04 September 2012

Where Did the Jobs Go?

I have a new column up over at the Breakthrough Institute in which I discuss two recent studies on US unemployment. In the column I try to answer the question, where did the jobs go?

Here is how it starts out:
US unemployment rates remain high and a major issue in the US presidential campaign. This post seek to explain with simple math where the jobs went as a first step in understanding how unemployment might be reduced. The math is simple, and it helps to show how most debate over economy and employment miss what actually matters most – and that is innovation policy.
 To read the rest, please head over there and feel free to comment/critique here or there!

21 comments:

  1. "What is needed is a more comprehensive approach to innovation in the economy, of which constant training and retraining of works must be a part."

    I assume you mean workers there. Would you care to define what you mean by "innovation"? I assume there's a technical meaning for economists. The reason I ask is that the results of policies need to be measurable, and I'm at a loss how you could do that here, using the ordinary English meanings of the words.

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  2. -1-Skip

    Thanks ...

    "Would you care to define what you mean by "innovation"?"

    See:

    http://rogerpielkejr.blogspot.com/2012/06/where-does-wealth-come-from.html

    Thx, Please ask if unclear ...

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  3. The number one thing that government can do to improve ecconomic growth in the private sector is get out of the way.

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  4. I think the charts you show can be misleading.

    They don't answer the question as to how many people with relatively high levels of education are employed doing jobs that require those higher levels of education.

    http://www.theatlantic.com/business/archive/2012/04/53-of-recent-college-grads-are-jobless-or-underemployed-how/256237/

    More than half of America's recent college graduates are either unemployed or working in a job that doesn't require a bachelor's degree

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  5. -4-Harrywr2

    Thanks ... from the linked AP article:

    "Opportunities for college graduates vary widely. While there's strong demand in science, education and health fields, arts and humanities flounder."

    Who is surprised by this?

    Clearly not all college degrees are created equal when it comes to skills and employment prospects. More on this in an upcoming post.

    That said, the Gtown numbers reported in my BTI column tell a powerful story about the long-term evolution of the US economy -- Have skills, will work.

    Thanks!

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  6. "Of course, the persistent unemployment will not be easily remedied simply by offering training to the millions of low-skilled workers currently unemployed."


    But 'innovation' will? Tell me exactly what innovation you think will generate jobs for millions of low-skilled workers. And please don't tell me you'll re-train them. They are adults, they have a certain level of education, and they aren't going to suddenly become software engineers or molecular biologists.

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  7. -6-Mark B.

    Thanks for the question -- here is an example:

    http://rogerpielkejr.blogspot.com/2012/01/apples-and-americans.html

    It is not millions, of course, but a good example of how innovation can create lots of jobs.

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  8. -6- Mark B,

    Clearly one promising innovation will be not paying them not to work.

    Training and retraining have always seemed futile to me. I believe many of these people were those who refused their initial training while going through school, and I haven't seen lots of evidence as to why another time around would improve the outcome (triumph of hope over experience).

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  9. Roger you don't show numbers for less than HS. The picture there must be extremely grim as they lack the qualifications for post secondary. I agree with MattL-8 about retraining especially for the <HS.

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  10. -9-Mike Mchenry-

    Thanks, the blue curves and bars in the three graphs show <=HS .. Thx.

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  11. Part I:

    Alright – I guess I might as well try to get this addressed once again. Won’t likely get a response, but can’t hurt, right?

    I think that maybe you are overlooking the impact of a "structural" issue: The interest in the private sector to maximize profits through increasing productivity *as the direct result of reducing labor costs.*

    This is a matter of directionality. We see it all the time: I go into a Home Depot and look around for a knowledgeable employee to help me buy a pipe to repair my kitchen sink. I can’t find any, so I walk out in frustration without buying anything. An opportunity for cross-selling with some related product is lost. Or I buy the wrong product and return it – eating up labor cost in the process of doing so (customer support for the return process, restocking the shelves, etc.).

    Compare that to walking into your mom and pop hardware store years ago when the old man behind the counter went to the back to get your part even before you finished describing the problem.


    Companies reduce employees and labor cost to create profitability even though in the process, productivity gain is marginalized. I would buy more products at Home Depot if I had better customer service. In the end, the company could make more profit and be more profitable through markup on selling more products to me, but they pass up that form of profitability because they see cutting labor cost as low-hanging fruit.


    This process necessitates an ever continuing upward pressure on unemployment. A more traditional model is that you take an existing ratio of employee cost to profit and increase the profit in an absolute sense by adding more labor and producing more product (of course, there is a limit to that approach). I think that model is less prevalent than it used to be. Why?


    One reason is probably because of an increased emphasis on maximizing the return to the employees at the top of the corporate ladder at the direct expense of employees further down the corporate structure – as seen by the dramatic increase in the ratio of CEO salaries to the average worker’s wages. This change is a manifestation of a larger shift in business methodology that filters down throughout all levels of business models: There is less emphasis on selling a product for a good price and more emphasis on creating a balance sheet that attracts investors – because employees at the top of the chain benefit directly from stock performance. The value of leveraging the input of human capital as a benefit to the company has been diminished.

    Within certain bounds, increasing the $ in profit can be obtained in various ways. One way is to hire more employees and produce more product.


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  12. Part II

    Another way is to keep producing the same product, or even a lesser quality product, and reduce the labor costs: Replace workers with machines, streamline processes to require less labor, hire more part-time employees with fewer benefits, spend less time training employees, reduce the amount of customer service provided for your product, reduce employee-to-customer interaction time, etc. It isn’t like we can’t see companies make the wrong decision in this regard all of the time. Middle managers are pressured by upper-level management to increase profitability by reducing labor costs even though it doesn’t pan out as a good business strategy long-term. As long as this paradigm is so pervasive, increasing training of employees simply will not happen.


    This second method increases productivity and profit directly as a result of increasing unemployment. I don’t think it is a given that this is the only way to increase profit. Choosing that second option is often a conscious decision that is made because it increases the income of a small segment of the company’s workforce – those who have the power for decision-making.

    This is not some iron law of economics that the only way to increase profit is by increasing profitability at the expense of labor costs, or at the expense of employment. But it is an easy way to increase profits (and profitability) in a short-term window. There are certainly exceptional businesses out there which deliberately choose to grow through rewarding their employees and keeping the wage ratio across the corporate structure more even. There are companies out there who eschew the process of increasing profits by an everlasting attempt to increase productivity through returning less of the gains to employees lower down the organizational employee chart.

    Do you give full weight to the influence of a short term orientation, where increases in short-term profitability gained through reduced labor cost can enable investors to leverage stock prices in the short term in ways that are unsustainable long term? Is it not true that there is an increasing trend in the private sector to gain profit from short-term leveraging of productivity without consideration of long-term impact? Do you think that these structural elements are simply not in play, or if they are, they aren’t significant enough to impact macro-level metrics like unemployment?

    If you think that these structural issues are in play and significant, where are they incorporated into your analysis?

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  13. -11- Joshua,

    OTOH, I avoid stores where the employees want to talk to me, and tend to look for low prices and a large selection. Hence, I buy a lot of stuff at Home Depot and Lowes. :-)

    Either way, employment is a side effect of profit seeking, as it should be. And I think that for any example of such strategy, you can find lots of companies going different ways, which is also a good thing. Anything that can't go on...won't.

    An interesting counter to short term investor incentives is the reaction to increasing government regulation in the form of SOX and Dodd-Frank where companies are staying private or actually changing from being publicly traded to privately owned.

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  14. MattL -


    ==]] "OTOH, I avoid stores where the employees want to talk to me, and tend to look for low prices and a large selection." [[==

    One doesn't imply the other. Believe me, that cranky old dude at the mom and pop hardware store was no "Hi there, how are ya' today!!!" type that I run into in places like Denver. As an East Coaster, I feel like telling those folks to stay the he11 away from me. But I like to be able to get some customer service when I want it. I can't tell you how much time I've wasted at Home Depot wandering around looking for items - only to finally find some employee who doesn't even know what the item is (even though it is stocked) because they lack the knowledge about building supplies.

    But I go to Home Depot anyway because of it's convenience. My point isn't that I don't shop there. It's that I buy less than I would there if they had decent customer service available when I want it. They don't because they are: (1) understaffed and (2), their staff is undertrained. Have you ever tried calling Home Depot or Lowes on the phone to inquire whether they have an item? I might drive the 20 minutes to get their rather than the 10 minutes it takes me to get to the more local hardware store if I could just call them to confirm whether they have a product.

    Maybe my point amounts to little other than Old Man Yells at Cloud" grumbling, but I simply don't believe that a common practice I see of reducing available customer service and under-training employees and reducing their wages makes good business sense in many of the places I see that strategy employed.

    Given the costs to employers of "shrinkage" and retraining and lost opportunities for cross-selling, etc., I am convinced that a strategy of increasing profitability through reducing labor cost is overused. Have you ever walked into an Apple store? I find it annoying and cult-like - but I think it is a very effective business model. It wouldn't work for everyone, but do you disagree that there is a problematic over-reliance on building productivity by reducing labor cost? Is that not a "structural" problem that is affecting our economy on a macro-scale?

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  15. -14- Joshua,

    I believe that you would buy more, but I'm not convinced that they'd sell enough overall to make it worthwhile. And the fact that they seem to have displaced most mom and pop stores supports that.

    In fact, I've never walked into an Apple store, and have a hard time imagining a scenario where I would.

    I vehemently disagree that there is a "problematic over-reliance on building productivity by reducing labor cost," certainly not to the point that it's a structural problem. I would agree that some firms have probably gone too far, but that others have not gone far enough.

    Even your post belies that there is some structural problem. You cite, as a counter-example, the company with the largest market capitalization in the world! In other words, there are some firms doing well from apparently doing the opposite of your cited problem.

    The failure of some firms in following a strategy isn't a structural problem unless, say, that strategy is something that has been made mandatory with the force of law. Otherwise, if there is a legitimate opportunity to take advantage of over reactions in the market, someone will rise up to take those advantages.

    Mostly, I think that the complaints about "the old days that were better" (I do it too!) discount the actual modern improvements in cost and convenience and quality too much, creating a nostalgia for a time that didn't really exist.

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  16. Britain is an extreme case. Margarer Thatcher deliberately destroyed British manufacturing on behalf of her American handlers.

    Like her friend, CIA installed General Pinochet, she adopted University of Chicago supply side (monetarist) policies. This also lead to Big Bang, the deregulation of the City of London finance centre and its establishment as the offshore pirate arm of Wall Street.

    Tony Blair picked up the baton and his solution was 'education, education, education' as he famously said on Russian radio. With little manufacturing, the solution was to do higher level tasks, following the curve that Roger showed in his article with employment amongst graduates expanding.

    Guardian economics editor Larry Elliot wrote a book on Blair's Britain which I recommend. It is called 'Fantasy Island'. Elliot warned of a financial crash and correctly predicted that Britain would be devastated by it. He contends that the expansion of education is simply a ruse to cover up the fact that there are no real jobs.

    In particular there has been a massive increase in arts courses. Blair believed Britain could lead the world in the creative industries. Elliot shows that this simply hasn't happened. Something like 75% of British films are never released and that ones that do, are embarassingly awful. Four weddings, Madonna and a cockney gangster.

    The problem with innovation is that it lags reality and those caught in the wake often drown. One of the advantages of global warming for the banking industry has been funding the transfer of industry to east. I would call it indecent haste.

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  17. Innovation and employment are highly correlated. I think Henry Ford was a good example, even today. He supervised the invention of the assembly line so he could build cars cheap enough that his employees(well-paid) could afford them. The innovation of the assembly line, plus a bunch of other innovations, allowed Ford to offer many relatively high paying jobs.

    One of the structural problems that was not even mentioned is that various benefits and subsidies make it uneconomic for many people to find work. They simply are better off(although maybe not happy) living off benefits and subsidies because any job they could land would put them overall worse off. This has a profound negative effect on society and the economy. As an example, the type of skills needed to produce at i-Pad are not particularly high. But the barriers to hiring people in the US at the minimum wage to do it are so high Apple finds it more effective to manufacture in China and East Asia. In standard of living terms the wages at a company like FoxConn(the i-Pad builder) are not that far below the minimum US wage.

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  18. @Joshua

    re: long rant on grumpy old man in hardware store vs home depot.

    The grumpy old man in the hardware store had to know how to use a hammer and saw and other tools in order to graduate junior high school. I know I did.

    The local school district I live in doesn't even offer shop class or auto mechanics as an elective course.

    So the fact that a junior high school education is no longer adequate for being employed in an entry level position in a hardware/home improvement store isn't the result of any great corporate conspiracy.

    It's the result of an education system that decided that a K-12 education would be inadequate for doing anything at all but getting more education. Basic carpentry is now taught in the community college system rather then junior high schools.

    So to be qualified to work in an entry level position in a hardware/home improvement store one now needs at least 14 years of education rather then 8 years.

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  19. This morning the business report noted that the rate of productivity growth was greater than GDP growth. So I think this is generally on target.

    My only concern is whether the affect of education might be weaker when corrected for the growth of the sectors. In other words, a confounding variable may be that the recovery is strong in sectors that require (or tend to hire) those with higher levels of education. Thus a sector specific issue would be conflated with a training specific one.

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  20. harry -

    The stigmatization of high school level vocational training is a real detriment to our society at many levels. The idea that even advanced students are necessarily better educated by trading off basic skills, like how to use a measuring tape or table saw, for abstract math skills is, IMV, mistaken. Even more so when the assumption is that such a tradeoff is better for all students. When I worked in jr. and high schools, it was always fascinating to watch the "good" students learn much about what they didn't know from working together with the "bad" students in shop class. In addition to learning discrete skills, they also learned about their own limitations and prejudices about the limitations of others.

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  21. "Opportunities for college graduates vary widely. While there's strong demand in science, education and health fields, arts and humanities flounder."

    Who is surprised by this?"

    It just shows that the person and their motivation are more important than the degree in many cases. My youngest daughter is a good example. She graduated with an honors degree in German Language and a minor in Japanese. All through high school(a strict one) she disliked math and science. Two weeks after graduation she got a temporary job(estimated at 2 months)as a clerk with a financial planning company. Within a month she had taught herself enough about SQL Query language to get offered a permanent job. A month later the company was bought out and she was transferred across the country to the parent company. Now she's doing well enough to realize that even though her salary is reasonable for the position she needs to change jobs for more opportunity.

    While an STEM college degree pretty much guarantees a higher starting salary, it does not guarantee success or job satisfaction. It is basically a ticket that tells a potential employer that here is someone who has demonstrated some drive, tenacity, and intelligence. Where they go from there is up to them.

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