America’s Lost Decade Already Happened

Once again, the United States faces the prospect of a jobless recovery.  Next month, the President is holding a conference on job creation.  The President seems genuinely distressed over the jobs situation.  He is seeking real answers.  He is asking the wrong questions. 

The President and his advisers view the job losses as a temporary cyclical problem, not as a structural problem with the U.S. economy.  Quick fixes for temporary downturns in the labor market are expensive but easy.  Last year (here,  scroll about half way down), I suggested a temporary social security tax holiday to boost employment and output.  Last week, Alan Blinder took up the call in an editorial in the Wall Street Journal.  At a cost of about $100,000 per job (I am not as optimistic as Blinder), the administration can create several million temporary jobs.  For far less money, the government could simply hire the same people at an average price of less than $40,000. 

Ultimately all of these programs are doomed to failure.  Quick fixes cannot solve structural problems, and a structural problem exists.  Before a solution can be devised, we must understand the source of the problem.  As of right now, the source is unknown and finding the source probably requires more data than is readily available on the structure of the job losses.  But we can make a start with the data in hand. 

In this post, I break out some of the key data, documenting the sectors of decline and the sectors of growth.  In my next post, I will try to explain the loss.  I will not succeed but perhaps we can get closer to an answer. 

The Problem

Between January 2000 and October 2009, employment in the United States rose by a paltry 67,000.  Including the already announced benchmark revision, the United States lost 757,000 jobs.  This loss was the first over a ten-year period since the Great Depression.  The post-war, record-low, ten-year job growth was 5.7 million achieved in December 1962. 

The job gap (the difference between the growth of the working age population and the growth in jobs) now exceeds 16 million.  The job gap in 1962 was 3.5 million jobs.  As a percent of employment, the current gap is 12 percent, the 1962 gap 6 percent, and the maximum gap during the Great Depression 19 percent.

And, the job gap is not merely an artifact of the current downturn.  At the peak of the labor market in December 2007, the job gap had already grown to more than 7 million jobs.  The economy was producing enough jobs to eventually overcome the difference, easing concerns into complacency, but the gap was still large.  The current downturn has simply exacerbated and made obvious an already existing problem. 

The current gap will almost certainly still exist when my fifth-grade daughter enters the labor force.  If we create 181,000 jobs per month (the average monthly job growth in the 1990s), the gap would take more than 12 years to close, given current projections of the growth of the overall workforce.  Even if job growth could be sustained at the maximum annual pace observed between 1940 and 2009 (392 thousand jobs per month), the jobs gap would persist for more than five years. 

Aren’t the losses “just” manufacturing jobs?

Over the past decade, job losses have been concentrated in manufacturing.  The goods-producing sector shed more than 6.3 million jobs as the Services sector added a roughly similar number.  In the middle of the last decade, many economists favored the idea that the loss of manufacturing jobs was a result of rapid productivity gains in the services sector.  They favored the idea that the loss of manufacturing jobs was part of the long evolution of modern economies:  from agriculture to manufacturing, from manufacturing to services.  The job losses were nothing more than a continuation of a long-term trend. 

The basic fact is verifiable.  As a share of output or employment, the services sector has outpaced the manufacturing sector since the early 1950s.  A shift to capital intensive technology in the manufacturing sector and rapid productivity gains in the services sector pushed and pulled workers.  The services sector was pulling labor out of the manufacturing sector, offering higher wages and easier work.  Between 1950 and 2000, the United States became an economic superpower and no one may question the relative change in our standard of living.  We survived the manufacturing losses and became stronger because of them. 

But, in the last decade, something changed:  manufacturing pushed workers out faster than the services sector could pull them in.  See, even though the share of manufacturing workers was falling, in absolute terms it was stable.  The level of manufacturing employment was approximately equal in 1950 and 2000. 

Job losses in manufacturing have been widespread.  Every major sub-category of manufacturing employment has declined.  Transportation, metals, computers, machinery, textiles, apparel, plastics, and printing have each lost more than 300,000 workers.  (I was amazed by the textiles figures.  When I went to NC State back in 1995, the textile industry was already rumored dead.  How can a dead industry still be shedding jobs 15 years later?)

Manufacturing is sick:  No surprise. 

Won’t Services save the day?

Maybe.  The services sector added almost 6.4 million jobs over the last decade.  The possibility that we remain in a period of rapid transformation exists.  It could be true, but the data stacks against the hypothesis. 

As manufacturing losses are broad, services gains are narrow.  Three sectors account for more than 100% of the service-sector gains.  The following chart shows the change in employment by major sector between January 2000 and October 2009.  Health led the charge.  The health services industry added more than 3.5 million jobs.  Part of this gain was funded by an expansion of Medicaid, but the gains look good.  Health is a growth sector. 

Unfortunately, the rest of the story is not as rosy.  Government employment accounted for one-third of the gains, 1.8 million people.  Worse, already in 2000, the government was the largest service-sector employer.  Government jobs do not promote growth.  Government jobs must be funded from other sectors.  Government jobs seldom innovate.  

Are the losses simply a symptom of an emerging new economy?

In the 1990s, the innovative services sector pulled workers in, but it did not pull just any worker.  Young workers are more flexible and adapt to new industries quicker than old workers.  They more flexible because they have less to lose in leaving the old industries; they have not yet built a stock of industry-specific capital.  The dynamic led to an increase in participation for workers younger than 45 and a decrease in those who were older.

Over the past decade the trend has reversed and it has reversed to a shocking extent.  The following graph shows the participation rate of workers by age group.  In all groups younger than 55, the participation rate has fallen.  In all groups over 55, the participation rate has risen. 

In 2003, the social security retirement age increased by a year, and that change may explain a bit of the shift.  But the change does not explain the increase in participation of the 70+ crowd.  The increase in 75+ almost doubles the participation rate of the very old.  The increase is not driven by better health, ten years is too short to effect that change. 

No, the data indicates two things:  older workers feel poorer and are working longer, and young people can’t get jobs.  (I am including everyone below 55 in the young category.  I will let you know when I need to change the definition again.)  I am surprised by the breakdown.  I had thought the picture would tilt the other direction, at least for prime-age workers (25-45). 

Push and Pull

The manufacturing sector pushes workers out whenever its productivity growth is sufficiently high.  The symptom of this push is rising output with or without gains in employment.  Since the 1950s, manufacturing output has increased steadily despite stagnant employment.  Beginning in 2000, this stopped being true.  Even the surge between 2004 and 2006 was mild.  The maximum growth rate of manufacturing output between 2001 and 2009 was lower than its average growth rate between 1992 and 2000. 

Likewise, the services sector pulled workers with high rates of productivity growth.  And, these high rates persisted over the last decade, but the average growth rate was a full percentage point lower in the last decade relative to the 1990s.  The services sector is not growing fast enough on average to offset manufacturing losses. 

Takeaways

The more I look at the data, the more I am convinced that the current downturn and the downturn in 2000 are related episodes.  At least from the labor-market perspective, they seem closely connected.  Treating the current job losses in isolation is a mistake.  Whatever forces devastated the labor market in the early 2000s remain in effect today. 

The President wants to solve the “jobs problem”, of this I am certain.  We are lucky to have a President who genuinely wants to solve the problem.  But his advisers do not seem aware of the structural issues.  The first step is admitting the problem.  Economists, especially those named Christina Romer or Larry Summers, need to stop thinking of the job losses as an unavoidable bad outcome associated with all recessions.  This time really is different.