What’s Wrong With America’s Job Engine

Over the past 10 years:
–The U.S. economy’s output of goods and services has expanded 19%.
–Nonfinancial corporate profits have risen 85%.
–The labor force has grown by 10.1 million.
– But the number of private-sector jobs has fallen by nearly two million.
– And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.

What’s wrong with the American job engine? As United Technologies Corp. (UTX) Chief Financial Officer Greg Hayes put it recently: ‘Sales have come back, but people have not.’

That is largely because the economy is growing much too slowly to absorb the available work force, and industries that usually hire early in a recovery–construction and small businesses–were crippled by the credit bust.

Then there is the confidence factor. If employers were sure they could sell more, they would hire more. If they were less uncertain about everything from the durability of the recovery to the details of regulation, they would be more inclined to increase their hiring.

Something else is going on, too, a phenomenon that predates the recession and has persisted through it: changes in the way the job market works and how employers view labor.

Executives call it ‘structural cost reduction’ or ‘flexibility.’ Northwestern University economist Robert Gordon calls it the rise of ‘the disposable worker,’ shorthand for a push by businesses to cut labor costs wherever they can, to an almost unprecedented degree.

Princeton University economist Alan Krueger estimates that 70% of today’s job shortage is simply cyclical, the result of a disappointing recovery from a deep recession. But he attributes 30% to changes in the job market that began a decade or more ago.

Consider these clues:

In the most recent recession and the previous two–in 1990-91 and 2001–employers were quicker to lay off workers and cut their hours than in previous downturns. Many also were slower to rehire. As a result, the ‘jobless recovery’ has become the norm.

In the past, when business slumped, employers cut work forces and accepted less work per employee. During the deep recession of the early 1970s, the output of goods and services in the U.S. fell by 5% and employment by 2.5%. Economists puzzled over ‘labor hoarding,’ or the tendency of companies to hold on to unneeded workers.

(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)

No one talks about that any longer. Between the end of 2007 (when American employment peaked) and the end of 2009 (when it touched bottom), the U.S. economy’s output of goods and services fell by 4.5%, but the number of workers fell by a much sharper 8.3%. Today’s puzzle: How and why employers managed to boost productivity, or output per hour of work, like never before during the worst recession in decades?

In an earlier era, when more Americans worked on assembly lines, many layoffs were temporary. When business bounced back, workers were recalled, often because of union-contract guarantees.

At the worst of the 1980-82 recession, one in five of the unemployed were ‘temporary layoffs.’ In the recent recession, the proportion of temporary layoffs never exceeded one in 10. In part that is because fewer Americans work in factories, in which production can be stopped and restarted; if a restaurant doesn’t have enough customers, it goes out of business.

‘When layoffs are temporary, subsequent recalls can take place quickly,’ say economists Erica Groshen and Simon Potter of the Federal Reserve Bank of New York. When layoffs are permanent, job recovery is slower, they say. If the employer wants to hire, there is the time-consuming chore of sifting through applications.

Corporate employers, their eyes firmly fixed on stock prices and the bottom line, prize flexibility over stability more than ever. The recession showed them they could do more with fewer workers than many of them previously realized.

In a survey of 2,000 companies earlier this year, McKinsey Global Institute, the think tank arm of the big consulting firm, found 58% of employers expect to have more part-time, temporary or contract workers over the next five years and 21.5% more ‘outsourced or offshored’ workers.

‘Technology,’ McKinsey says, ‘makes it possible for companies to manage labor as a variable input. Using new resource-scheduling systems, they can staff workers only when needed–for a full day or a few hours.’

Temporary-help agencies are playing an ever-larger role–from providing clerical and factory workers to nurses and engineers.

Black & Veatch, a Kansas City, Mo., engineering firm that shrank from 9,600 employees before the recession to about 8,700 today, is hiring around 100 workers a month. About 10% of its workers are temps, says Jim Lewis, the firm’s human-resources chief. ‘That’s a quick way to bring people in, and gives you a little time to see if growth is going to hold or not,’ he says.

It also makes it easier to cut back in tough times. Workers, in short, now can be hired ‘just in time.’ And many employers apparently don’t think it is time yet. Because they can hire temps almost instantly, there is little need to hire in anticipation of a pickup in business.

When they do hire, big U.S. multinational companies are more able and more willing to hire overseas, both because wages are often cheaper there and because that is where the customers are.

In the 1990s, those multinationals added nearly two jobs in the U.S. for every new job overseas; in the 2000s, they cut their U.S. work forces by 2.9 million and increased them abroad by 2.4 million, according to the Commerce Department.

Hal Sirkin of Boston Consulting Group says rising wages in China are dulling its edge as a low-wage nirvana. In 2000, wages of Chinese production workers averaged 3% of what their American counterparts made. Today, they are at 9%. BCG expects the figure to reach 17% by 2015. Sirkin predicts that will prompt some manufacturers to move jobs back to the U.S.

How many? He is still working on an estimate. But one thing is clear, though, ‘These are $15-an-hour jobs,’ he says, ‘not $30-an-hour jobs.’

Even though the government counts 4.68 unemployed workers for every job opening, some employers insist they can’t find workers with the skills they need at wages they can afford.

Federal Reserve surveys of local economies find employers from Boston to Kansas City to San Francisco reporting difficulty in hiring workers ‘with specialized technical skills, particularly in the health-care and technology sectors.’

But workers without college degrees find well-paying jobs scarce. The Bureau of Labor Statistics says there are 25.3 million Americans over age 25 without high-school diplomas: Only 9.8 million, or less than 40% of them, were working in June. About 1.6 million said they were looking for work; the rest weren’t even looking.

David Wessel
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