December 11, 2011 6:58 pm

Can America regain most dynamic labour market mantle?

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In Part One of the series examining the US jobs crisis, Edward Luce says that fears persist it cannot be fixed

Last week, Barack Obama went to Osawatomie, Kansas, to kick off a more populist phase in his 2012 re-election bid. “This is a make-or-break moment for the middle class,” declared the US president, who chose the same venue that Teddy Roosevelt used in 1910 to call for a new progressive era. “I believe that this country succeeds when everyone gets a fair shot.”

Saying everyone should get a “fair shot” always makes political sense – particularly at a time when US income inequality rivals that of Mark Twain’s “Gilded Age”. But it might have been a stretch for Mr Obama to suggest the American middle class is facing a unique “make-or-break” moment. In reality, the labour force has been polarising for most of the past generation in a trend that has sharply accelerated since 2000.

America used to be exceptional. Postwar, it maintained lower unemployment than the Europeans and a higher rate of jobs turnover, enabling it to get away with more meagre benefits; “a fair day’s work for a fair day’s pay” was within the grasp of most. That gave America a booming middle class that until recently was the most important engine of global demand.

No longer. Today, somewhat remarkably, US joblessness is higher than in much of Europe. And the US consumer is mired in high personal debt. As the jobs crisis deepens, so too does US political polarisation. Allegations of “class warfare” are a staple of Washington debate. In contrast to the 1960s, dominated by protests for peace and civil rights, today’s battles are economic. Yet there are few signs that either policymakers or economists are closer to finding answers.

Nothing Mr Obama has been able to accomplish since 2008 – including staving off a second Great Depression and pushing through an overhaul of the healthcare system – appears to have resolved that underlying structural challenge. Indeed, the signs are that the problem is intensifying. In the words of David Autor, a leading labour economist at Harvard University, the labour force is suffering from a growing “missing middle”.

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.

America thumbnail

America thumbnail

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 1990s. 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 146m people. Four years later, it languishes at 140m. 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 10m.

“I know companies that employ senior engineers whose only job is to find ways to reduce the headcount,” says 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.

Case study: Michigan

How many electricians does it take to change a lightbulb? None. They are too busy emptying your bedpan.

That may sound far-fetched. But in Michigan, where hundreds of thousands of mid-career men have lost their jobs in the car plants, nursing is one of the few alternatives on offer.

Healthcare provides the state with by far the largest (and fastest growing) source of new jobs – as it does for America as a whole.

“My friends taunted me all the time after I said I was going to be a nurse,” says Kenneth Swint, a 44-year-old electrician who used to work at General Motors. The teasing had no impact on him.

“Those jobs, you know, where you didn’t have to work very hard, and you earned a hundred grand a year, have gone for good,” he tells his friends. “Now, if that’s your preference, you can sit around and wait for the tooth fairy to visit, or you can wise up.”

The decision came to Mr Swint after his wife was diagnosed with breast cancer. There was nothing he could say to console her: “I was helpless to do anything about it.” Then he observed how effectively the nurses lifted her spirits. The prognosis turned out to have been too bleak and she is now in remission. He went into nursing because he wanted to help people who had “fallen by the wayside”.

Mr Swint says too many of his friends still hang around at home, not knowing what to do with their lives. “We are still going to need electricians,” says Mr Swint, who jokes that he never wants to change a lightbulb again. “But a lot of them are going to have PhDs.”

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 2.5m – more than the combined population of Atlanta, Boston, Seattle and Kansas City, according to the Economic Mobility Project of the Pew Center, 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 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 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 27.3m 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.

What, then, can be done to revitalise the increasingly sclerotic jobs market? If the answer were simple, it would have been on everyone’s lips a long time ago. Unfortunately, there is no precedent for the challenges America faces, and thus little consensus among economists or policymakers on the best remedies. However, almost everyone agrees on how to ensure the situation does not deteriorate. Top of the list is a better education system for all stages of life.

Alas, rebooting an increasingly mediocre school system is easier said than done. Nor is permanent reskillling realistic for large chunks of the workforce. There may be lessons to be learnt from nations such as Germany, particularly on vocational education, but there is little federal appetite to apply them. “Every American is going to have to get used to the idea of a completely different work style,” says Mr Camden, whose company farms out hundreds of thousands of temporary workers around the world, from lawyers to office assistants. “What you learnt in college five years ago may already be obsolete.”

Perhaps inevitably, given the fiscal climate, education and training budgets have gone in the wrong direction in the past few years. State schools and vocational community colleges derive much of their funding from local property taxes. That model brings two big disadvantages. First, it means community colleges are victims of “zip code apartheid” – the lower the property values in an area, the less money there is to train the workforce or educate the children.

In depth: Is America working?

Is America working

Washington has spent most of 2011 fighting over the US deficit but Congress has spent precious little time looking for ways to get Americans back to work

Second, it deprives communities of the fiscal stabilisers that they need during a prolonged home foreclosures crisis. The areas worst hit by the housing crisis have experienced some of the steepest education cuts. By contrast, some of the best community colleges have kept their heads well above water. But most budgets have taken a nosedive at a time when demand for retraining has surged. “It is absurd that we withdraw support from the community colleges just when they most need it,” says Prof Autor.

Economists also agree on the need for a panoply of other measures – from higher spending on infrastructure, with the quality of roads and airports now rapidly approaching second world status, to a more sensible immigration policy that encourages the most talented foreign students to remain in the US. Most also call for far higher public spending on research and development, as well as better private incentives. The US now has one of the least generous R&D tax credits in the developed world.

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 Peter Orszag, Mr Obama’s former budget director, now a vice-chairman of Citi. “It would help to spend more on retraining and on infrastructure and to have a more rational immigration system. But these wouldn’t fundamentally transform the situation for the middle class ... It is not yet clear what, if anything, could.”

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