Where Will New U.S. Jobs Come From?

For the first time, American jobs don't automatically follow economic growth.

by Rachel Beck

Get the U.S. economy humming again and the labor market should rebound. Or not. According to Nobel Laureate Michael Spence, there is no short-term fix to the broken job market.

Blaming the slow economic recovery for restrained hiring misses the real problem that is keeping the U.S. unemployment rate stuck at about 9%, Spence says. Structural changes over the last two decades have altered the design of the labor market, making much of its growth hinged on domestic demand, which is virtually nonexistent today.

"For most of the postwar period, U.S. policymakers assumed that growth and employment went hand in hand, and the U.S. economy's performance largely confirmed that assumption," Spence wrote in a July essay for the journal Foreign Affairs. "But the structural evolution of the global economy today and its effects on the U.S. economy mean that for the first time, growth and employment in the United States are starting to diverge."

Spence sees a mismatch between areas of potential economic activity and workforce capacity. "It's a chicken-and-egg situation," says the dean emeritus of the Stanford Graduate School of Business and author of the 2011 book The Next Convergence: The Future of Economic Growth in a Multispeed World. Family, community, and national
commitments to better education for all Americans won't happen without "creating attractive employment opportunities conditional on educational success," he wrote. That may require some income redistribution strategies, as well as commitments to infrastructure expenditures and tax reform.

Spence's research on job growth over the 18 years from 1990 through 2008 paints an unsettling picture. The U.S. economy added a respectable 27 million jobs, but 98% were in the "nontradable" side of the economy. Nontradable refers to sectors generating goods and services that are consumed where they are produced, such as government, health care, construction, retail, and hospitality.

Over the same 18 years, growth in the tradable sector, which includes exportable goods and services, was essentially flat — a negligible 600,000 new jobs. Part of the slow growth was a result of labor-saving technology advancements, which permanently eliminated jobs. Beyond that, manufacturing jobs held by the middle class moved overseas, offsetting growth in high value-added, tradable service jobs in finance, consulting, and computer design.

"By relocating some parts of international supply chains, globalization has been affecting the price of goods, job patterns, and wages almost everywhere," Spence wrote. "If anything, it is remarkable that the U.S. economy did not have much of an employment problem until the recent economic crisis."

The financial crisis that began in 2008 curbed U.S. domestic demand almost immediately, and it hasn't come back, making it difficult to continue job growth in the nontradable sector. Asset prices fell and haven't rebounded. Americans sidelined their debt-fueled spending and have been saving more. The government is strapped with its own budget woes due to lower tax revenues and rising expenditures.

The key to preventing a long period of high U.S. unemployment is to get the tradable sector in a position to make up for the slack in the nontradable sector. It's not going to be easy, Spence says. As emerging economies grow at an unprecedented rate, they also are creating new populations of highly skilled and educated workers.

"The major emerging economies are becoming more competitive in areas in which the U.S. economy has historically been dominant, such as design and manufacture of semiconductors, pharmaceuticals, and information technology services," he wrote in Foreign Affairs.

To reinvigorate the tradable sector, Spence prescribes a government push to raise investments in infrastructure and to educate as many Americans as possible to compete for jobs "at the top end of the value-added chain." He points to research from the Organization of Economic Cooperation and Development, which administers standardized tests to teenage students across 60 countries, advanced and developing. The United States ranks close to average in reading and science and well behind most countries in math.

If investment in infrastructure improves productivity, that will give the United States a competitive advantage, which it lacks now. For instance, Spence points to the inefficiencies at the nation's airports due to the lack of jetways, overcrowded customs areas, and jammed baggage claims. Consider what happens if you add an additional hour to a trip for, say, 300 passengers on each of 10 flights a
day, 365 days a year, and that happens at 10 major airports. "That is a lot of wasted hours," Spence says. "If it gets bad enough, business and other visitors will try to avoid coming here." Or, as he points out, if ports are inefficient, adding hours or days to the movement of a lot of ships and containers, "you end up with a big and unnecessary increase in inventory in transit. That costs money, meaning it adds to somebody's working capital."

"We stopped investing in the most elementary things that make the U.S. an attractive place to do business," he says.

Beyond that, Spence would change government science and technology policy to make expansion of U.S. employment opportunities a specific goal of government investments, which it is not currently. He would also like tax reform to get rid of complexity and waste and to move in the direction of taxing consumption more and investment and labor less. The United States could also give a tax holiday to
corporations on their foreign earnings, which are currently taxed where they are earned as well as in the United States. As a result, many corporations do not repatriate their foreign earnings.

A potential route to restoring employment growth in the tradable sector — especially manufacturing jobs — could come by making wages more competitive. That would involve the public and private sectors working toward some agreement to lower real wages. Spence's blueprint for this is Germany, which restructured its economy from 2000 to 2005 to bolster competitiveness. Part of that effort included limiting wage and salary growth, which then allowed it to compete more effectively in exports and kept a flatter income distribution than in the United States.

"Our challenge is to expand the scope of the tradable sector," he says. "We don't want to claim that we are completely uncompetitive, but we are when it comes to work for middle-income people."