The U.S. Employment Challenge E-mail
Wednesday, 24 August 2011 18:34

Behind the US unemployment numbers

 

Unemployment induced by the crisis is likely to turn out to be stubbornly high because it’s in part structural, and before the crisis it was sort of hidden from view or overcome by some unusual forces that are not sustainable. In the study of the evolving structure of the American economy and the employment problem, we looked at employment over an 18-year period coming up to 2008, just before the crisis, and we looked at value added sector by sector, and we looked at value added per person.

 

We divided the economy as carefully as we could into a tradable and a nontradable part. So the tradable part is goods and services that can be produced in one country and consumed in another, and the nontradable side, which is the lion’s share of the economy in most advanced economies, is a whole set of goods and services that have to be produced domestically, like government, healthcare, construction, et cetera, much of legal services because of legal differences in the systems across countries.

 

So when we looked at this, the net employment generation in the American economy was impressive—it was 27 million jobs. But almost all of it was in the nontradable side. So that meant basically there was negligible employment growth on the tradable side of the economy where we compete with other people.

 

Where the jobs went

 

When we looked at value added, the picture’s very different. Overall value added increased on both sides of the economy. And when you look specifically at the tradable sector, what you find is it divides into two parts. There’s a set of sectors like finance, like consulting, like computer design, and in those sectors, value added increased, employment increased, and value added per person increased. So it’s all good. You could say those are sectors in which we were highly competitive.

 

The second set tend to be what we call manufacturing, and they are long value-added chains that can be decomposed and moved around the global economy. What happened there is that employment went down, but value added went up, so value added per person went up enormously.

 

And what’s going on in those sectors is that the lower value added per person parts are moving to other parts of the global economy, and the upper parts—the design, managing the enterprise and so on—that’s highly educated people. They’re growing. They’re competing in the global economy. Then when you net out the declines in the manufacturing sector against the growth in the others you get this approximate match. Very little, 600,000 jobs out of 27 million, and nearly all of them, all but 600,000 of them, were in the nontradable sector.

 

When you look closely at that, what you discover is that we had big growth in government, in health care, and substantial growth in other labor-intensive sectors like construction, retail, hotels, food services, restaurants, that sort of thing. And we had, of course, excess consumption for ten years at least coming into the crisis because we had an asset bubble. We thought we were rationally consuming some of our wealth each year, only it turned out not to be real.

 

So I think those are the factors that allowed us to absorb all the incremental employment needs of the population in the nontradable side. I think my own opinion is it’s very unlikely to be a sustainable trend. The tradable sector needs to be a healthy growing part of an economy in terms of value-added output and employment. You can’t just keep relying on the nontradable sector to absorb all the incremental employment in an economy like the United States.

 

A structural problem

 

The crisis clearly created unemployment. I think these underlying structural problems are going to make it difficult to solve the employment problem without addressing the structural issues as well. It’s an issue that affects the range of employment options for people in the middle-income category—moderate levels of education but not the top, middle income as a result, midrange of sort of variety of kinds of skills.

 

So that’s why there’s this sort of tension and concern on the part of a substantial part of people that employment opportunities are declining. In many ways, I think it’s a miracle we didn’t have an unemployment problem, given the magnitude of the nonjob creation on the tradable side. So the nontradable side absorbed all these people, but I don’t think it’s a good bet that that will happen in the future.

 

The limits of job mobility

 

In our case, youth unemployment is a feature of the crisis, because the youth tend to come into the market and be at the end of the queue. And the concern is, if there’s a dramatic shortage of employment opportunities—lots of people have said this and I think it’s right—that if you find people who come out of school, say high school, and don’t find a job for four, five or six years, and then the markets finally come back, you tend to lose them. Employers will go for the recent graduates. So it’s a very worrying situation, both economically and socially.

 

In an ideal global economy where resources are mobile (we know goods and services that are mobile when they can be traded), we have capital that’s highly mobile, but labor’s not. In a domestic economy, if there’s a surplus labor condition here and a labor shortage here, then one of two things happens: the people move to the jobs, or the jobs move to the people. Usually it’s a combination of both.
In the global economy, the people can’t move to the jobs. There’s just too many barriers to mobility. And some of the jobs are nontradable, so that means that the jobs can’t move to the people. So we have a situation in which there’s a natural sort of economic answer, which is mobility of jobs and people, and we can’t implement that solution for reasons that are largely social and practical.

 

Solutions

 

I think the answer to this is not obvious, but we’re going to have to try to fix the ineffective parts of our educational system. We’re underinvesting in things like infrastructure, and sort of across the board if you look at the numbers for the investment rates in the United States, we’ve just been living on consumption and we need to live a little bit more on investment, including public-sector investment.

 

We should have a sensible energy policy. We should build some infrastructure which has the effect—productive infrastructure, I might add—which has the effect of employing people in the short run and raising the return to certain kinds of private-sector investment in the long run, that being the driving engine.

 

I think we should fix the tax system. It’s complicated, it has loop holes, and it has distortions with respect to investment. It privileges housing and builds up asset prices, creating jobs in the construction industry, but not the kind we’re talking about. And it’s nontradable.

 

We tax earnings from abroad when they’re repatriated, so we’ve created an incentive to leave them out there, an investment out there. Some of that would occur anyway because the other parts of the world are growing and so it’s natural for our multinationals to invest out there. But, still, why tip the playing field against us, in that sense?

 

So I think there is a structural issue underlying this that needs attention. I think it’s going to actually take a new policy framework that pays attention to structure and distribution and opportunity. And I think in order make sensible, pragmatic progress, it’ll require cooperation between the business sector and government.

 
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