiglitz’ prescription is the same as every other “mainstream” economist: More education, invest in infrastructure and basic research, close budget shortfalls. He writes: “Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation?” Earth to economist: most modern innovations are designed to put people out of work. It’s been that way since the steam engine. The Internet is a case in point – outsourcing to the extent we do would be impossible without it. Some magical innovation is not going to put people back to work. And high-tech industries employ tiny amounts of people. At least the Luce article is smart enough to admit that the conventional answers are a bit riduclous. Stiglitz' conclusion is at odds with his premises. He also forgets to note that the unemployment crisis is worldwide. How will competition solve that?
So I should sum up and conclude this overly long post. The truth is, the only innovation that will save us is social innovation. Our society is extraordinarily productive – reducing the number of hours worked would allow more people into the workforce. Essentially, you are distributing the work society needs to be done among the people who are available to do it. I’ve noted before that if all our productivity gains were translated into time off instead of economic expansion, we’d all be working fifteen-hour weeks. There is simply not enough work anymore to justify forty hour work weeks! Plus, it would have added benefits of lower stress, more family time, time for child care, time to cook healthier foods, time to exercise, time for DIY projects, time to volunteer, unclogged freeways – all of which would lead to a healthier society and actually save money (lower health care costs, more volunteer organizations, less traffic congestion, etc.), and may even lead to more innovation than just spending willy-nilly. More population + labor-saving inventions = less work per person.
This will not happen, of course, because the elites benefit from mass unemployment. I’ll say that again: the elites benefit from mass unemployment. Why? It keeps wages down and workers desperate. Since government does what’s good for the elites and not what’s good for the nation, do not expect any solutions to be implemented that don’t conform to the orthodoxy of eternal growth. Mr. Orszag is lying through his teeth when he says there are no answers. But, as a member of Citigroup, he is one of those elites. He doesn't have to worry about a job. The irony is, by not taking the necessary actions required to sustain the economy, by ignoring the burgeoning ranks of the unemployed and the social fallout that creates, they are assured of a collapse of the entire system.