The case of the missing jobs
The Bush administration has a problem. A big problem. Last year, the president and his aides promised that their tax cut would give America what it needed most: jobs. The Council of Economic Advisers predicted that this alone would give work to 510,000 people by the end of 2003 and an additional million or so this year. Never happened. Total job creation was supposed to average out at 306,000 a month, but not even a third of that has been achieved.
The numbers clearly undercut the Bush claim that tax cuts for the wealthy would generate jobs for the middle and working classes. Even the limited job growth we have seen wasn't broad based but was instead concentrated in temporary staffing, education, healthcare, and government. The jobless recovery we're now in is unlike anything the American economy has ever seen before. Typically, the Great American Job Machine energizes our economy. New jobs beget more income, which begets more spending, which begets more hiring, incomes, and spending. The result is a self-sustaining, self-reinforcing economic growth that invigorates the entire private sector.
Ups--and downs. What we're seeing now, however, suggests that there may be something fundamentally wrong in the engine room of the American economy. If the normal trajectory had prevailed, two years after the trough of the recession jobs would have been up around 6 percent, and 7.7 million more Americans would be working. Instead, we have lost 2.5 million factory jobs. Since the 1930s, jobs lost in recession had been more than recovered 31 months later. Now, 34 months later, private-sector jobs are down by 2.5 million since March 2001. In the recoveries of the mid-1970s and 1980s, America was generating about 300,000 new jobs a month within six months of cyclical upturns. In the early 1990s, this expansion slowed to about 200,000 a month, and we had to wait a full two years for that. This time we have seen not a deceleration in job creation but a net loss--the sharpest in any period since the Great Depression, especially in manufacturing. In the 1980s and 1990s, it used to be that a 1 percent drop in gross domestic product resulted in a dip in private employment of between 1.3 and 1.5 percent. This time, with only a one half of 1 percent decline in GDP, the economy shed almost 3 percent of its jobs.
No work--and not much in the way of wage increases either. According to the Economic Policy Institute, inflation-adjusted average wages are flat or falling slightly. Typically, private wages and salaries, which make up about 45 percent of total personal income, rise by 8 percent two years after a recession. This time they are down nearly 1 percent. That translates into a shortfall of about $350 billion in real consumer purchasing power. Ouch! Is it any surprise, then, that 72 percent of people in the New Hampshire exit polls rated the economy the most serious issue, and over 43 percent said their livelihoods had suffered since George W. Bush was elected?
What's going on here? Well, clearly international competition and outsourcing have hit some sectors hard. In the past decade, China became the world's workshop. In this decade, India is becoming the world's back office. Cheap bandwidth and the Internet permit companies to tap into a huge supply of English-speaking, educated, and dedicated workers, happy to take knowledge-based jobs for 10 to 20 percent of what American employees receive. "Offshoring" is moving up the food chain of services to include professions like engineering, design, accounting, legal work, actuarial and insurance work, medical services, and financial analysis. The result is that at a time when information technology is more widespread than a decade ago, jobs are down in this sector by 1 percent two years after the upturn began, compared with an increase of nearly 4 percent after the upturn in the early 1990s.
That's why virtually all the new jobs created in the latter part of 2003 were concentrated in the most sheltered segments of the workforce. It also explains why some 80 percent of the 2.5 million manufacturing jobs lost are gone for good. Factory jobs are vanishing all over the world. According to an Alliance Capital Management study, between 1995 and 2002, 22 million factory jobs disappeared worldwide. The Japanese lost 16 percent, Brazil 20 percent. Even China lost 15 percent. All of this when global industrial output has risen more than 30 percent.
Jobs in this recovery are also shifting from higher to lower paying. Less educated, older workers and middle managers have been replaced by cheaper contingent labor (if they've been replaced at all), and at an average salary reduction of 21 percent. In 48 of the 50 states, lower- paying industries have replaced higher-paying industries like manufacturing, retail, financial, and information services. The result is that too many of America's jobs today simply cannot support a full household, at least at the level that most people feel appropriate to a middle-class lifestyle.
This has profound consequences for America's politics. They are outlined clearly in a new book, Downsizing in America, by William Baumol, Alan Blinder, and Edward Wolff. Of the 100 million men and women with full-time employment in 2001, the authors note, more than half earned less than $35,000; 84 percent earned under $65,000; 10 percent made between $65,000 and $100,000; while only 5.7 percent made above $100,000. Overall median earnings were a mere $33,636. Most middle-class families would feel that $65,000 is needed to maintain a family in a middle-class lifestyle. If you lower the bar, only 32.8 percent of jobs paid over $45,000 annually.
How are people coping? Not easily. The authors report that in two thirds of households with wage earners, the workers now hold two or more jobs. Even for families with children, two thirds of the mothers work, although fewer than half these households have adults holding two full-time jobs. The median paycheck for wives who worked in 2001 was less than $18,000, close to the low-wage category. Of the 46 million Americans in 2001 who were not yet married, median earnings were roughly $17,000; that is, 50 percent earned below the median. For women who had households of their own in 2001, their median income was $18,472. Meanwhile, the number of people working part time broke 25 million for the first time this past November. Of these, 4.9 million are classified as "involuntary part time," meaning they would rather be working full time. This number alone has increased 600,000 from a year ago and 1.6 million since the recession began in 2001. And more of these jobs offer no benefits, little opportunity for mobility, and slim prospects for long-term security.
Doing the math. This is all part of a massive leakage from our economic system that could render the traditional multiplier effects of higher employment unavailable to millions. It also underscores in a most disturbing way the weaknesses inherent in the current economic upturn. The migration of millions of service jobs is a critical challenge to the once unstoppable American job machine. It may very well be the defining economic challenge of the next decade.
There is no doubt that the Great American Job Machine has simply not kicked back into gear. The optimists look at the declining levels of first-time unemployment insurance claims, improved sentiment among purchasing managers, a pickup in employment in the services area--especially temporary employment--and increased corporate profitability and confidence. They hope businesses will soon deliver on job creation. But that hasn't happened, and it won't happen. What is happening is a spectacular improvement in productivity, which has more than accounted for the economy's total growth since the recession ended. Productivity gains, alas, are also the cause of so many jobs disappearing. With worker productivity growing at 4.8 percent in 2002 and probably at over 5 percent last year, the average increase in productivity over the past decade has climbed over 3 percent--twice the average rate of the two previous decades. Add an annual increase of 1 percent to the labor force and you have to have an economy growing at least at 5 percent a year for payrolls to expand. This would be unprecedented. As long as far fewer employees can churn out more and more complicated products than before, the number of workers or the hours they work simply has to fall. Look at steel production. It has increased over the past two decades, from 75 million tons in 1982 to 102 million tons last year, with a considerably higher degree of product complexity. Yet the number of steelworkers has dropped in that same period by almost 75 percent.
Productivity has at least succeeded in lifting profits and stock prices. This has produced a boom on the capital side of the economy, but not on the labor side, for it has not yet increased either jobs or workers' pay. This has been masked in part by tax cuts, by a huge buildup of personal debt, and by the extraction of money from the increased value of assets, especially homes, made possible by record low interest rates.
In order to continue our tradition of creating more new jobs to replace the old ones we destroy, we are going to have to rely on more than dramatically stimulative fiscal and monetary policy. We're going to have to do a better job of preparing more and more of our citizens for knowledge-based employment, especially through increased K-to-12 education. Happily, there is reason to hope. We have a remarkably hardworking, entrepreneurial population and a bottom-up economy responsive to energy, talent, effort, and new ideas. Our universities are the envy of the world. Our post-university, on-the-job training in business is unsurpassed. But it is clear that we are going to have to think hard about jobless economic growth. How that is managed will be critical to our nation's economic policies, including its trade policies. As New Hampshire demonstrated, it will also be a critical component of our politics.
According to the polls, New Hampshire voters supported John Kerry because they felt he was the best man to be able to stand up to President Bush on issues of national security. But look closer and you'll see they really want someone to challenge the president on the gut issues they really care about, namely, jobs and healthcare. As New Hampshire goes, so goes the nation.
This story appears in the February 9, 2004 print edition of U.S. News & World Report.