I’ve been reading accounts of the relatively dismal reports on job creation in the US over the last few months (most recent report for February was a net gain of only 21,000 new jobs created). By most people’s accounts, the economic recovery has been relatively sluggish.
Now, something I’ve been thinking about regarding the above. The number of jobs that have been lost have not been replaced with new jobs. And I don’t think I have come across any recent arguments/comments that the jobs that have been lost are probably gone forever.
To simplify, one of the reasons for why new jobs have not been created to match the old jobs lost is tied to the productivity gains that have accrued within the US economy as a result of the massive capital investment in tertiary (services) sector elements (principally with regards to computers and telecommunications). In other words, the US economy is now firmly part of the “post-industrial era”.
Should economists (and interested laymen) be seriously considering the possiblity that the US economy is now a different sort of economy from that of the past? And if so, how should one attempt to understand/explain this new economy? What are the implications that this new economy have on how those within the government set policies with respect to said new economy?
Of course, I could be completely wrong in my assessment - if so, I would welcome any insights/comments into the current economic situation of the US economy (particularly with regards to permanent job losses and the current lack of growth in new jobs).
Structurally, it’s the old story with dynamic economies: they lose old occupations and gain new ones.
The problem with this cycle is that the outsourcing phenomenon introduces a source of instability with which Marxists would be intimately familiar: the globalization of competition for existing jobs.
From The Communist Manifesto:
A primitive way of putting it, but then computers and the Internet weren’t around in 1848. Either way, what we today call globalization is now eating up intellectual labor (IT of course, accounting as well) along with manufacturing, the old class of tradeable labor.
This accounts for the following:
1 - Bill Gates expressing concern that students in the US are turning away from computer science: I can’t cite to it anymore, but on March 1 the New York Times ran an article on Bill Gates bemoaning the decline in the number of students majoring in computer science or computer-related degrees.
The following is from the entry in a blog referencing this article (Brutal Article on Computing as a Career ):
The above is, unfortunately, a pretty accurate description of what’s happened to programming. I’m a programmer, and have been for a quarter-century. I don’t have a degree, and never thought it - and still don’t find it - necessary, because if you’re really good at it and enthusiastic, it doesn’t matter. Bill Gates himself is a college dropout - dropped out from Harvard.
But the profession’s long since been commoditized and taken over by careerists, and that makes it susceptible to the current outsourcing binge.
The US middle class is made up in great part of people who chose their careers not on the basis of doing what they loved, but on the basis of doing what would bring in the most money. This may still work for doctors and lawyers, but for anything else, if you really want to be a success, you’re going to have to find what you love and are good at and do that. And even then you may not succeed.
This is because
2 - we’re in a deflationary environment for labor, because the demand for labor has been globalized, a la the Marx quote, even for intellectual work. Because of high-speed connections, the number of service jobs that can be done from anywhere is getting higher with every year, and the number of managers who’ve figured this out is also getting higher. Literally hundreds of millions of formerly rural folks are going to need to be integrated into the urban workforces of China and India. That overwhelming wave of people is going to drive worldwide wages lower, and that, believe me, is something you can take to the bank. Worldwide inequality between laborers and capitalists is going to increase in a major way over the coming decades.
3 - Finally, the international trading system is a big, awful mess, and has been since the dissolution of Bretton Woods in the early 70s. Since that time, business cycles in the US have grown longer and gotten stronger in amplitude. The Reagan boom was the longest and strongest of the twentieth century, followed by the Clinton boom, which replaced the Reagan boom in this area: see NBER Research on Business Cycles, which shows that the last recession before the Reagan boom began ended in November 1982, with the next recession starting in July 1990, more than seven and a half years later. But what is popularly thought of as the Clinton boom started in March 1991, and didn’t end until March 2001, a full ten years later, an extraordinary length of time. The start of the next recession will probably be an even longer amount of time away from the end of the last recession (November 2001) given the truly breathtaking amount of time it has taken this recovery to even begin to produce jobs at anything like a “normal” rate.
IMO, this is the inevitable result of the lack of an adequate feedback loop in the international trading system, but I’m sure others have a different explanation. Either way, the trend is unmistakeable, and to my mind accounts for why it’s taking so long for jobs to come back in this recovery.
I think you should diversify your reading material.
An economy is an economy is an economy. The “New” Economy of 1998 was just a propaganda slogan for .com companies to stir up investors emotions, and wallets. The US economy is playing by the same rules it ever was, despite globalization. The Big Tizzy the unemployed are throwing now is over Service Industry jobs lost to outsourcing when they were previously though to be “safe”. But the fact remains that if if a good or service can be produced more cheaply elsewhere, then it should be, almost without question. This is a necessity if we want to maintain or increase the standard of living here, because it will allocate people and money where they can be used most effectively.
How is a net gain of 21,000 new jobs “dismal” news? Are you kidding me? Unemployment is historically low and the envy of most of the world, its like 10% in the EU. Full employment can be more harmful than helpful, too. If every american has a job, then there is no room for growth. If you wanted to build a new financial center, would you build it in the US, who (just for argument) is at full employment (4%), or in France with 9% unemployment? If you wanted to build it in america, who would you hire?
In summation, the jobs lost to outsourcing should be lost, it keeps businesses more lean and competitive, and even so, the vast majority of jobs lost have been cyclical, not structural, which means we are in the upward swing now. The answer to avoid job loss is re-education or entrepreneurship, not legislature.
I am much more worried about protectionist tendencies in politicians than any indian programmer, uncompetitive governmental policies are much more damaging in the long run.
The Feb 21st issue of the Economist dealt with these issues more intimately, I suggest it to you.
There are a number of factors here. First, it’s entirely possible that the extremely low unemployment rate we saw in the late 1990’s was unsustainable. Before the 90’s, we used to consider ‘full’ employment to be somewhere around 5.5-6%. That’s where the unemployment rate is now. In the late nineties, it fell below 5%, but that was a bubble economy.
Second, there have always been permanent job losses in the economy. At the turn of the 20th century, almost 90% of all employees were employed in the creation and distribution of food. Today, that number is less than 10% of that. In just the last 30 years we’ve seen the virtual elimination of jobs such as switchboard operators, typists, typesetters, etc. In fact, the computer/automation revolution cut huge swaths through numerous traditional industries, leaving millions unemployed.
Eventually, those people got new jobs. Some went back to school, some took early retirement, some moved laterally into other positions, etc. The same will happen here.
There are a couple of differences now. First, in the past most jobs that were lost due to innovation were low paying jobs, making it easy for the displaced people to find equivalent work. But the tech bubble created an artificial demand for skilled workers, and paid them very well. A lot of those jobs are gone forever, but the people who occupied them are far less willing to take menial positions after losing their $80,000/yr IT iobs. For these people to find equivalent work is going to require retraining, which means there is a bigger lag between job loss and new employment.
Another factor: risk. We are still in a situation where capital is not being invested because of the fear of a major terrorist attack. So businesses are slower than usual to rebuild their workforces. That’s why productivity numbers have gone up so much - businesses are asking more of their current employees rather than expand their payrolls.
Next, the data is a little hard to interpret. There are two traditional ways that the job market is evaluated - the employer survey (“How many jobs are you planning on adding in the next month?”, and the household survey (“Are you looking for work?”). The household survey results do not match the results from the employer survey. Some have attributed this to people dropping out of the workforce completely due to discouragement, and I’m sure there is some of that. But another factor is that the employer survey can not count job creation that happens due to workers deciding to become entrepreneurs and contractors. Computer professionals are more likely than most to decide to become self-employed, because the barriers to entry are much, much lower than they are in say, retail or manufacturing. Any programmer can simply hang out a shingle and become self-employed. The same is not true for truck drivers or restaraunt workers - they need significant amounts of capital.
The disparity between the two methods of calculating unemployment isn’t that large - maybe .2% or so. But when you’re already at unemployment levels that are only .5-1% above ‘full’ employment, that’s a pretty big difference.
Finally, the job market isn’t as bad as everyone thinks. The reason everyone thinks the job situation is so horrible is because A) the unemployment rate among internet users is probably higher than average, because of the disproportionate number of computer professionals iin it, and B) because the other economic numbers are looking pretty damned good, so the Democrats have been hammering on the job number as being the key indicator, and they are trying to claim that the jobless rate is a crisis. It isn’t.
You have to put it in perspective. In previous recessions, the jobless rate has climbed as high as 10% or more. Here in Canada, our unemployment rate is 7.4%, and I don’t see as much handwringing over it as the U.S. is over 5.6%. And if you want to see really bad employment numbers, head over to Europe, where the average unemployment rate is over 8%, and France and Germany are over 10%.
The question before us is what’s happening structurally, not what some political party is saying about it.
If you look at that NBER data I cited earlier, you’ll see that the longest cycles prior to the last two expansions both occurred in wartime. As peacetime expansions go, the last two were amazingly long, and in both cases, the early part of the expansion was characterized as “jobless” at the time, because of what felt at the time like extraordinary lags between the time the recovery officially began and the time job creation really kicked in.
This one is making those past two look like downright booms, jobs-wise, here in the first few years - not months or even quarters, but years - of the cycle. It’s off the charts as far as lag time. If past patterns from these past two expansions hold, that also means this expansion will be - once again - off the charts as far as length for a peacetime expansion.
Like they say, once is chance, twice is coincidence, three times is enemy action.
[QUOTE=eponymous how should one attempt to understand/explain this new economy? What are the implications that this new economy have on how those within the government set policies with respect to said new economy?
[/QUOTE]
Any job that “can” be oursourced, “will” be outsourced.
If an asian can do it cheaper, then the(your) job will be lost - forever.
In asia, the wages are lower, there is no social security, no epa, no osha, no unions, no state taxes, no fair labor or child labor laws, no workers comensation, no unemployment insurance, no medical insurance, etc. so any company will hire an asian before it will hire an american. If a company does not replace americans with asians, they will be forced out of business by their competition who WILL replace expensive american workers with cheap foreign labor.
The implications are, that with an increasing number of good jobs moving from america to asia, our tax base will be lowered - fewer americans paying less taxes, thus we will either have to cut federal and state spending, or have increasing budget deficits and a lower dollar.
Another implication, is that if we ever have to go to war as we did in WW2, then we will no longer be “the arsenal of demcracy” if all of our high tech and factories are moved to communist china. We will be dependent on the asians for our manufactured products, and it will change our military and foreign policy, as we will not want to have communist china get mad at us and cut off our manufactured goods.
because it is less than the number of new (legal) immigrants entering this country during the same time frame, putting us even farther behind. We have MORE people in this country who are out of work, not less, if we only created 21,000 jobs and more than 21,000 immigrants, legal and illegal, entered our country during the month.
We have to create more jobs than what our population is increasing, not less.
An outsourced job is still a job for someone. That is part of the reason why there is such a market for consulting firms like Accenture, EDS or a thousand smaller firms. Instead of paying some boob to sit around your company for thirty years running the server, performing the HR functions, or whatever, you can hire professionals to do it for you while you focus on your actual business.
IF an asian can do it cheaper and IF it’s cheaper to ship the product 10,000 miles instead of manufacturing it locally and IF they can find the same level of competency in your 3rd world counterpart and IF the backward nation has the technological infrastructure to manufacture your project and IF you want the hassle of dealing customs, language and culture barriers and everything else that goes with overseas operations.
It’s ignorant to assume that every job can be sent to China, India or wherever just because they offer cheap labor.
Do you know of any weapons system that the US imports from overseas?
I don’t know if your being sarcastic, but I’ll take your comment in the spirit of good advice.
I quite agree - I wasn’t trying to equate the “New Economy” talk that was prevelant at the height of the bubble economy. I’m thinking more along the lines of structural changes that haven’t existed before (or, if has taken place before, then it’s been a long time since we’ve experienced this type of economic recovery without the corresponding creation of jobs).
If I understand the arguments correctly, many economist believe that the US economy should have created far more jobs that the actual numbers reported.
While it’s true that unemployment is low relative to other countries, from what I’ve read the percentage of workers in the labor force who are employed relative to the entire labor force has been declining. This is after we have started to come out of the bubble economy of the early 2000’s. In other words, the US labor force has been adding workers (the number of people who enter the so-called productive years of their lives - 16 to 65), but their hasn’t been a corresponding addition in the number of those entering the workforce who are employed.
Why not build a new financial center in India or China or Malaysia, where there is (probably) in place the necessary infrastructure (physical structure, telecommunications network, etc.), but the cost of labor is cheaper? Given the current technology that would allow a new finacial center to be built and maintained in China, et al, the difference in marginal productivity (productivity of American worker versus Chinese worker given the same skill set/resources), it would be cost effective for me to build and maintain a financial center in China.
I don’t really want to get involved in the whole outsourcing issue - I don’t really know if it’s an integral part of the problem (indeed, if it really is a problem). However, from what I’ve been reading, the latest figures are that the vast majority of the jobs lost are structural in nature, not cyclical.
For almost a year, I have been on a tirade about the political importance of the jobs issue in this election, even before I saw an
eye-popping August report by the Federal Reserve Bank of New York on the
subject. The New York Fed study showed that during the twin economic
downturns of the mid-1970s, 49 percent of the job losses were cyclical
– or temporary job losses – such as letting a shift go at the plant.
Meanwhile, 51 percent of the job losses were structural, permanent job
losses. The study went on to show that during the next downturn – in
1981 and 1982 – the percentages were exactly the same, 49 percent were
cyclical, 51 percent were structural. The 1991-92 downturn was somewhat
different, with only 43 percent of the job losses cyclical, and 57
percent structural.
What about this downturn? A measly 21 percent of the job losses are
cyclical ones, while a whopping 79 percent are structural, permanent job
losses. Why is this bad? It’s bad because we know that it always takes
longer to create a brand new job than it takes to call a shift back at
the plant.
Originally posted by Sam Stone
I’ve been reading up on the two, but from what I understand it that the employer survey is the more realiable of the two (based on economists opinion of the survey). While the houselhold survey numbers were fairly decent for January, they weren’t that good for February.
If what you are saying is true, then economists and others should be able to detect whether there were more people who became self-employed or started their own businesses other than the household survey (Or maybe not, but I would think that economists could gleen from all the data that is collected and compiled).
Another factor - which I’m sure someone has commented on somewhere - is that its quite possible that a segment of the workforce is engaging in informal economic activity. In other words, rather than becoming self-employed or starting a new business and doing the necessary paperwork that would allow the government to monitor the activity in some way, they are opting to work on a cash basis.
This would help to explain the lag in the number of expected jobs created versus actual jobs created. It would also, in some sense, help explain the decline in the percetage of workers in the labor force who are employed versus the total labor force. In other words, there has been an increase in the number of new workers in the labor force engaged in informal economic activity (activity “off the books”). In addition, there has also been an increase in the number of workers involved in the informal economy for a much more extended period of time relative to previous recessions and recovery periods. Which to me suggests that there is something structurally occurring within the US economy that we haven’t seen before (or at leat we haven’t experienced for a long time).
While it’s true that unemployment figures are good, I wouldn’t go so far to say that the other economic numbers are great. Wages have remained relatively stagnant. Debt levels are high and personal savings are low. If what you’re telling me regarding the reluctance of businesses in hiring new workers or people investing in new ventures due to the fear of terrorist attacks is true, then it appears (so far) that the tax cuts the US implemented to stimulate the economy have been ineffetive.
Agreed that the situation in the US vis-a-vis unemployment figures aren’t as bad. But it’s not so much the rate of unemployment - it’s the rate in which the US economy is generating new jobs given a level of expected economic growth. In other words, if the US economy is expected to grow at rate X (and generate the creation of Y net new jobs), but the numbers suggest that we are only creating Z net jobs - numbers that are lower than Y net jobs), then what’s happening? Are our projections for growth wrong? Are workers more productive? Are we using the wrong data? Are our methods in making economic forcasts now entirely probelmatic (when in the past they were reasonably acceptable)? What? That’s the essence of what I trying to get at.
I’m leaning towards some sort of structural change that the US hasn’t experienced before (or hasn’t experienced in a long time), but I would agree that right now it’s too early to say one way or the other.
For what it’s worth, many companies are scaling back their plans to outsource IT to India. The first results of this experiment are in, and they aren’t as good as many thought they’d be, for the reasons msmith537 pointed out.
My company has slowed down expansion to India. Our first forays into setting up a software team there have been less than spectacularly successful. The time difference makes it hard to coordinate with North American teams. The language barrier is difficult. Getting expectations across is difficult. So far, the quality of the programmers hasn’t been nearly as high - a few of our products that relied on offshore development wound up seriously delayed and buggy. Plus you have the added expenses of telecommuting between teams, flying managers out there, etc.
But the bottom line is efficiency. Splitting up software teams across the world is not an easy thing to do. You need to have significant advantages to do so.
Was just reading an interesting article in The Nation about this very subject, specifically from the point of view of outsourcing and its effects.
I think we can all agree that the effects of free trade in the long run, between economies with roughly comparable labor markets, are bound to be positive overall. It’s the good old principle of comparative advantage: if I can make widgets cheaper than you can, and you can make gizmos cheaper than I can, then we eliminate our trade barriers so that I sell you widgets and you sell me gizmos. This way everybody gets cheap gidgets—wizmos—oh heck, what I mean is, everybody saves money and everybody’s happy.
However, the elephant in the living room of trade liberalization is the fact that in the short term, especially between economies with large wage gaps and less than full employment, the benefits and disadvantages of freer trade are very, very lopsided. As the cited article notes,
Yes, in the long run (hopefully), when e.g. Indian standards of living and wage levels are comparable to those in the US, free trade really will let our economies exploit our mutual comparative advantages to the benefit of everybody. In the meantime, though, the gains to Indian workers and to the owners and shareholders of US firms (plus the much smaller per-individual gains to US consumers) may not make up for the losses to US workers who simply cannot find a job as good as the one they lost, if they can find any at all.
(And the severe imbalance is not going to change any time soon. In fact, the strong Indian economy has already shoved the rupee up from 47 per US$ to 43 over the past few months; it would be going higher still, but the Indian government is deliberately pegging it to the level of the dollar instead of letting it appreciate. They want to keep rupee costs as cheap as possible in terms of dollar costs, for fear of losing new outsourcing jobs to even more “comparatively advantageous” economies like the Philippines.)
But is this really the crux of America’s jobs problem? Actually, probably not: outsourcing accounts for a pretty small proportion of our jobs deficit.
This suggests epo’s on to something with the “structural change” hypothesis. Not just outsourcing, but increasing mechanization, plus continued pressure from investors for high profits, may mean that the decaying job market (not just in quantity but in quality of jobs) is something more than the effect of an ordinary business-cycle downturn.
Offtopic I know, but you mention the fact that you are a nongraduate computer programmer. Could you elaborate a litle on how you developed your skills and what sort of languages you use and on. How do you view your future prospect?
Sam, I know you’ve got a real bugaboo about another terrorist attack but I just don’t think you can justify this statement. It’s much more likely that investment in human capital is lagging because with productivity gains there’s little need for it.
Combine that with the natural reluctance to be caught leaning the wrong way in event of the recovery slipping and I don’t see any root cause for the lack of hiring and other capital investments other than the natural lag in the business cycle.
Wikstead: I got pulled in by working for a travel company, crazy as that sounds, back in the late seventies, a company I was working for to get myself through college. Been programming ever since. Back then, programmers were coming in from every kind of profession; the first one I ever met was a musician, and he certainly wasn’t the last one I met who was one.
I’ve done just about everything at one time or another, and I’m currently working in a strictly Microsoft environment now: VB/SQL Server on Wintel systems.
My prospects are stagnant, and I know it. I’m just biding my time until I can get my son through college, meantime making contingency plans for just in case I do get laid off.
However, for the time being, I’m secure. People are leaving my department voluntarily or taking leaves of absence, forcing more work my way, for the time being. Also, my skills, despite the generic-sounding nature of the above, are not easily replicable because of the software packages that I know and can work with.
So for the time being I’m OK. We’ll see how long that lasts. I’m expecting that despite the problems Sam Stone cites, sheer force of numbers is going to kill this profession here, as more Third World countries come online and underprice even the Indians. I mean, like I said, we’re talking potentially hundreds of millions of people here. That’s a tide that can’t be held back.
Ought to be fun.
Back on topic: shouldn’t forget the galloping cost of health care here. My contribution to my health insurance through work went up 17% over last year, and ate up all of my raise and then some. This is the third year in a row that’s happened. It’s a huge disincentive to a company looking to hire someone permanently, if that company offers health insurance.
For my own personal financial situation, I’d be in much worse shape by now if I hadn’t refinanced my home a little while ago, substantially lowering my payments. I think I’m fairly typical in this way.
What difference would that make? Will people stop being economically rational because the service sector is bigger than the manufacturing sector? Will monetary policy suddenly have different effects because of it? Will housing starts cease to be an important indicator of economic activity? Please expand your reasoning on why it might be a question worth asking.
One thing that I’ve never really seen addressed when this topic is discussed…
We just spent a couple of decades revamping the entire infrastructure of business in this country. All the underemployed computer geeks of today just spent years getting offices online, putting systems in place, hooking up networks, creating databases, and writing code to make the businesses work more efficiently. Businesses made major investments in switching over to these new infrastructures, and for good reason. It lets them function more efficiently.
Compounding this is the fact that computer technology has, since its inception, been working towards being more stable, more intuitive, and more maintenance-free every year. The problems involved in hooking up several computers on a LAN and getting them internet access are trivial now compared to what they were eight years ago.
Millions of people just spent billions of dollars to change the nature of business to be less dependent on human employees. How can we possibly be surprised that one of the net results is decreasing demand for employees?
I’m not saying it doesn’t suck. It’s hard work finding a job out there these days, and harder still to keep it with the wolves circling, waiting for your job. It’s tough to be an employee when you know that laying you off makes sense for your company, and it’s just a matter of time before they get around to you.
If the trends of the last century hold true, businesses are going to need fewer and fewer employees as time goes by. Meanwhile, there will be more and more people. So far, getting the structure in place for these changes to happen has taken up the slack. It has to end somewhere, though, and I think what we’ve started to see in the US is the modernization of commerce coming home to roost.
I think the OP is bringing up a valid point. What happens when there just aren’t enough jobs to go around? When businesses don’t hire people, not because they can’t afford them, but because they don’t need them?
C’mon. In a society with no social safety net – or with one that’s in tatters, like ours – people starve. People die. That’s what has happened historically. We aren’t there yet and I hope we never get there but that’s what happens.
This is important and key. Compounding it is that during the bubble, an unknown number of people were employed in jobs with literally zero productivity. All computer people setting up computer system for dot-gones, blue collar workers making and burying fiber optic cable which will never, ever be lit, engineers and workers making designing and routers which went straight from the warehouse to a landfill, energy traders, they never should have got their jobs in the first place, which had the effect of artificially increasing employment during the terms of the projects.
A piece of that will come back. For example, there will come a time when the overproduction of commercial aircraft will be exhausted and Boeing and its suppliers will rehire. Eventually, someone will need a new router and that business will return, albeit at lower levels. But other pieces are not coming back. There will probably not be another undersea cable from the U.S. to London during our lifetime, for example, and the size of the undersea cable-laying business is permanently a tenth or so of what it was at the peak. Unfortunately, I’m not aware of anyone who’s done a good job quantifying how much of this “structural” job loss might return and how much should never have been counted in the structure in the first place.
