Broken Jobs Machine

In the early 1990s, when I was setting up the office of my consulting firm, we had a friend from Paris staying with us. He wanted to come along, so I took him to our local Staples, where I picked up some pens and paper, as well the cheapest desktop computer on the shelf. He helped me carry it into a room I rented in an office building — and there I was, in business.

Of course it required registering my business as a sole proprietorship, getting a business account at a bank and a few other minor things. Still, he was awed by the ease and simplicity of the process. In France, he averred, it probably would take years and involve considerable outlays. An entrepreneur would be required to shell out money to the government even before he earned his first franc.

Lack of red tape and a can-do, pro-business regulatory climate in the United States have been the envy of businesspeople everywhere. For decades, this environment has been credited with robust jobs creation, in a sharp contrast with Western Europe, where the labor market was mired in stagnation. Economic reformers there have been trying to emulate the American system.

But this economic cycle has been different — in fact, unique since World War II. When the recession came, jobs were shed with catastrophic speed, pushing the unemployment rate toward 10 percent within months. Not only millions of jobs were lost but, more to the point, the labor market uncharacteristically failed to come back in a recovery. The usual excuse — that employment is a lagging indicator and companies begin hiring only after a lag — no longer seems to apply. Why?

I see several snags in the U.S. labor market. First, the structure of employment has changed. In 1988, 18.3 percent of jobs were in manufacturing. Two decades later, at the start of 2008, the number of manufacturing jobs declined by one third, while their share in total employment fell to just over 10 percent. Manufacturing jobs were replaced by much fluffier service sector jobs. One great example is the number of registered realtors, which has rocketed over the past decade and now adds up to over 1.3 million — or nearly 1 percent of all U.S. jobs.

Many services, especially in once fast-growing industries such as leisure and hospitality, financial services and professional services, rely on consumers and businesses having a solid amount of discretionary cash. Such jobs were quickly shed in a recession and are having trouble coming back.
Moreover, the kind of manufacturing jobs that remain on these shores also present a problem. Any recession decimates manufacturing jobs, notably in durables and investment goods production.

However, people continue to purchase certain categories of basic consumer goods and smaller staple products even during severe recessions. Ironically, more jobs in the durable goods sector — notably in the auto industry — have been retained in the U.S., while consumer goods production has moved offshore. When investment came to a halt in 2008-2009 and the auto market fell off the cliff lots of manufacturing workers were fired.  

Even now, more than a year into a recovery and some renewed hiring by Detroit, manufacturing jobs make up less than 9 percent of total U.S. employment — a 10 percentage point drop in just two decades! Defense-related industries now seem to be the only manufacturing that is done in this country.

Cautious Companies

We know that taxes are bad for business. They penalize successful companies and siphon funds away from productive investments that create jobs. But governments are not the only economic actors who can take money out of businesses. Owners, too, can become too greedy, taking too much out of the business and reducing employment over the long run.

Ronald Reagan famously wanted to get government off businesses’ backs and there have been considerable strides in that direction over the past three decades. Taxes on corporate profits hovered around 35-40 percent through 2000, but measured only 24 percent in the second quarter of this year. Corporate profits, meanwhile, increased fivefold since the late 1980s, whereas GDP rose by only half as much during the same period. After-tax profits rose a portentous 6.66 times between 1989 and mid-2010.