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Magazine / STATE OF THE UNION: ECONOMY

The Phantom 15 Million

Taming unemployment starts with solving the mystery of the jobs that were supposed to have been created in the past 10 years but weren’t.

Anxious: Job seekers in Denver.(John Moore/Getty Images)

photo of Jim Tankersley
January 21, 2011

America’s jobs crisis began a decade ago. Long before the housing bubble burst and Wall Street melted down, something in our national job-creation machine went horribly wrong.

The years between the brief 2001 recession and the 2008 financial collapse gave us solid growth in our gross national product, soaring corporate profits, and a low unemployment rate—but job creation lagged stubbornly behind, more so than in any economic expansion since World War II.

The Great Recession wiped out what amounts to every U.S. job created in the 21st century. But even if the recession had never happened, if the economy had simply treaded water, the United States would have entered 2010 with 15 million fewer jobs than economists say it should have.

 

Somehow, rapid advancements in technology and the opening of new international markets paid dividends for American companies but not for American workers. An economy that long thrived on its dynamism, shedding jobs in outdated and less competitive industries and adding them in innovative new fields, fell stagnant in the swirls of the most globalized decade of commerce in human history.

Even now, no one really knows why.

This we do know: The U.S. economy created fewer and fewer jobs as the 2000s wore on. Turnover in the job market slowed as workers clung to the positions they held. Job destruction spiked in each of the decade’s two recessions. In contrast to the pattern of past recessions, when many employers recalled laid-off workers after growth picked up again, this time very few of those jobs came back.

These are the first clues—incomplete, disconcerting, and largely overlooked—to a critical mystery bedeviling a nation struggling to crawl out of near-double-digit unemployment. We know what should have transpired over the past 10 years: the completion of a circle of losses and gains from globalization. Emerging technology helped firms send jobs abroad or replace workers with machines; it should have also spawned domestic investment in innovative industries, companies, and jobs. That investment never happened—not nearly enough of it, in any case.

If we can’t figure out why, we may be doomed to a future that feels like a long jobless recovery, no matter how fast our economy grows. “It’s the trillion-dollar question,” says David E. Altig, senior vice president and research director for the Federal Reserve Bank of Atlanta, where economists are beginning to explore the shifts that have clubbed American workers like a blackjack. “Something big has happened. I really don’t think we have a complete story yet.”

 

THE LOST DECADE

We certainly didn’t see it coming. At the turn of the millennium, the Bureau of Labor Statistics predicted that the U.S. economy would create nearly 22 million net jobs in the 2000s, only slightly fewer than the boom 1990s yielded. The economists predicted “good opportunities for jobs” and “an optimistic vision for the U.S. economy” through 2010.

Businesses would reap the gains of new trading markets, the projection said, and continue to invest in technologies to boost the productivity of their operations. High-tech jobs would abound, both for systems analysts with four years of college and for computer-support analysts with associate’s degrees. The manufacturing sector would stop a decades-long jobs slide, and technology would lead the turnaround. Hundreds of thousands of newly hired factory workers would make cutting-edge electrical and communications products, including semiconductors, satellites, cable-television equipment, and “cellular phones, modems, and facsimile and answering machines.”

“U.S. companies … are privatizing the gains of globalization.” —Howard Rosen, Peterson Institute

Such long-term projections are inexact by nature. (One economist who consults in the private sector said that the companies he works with refuse to make employment projections more than a year or two ahead.) These government forecasts for 2010 were particularly off. When the job market peaked in 2008 on the eve of the financial crisis, the manufacturing sector had already shed 5 million workers since the decade began, with more layoffs to come in the Great Recession.

Politicians, particularly those in the Rust Belt, decried the losses. Hardly anyone, meanwhile, noticed the more damaging shortfall in the national jobs picture: Every major occupational group was running far behind the 2010 job-growth projections—often to the tune of 2 million jobs per group.

The forecasters said that the economy would create 22 million jobs over the next 10 years. At the decade’s economic peak, though, that number stood at only 7 million. Job growth in the 2000s was the lowest of any decade ever recorded by the federal government, stretching back to the 1940s. As a result, workers were extremely vulnerable to the tidal-wave recession that washed away all of the decade’s meager gains.

U.S. payrolls, by their 2008 peak, had grown about 5 percent from the start of the decade. Ever since the Labor Department began tracking employment in the late 1930s, no previous decade produced less than 20 percent payroll growth.

Infographic

The national population grew faster than the labor force; in 2008, about 63 percent of working-aged Americans held a job, down from 65 percent in 2008, reversing decades of improvement in the employment-population ratio. Real middle-class incomes fell from 2000 to 2007—from a median of $58,500 to $56,500 another first in U.S. record-keeping.

It’s easy to see today why such alarming numbers went so undetected. The national unemployment rate stayed persistently low, between 4 and 6 percent, until the financial crash. Voters tend to associate the jobless rate with the strength of the economy. But the rate was low not because the economy was adding a lot of jobs, but because fewer people were joining the workforce—specifically, fewer women.

Female workers poured into the labor pool during World War II and steadily throughout the decades that followed. In the late 1990s, that trend began to end with about three in five women in the workforce. The phenomenon was a mathematical blessing for the unemployment rate, which measures the percentage of eligible workers who want to find jobs but can’t. When women’s employment demand stopped increasing, the economy didn’t need to create as many new jobs to keep the jobless rate low.

Blinded by low unemployment, lawmakers and economists overlooked two crucial warning signs of the nation’s deteriorating economic health. One was the percentage of working-aged men—the traditional backbone of the U.S. labor force—who held a job. The other was the number of jobs being created each month. Throughout the 2000s, both numbers nose-dived.

A few researchers caught early warning signs of the trend. In 2003, economists Erica L. Groshen and Simon Potter at the Federal Reserve Bank of New York warned in a paper that “structural changes” in the economy
appeared to be hindering job creation. Groshen and Potter noted that after the past two recessions, in 1990-91 and 2001, economic growth had picked up long before jobs began to reappear, bucking a long historical trend of growth and jobs returning in tandem. The explanation, Groshen and Potter said, was a shift away from the time-honored American tradition of laying off workers in bad times and recalling them when the clouds parted.

“Most of the jobs added during the recovery have been new positions in different firms and industries, not rehires,” they wrote. “In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier” when recovery still appears fragile.

In other words, American companies had adopted a more cold-blooded attitude toward recessions, one that fit the new model of globalization and automation. Technology made it easier to lay off your 100 least-effective workers and ship their jobs to India, or to replace them with a software program that made your remaining workforce dramatically more productive.

Infographic

That theory would hold true in the next recession, too. Meanwhile, it raised a troubling question: Why didn’t the gains of cold-bloodedness stack up to the costs?

 

OFF SCRIPT

Here is how the evolving global economy is supposed to work: Mature economies with high living standards, such as the United States, ship some of their lower-skill jobs to developing countries where wages are lower. The costs of the outsourced goods and services go down, and the buying power of the developing countries goes up. American firms reap higher profits, which they invest in developing higher-value products that can’t be made elsewhere and sell them to increasingly flush consumers at home and abroad. Laid-off American workers find jobs in the innovative industries that result.

That story has almost entirely come true for corporate America, whose record profits spurred strong GDP growth throughout the 2000s, but not for workers. “A lot of people have been displaced due to technology and outsourcing,” says Mark Thoma, an economics professor at the University of Oregon who writes the popular Economist’s View blog. Those workers have often settled into worse jobs than the ones they lost, he adds, if they have found work at all. “That’s not really what’s supposed to happen.”

Thoma is one of a fleet of economists from top university research departments, regional Fed banks, think tanks, and the wonky economic blogosphere, who were asked why U.S. job creation had stalled so spectacularly in the past decade. Liberals and free-market purists alike all said, “Good question,” and almost to a person added some form of “I wish we knew the answer.”

Lawmakers have still barely touched the question—they are too focused on taxes, regulation, and government spending, policy areas that hardly any economist has suggested as explanations for our lost decade of job growth. Researchers are just starting to piece together the evidence, and no one can yet finger the culprit.

 

EDUCATION AND INVESTMENT

Perhaps, some economists theorize, the United States isn’t creating innovative jobs because its workforce isn’t up to the challenge. For probably the first time in history, our young adults are no better educated than their parents. Nearly all our international rivals, in developed and developing economies alike, continue to make generational leaps in college graduation. Brainpower is still our comparative advantage with the rest of the world, but the advantage is shrinking.

“It is the best educated and those with the highest skills that derive the most benefits from a globalizing economy,” says Jacob Funk Kirkegaard, a research fellow at the Peter G. Peterson Institute for International Economics who studies global labor markets. “As the U.S. workforce becomes relatively less skill-intensive vis-à-vis the entire world, the broader benefits of the global economy, both in terms of job creation (and national well-being), are going to decline.”

“Prosperity in the 2000s … was quite ephemeral, bordering on illusory.” —David Autor, Massachusetts Institute of Technology

Mounting evidence suggests that educational stagnation has already socked American workers, particularly men. David Autor, the associate chairman of the Massachusetts Institute of Technology’s economics department, makes the case in a series of recent papers that globalization has effectively “hollowed out” much of the country’s middle-skill jobs—assembly-line, call-center, and bookkeeping occupations, for example—and replaced them with a computer or a lower-paid foreign worker.

Those types of jobs typically required technical training but not necessarily a college degree. As the jobs disappear, the workers who held them are generally pushed into lower-skill, lower-paid occupations such as retail or janitorial services, because they lack the education to compete for higher-wage, higher-skill jobs such as engineering.

Autor is pioneering the research into what he calls the “polarization” of American jobs into low- and high-skill camps, but even he isn’t sure whether his findings explain our national jobs crisis or result from it. “I don’t have a simple answer,” he wrote in an e-mail recently. “I think the prosperity in the 2000s, even prior to the crisis, was quite ephemeral, bordering on illusory. I’m not sure that’s a result of polarization per se. But it is a mystery why the good times ended” at the turn of the century. The completed circle of losses and gains from globalization, he added, is “what is supposed to happen in the long run. But it requires investment, adjustment, adaptation.”

Mention of that requirement raises another leading theory for our job-creation woes: American companies aren’t investing enough in domestic innovation and the jobs it should create.

One baffling aspect of the current recovery is why U.S. companies continue to sideline nearly $2 trillion in cash instead of using it to buy equipment or hire workers. That hoarding turns out to be a piece of a decades-long investment puzzle. American corporate spending on nonresidential plant equipment—factories and equipment, not houses or shopping malls—has fallen to its lowest rate as a share of the economy in
40 years. Businesses aren’t investing in American workers, either. The major productivity gains of the fledgling recovery, and in the 2000s in general, came largely from companies producing more with fewer employees.

The simple truth is that American firms are either returning the spoils of globalization and technology to their shareholders, spending them on new projects abroad, or both. “Globalization isn’t the problem,” says Howard F. Rosen, a labor economist and visiting fellow at the Peterson Institute. “U.S. companies are investing in plants and equipment, just not in our borders.… They are privatizing the gains of globalization. That’s really it. They’re our gains!”

Policymakers, Rosen adds, must learn why that is happening. “What motivates investment?” he says. “How do we stimulate investment? I personally think we should use that question to judge every economic policy that we do.”

This is not an academic exercise. The mystery of why 15 million jobs never materialized could haunt our economy for the foreseeable future.

 

MORE LIKE EUROPE?

Economists, lawmakers, and other Americans have mostly assumed that if we could just get the postrecession economy growing again at a good clip, jobs would come back in high numbers. But what if that’s wrong? What if we’ve blown a gasket in the job-creation machine and workers remain stuck on the roadside until we get it fixed?

What if the Peterson Institute’s Kirkegaard is correct when he says, “There is a significant risk that we wander aimlessly into a situation where U.S. labor markets … end up becoming much more European than they were before,” less dynamic, less innovative, with persistently higher unemployment. “That’s not a description that I use lightly,” he says, “because that’s a very, very bad outcome.”

It’s worth noting, as we look back at the last decade’s job projections, that American workers aren’t making many answering machines or modems. They’re also not making cell phones—even the market-moving cell phones that forecasters couldn’t conceive of 10 years ago.

Infographic

A recent paper by researchers at the Asian Development Bank Institute concluded that the iPhone, one of the United States’ top innovations of the past decade, actually contributes nearly $2 billion to our trade deficit because it is almost entirely produced and assembled in Asia. The paper also raises a conundrum for lawmakers and business leaders alike: If Apple moved its assembly line to the United States and created domestic jobs but didn’t raise the cost of the iPhone, the company would still turn a 50 percent profit on every one it sold.

Maybe Apple’s greed is at fault. Maybe the government is to blame for not making the industrial climate more hospitable to Apple and other job producers. The harsh reality is that workers, companies, and lawmakers all need to readjust if we ever hope to rev up the job-creation machine again.

Female workers poured into the labor pool during World War II and the decades that followed. In the late 1990s, the trend began to end.

Some free-market economists say that we could encourage more domestic investment by cutting corporate tax rates, although it’s fair to note that the jobs breakdown of the 2000s coincided with hefty tax cuts under President Bush. Still, liberal and free-market analysts alike have argued for a sweeping reform of America’s corporate tax code—one that would reduce rates while eliminating many deductions and provisions that give companies incentives to spend their global profits outside the United States. More narrowly, groups such as the Association for Financial Professionals have urged Congress to lower America’s tax rates on repatriated income, to levels closer to international competitors.

Infographic

Some liberal economists say we should consider more direct industrial policy to force investment in innovative fields such as clean energy, to match China, Germany, and other competitors, or we should further curb foreign trade until the international playing field is more level in areas such as currency.

Thoma, of the University of Oregon, says he has been lately rethinking whether the situation demands more pronounced government income redistribution to help those whom globalization has hurt the most.

Nearly all the economists interviewed for this article called education a key piece of any solution, and some were alarmed by the potential fallout from state and local budget shortfalls that could lead to cuts in primary, secondary, and higher education. As middle-skill jobs disappear in the United States, some experts recommend new policies to push more students into college or vocational school in order to swell the future ranks of highly skilled workers. Implementation could include more federal college aid or even a requirement that students complete a year of higher education after high school.

Others say that the government should revamp its approach to unemployment benefits, linking payments to job retraining in an effort to shift workers from disappearing fields. “We’re in an economy that is undergoing rapid change,” Carl Van Horn, director of the John J. Heldrich Center for Workforce Development at Rutgers University, said, “but we have policies for an economy that we assume is more or less the same.”

Autor, the MIT economist, says that there’s no guarantee the gains from globalization and automation will appear as immediately as the costs—or that everyone in America will benefit equally from them. “What people tend to not appreciate is how large the adjustment costs are and how long adjustments take,” he said in an interview, adding later: “There are things we can do to help people adjust. But we’re not very good at this.”

It may be that Washington must take bolder steps to encourage higher-risk, higher-reward investments by companies flinching at the violent churn of the global economy. As the New York Fed’s Groshen and Potter wrote in their trailblazing paper in 2003, “Structural change itself may have given rise to uncertainty. In periods of rapid change, it is hard for investors, companies, and workers to know which firms and industries will require more jobs. Our findings suggest that a return to job growth may require a mix of two ingredients: improved financing options for riskier ventures and resolution of current uncertainties, including time for the dust to settle from all the recent structural changes.”

Eight years later, it’s hard to say that anything in the economy feels more settled. Policymakers just now seem to be tuning in to the mystery of our changing situation. Before we can fix our jobs machine, we must figure out what broke it. As several economists noted, anyone who says they’ve solved the problem is lying.

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