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11 Jun. 2013 | Comments (0)

Why are we creating so few jobs in the United States? As a matter of fact … we are not. Since the 2008/09 recession, when we lost 8.7 million jobs, we recovered as many as 5.7 million. It definitely has been a bumpy path, as attested to by the latest job report for March. However, we are now back at an aggregate number of 135 million jobs, which is only three million behind the pre-recession peak. In some industries, such as mining, as well as professional and business services, we have gained even more jobs than before the recession. Currently, we are trending about 180,000 jobs per month, which, from a historical perspective, isn’t bad at all.

Nevertheless, there has not been much of a feel-good factor about the job market as the unemployment rate has remained stubbornly high, partly because employment hasn’t returned to pre-recession levels, but also because the working age population has continued to rise (at least until now). While participation has declined, the delaying retirement of older workers may add to the difficulty of younger workers finding a job. Another key problem is that, due to subsequent spending cuts over the past 2-3 years, government jobs haven’t recovered.

However, there is another big problem with the labor market today, which has largely gone unnoticed: today’s jobs aren’t getting any more productive. Many argue not to worry about productivity now. The economy is still below the potential output level (perhaps even below the potential output growth), so more jobs are better (whatever job it is). Also, in the short term, productivity growth only kills jobs, so maybe this slow productivity growth lends some support to job creation. But is slow productivity growth really a good model for the future creation of jobs, and when do we need to start to worry about it? We would argue: sooner rather than later!

The need to accelerate productivity is simple: you cannot grow an economy for very long on a jobs-only basis. Even if labor compensation growth remains stagnant, without productivity growth, there wouldn’t be much left for new investment. Productivity growth provides the economy with the additional firepower to invest in new machinery and equipment, people skills, and other intangible assets, such as R&D and innovation. Without productivity growth, the average return on a job falls. Labor becomes cheaper, which reduces the incentives for employers and employees to invest in training and education. Low productivity also means low wages, which won’t help consumption. Less government austerity, or rather more government spending, would help counter the slow growth in GDP, and make some new investment possible – but not much help can be expected from there in the short term. In other words, with a zero productivity growth rate, diminishing returns kick in rapidly and growth eventually comes to a halt.

Indeed, the latest numbers reveal that the productivity performance of the U.S. economy is dismal. Before the recession, output per hour in the non-farm business was on average 2.6 percent during the peak-to-peak period from 2000-Q4to 2007-Q4. During the recession, labor productivity surged in a very unusual way to almost 6 percent year-over-year by the end of 2009. “Unusual” because productivity typically behaves in a pro-cyclical manner and slows during recessions, rather than accelerates. We all know what happened: companies panicked in late 2008 and laid off more people than necessary, with little damage done to their business processes, as they had the technologies from previous years available to do more with less. Once the recovery began in late 2009, many jobs came back and productivity began to drop, again in an untypical, anti-cyclical manner. Yet, the latter was nothing more than a correction to what happened during the recession.

The productivity story has become more puzzling as of 2011. By now, we have arrived in the “structural” phase of the recovery, characterized by slow GDP growth as demand remains low, a slowing global economy, and (although contestable, and certainly not telling the full story) some persistent structural issues in the labor market itself, such as skill and geographic mismatches, etc. Labor productivity growth in the non-farm business sector slowed to almost zero by 2011 and remained very low at 0.7 percent for 2012 as a whole. Manufacturing, the stronghold of productivity growth has been somewhat better at 2.2 percent in 2012, but nothing like the average in the 2000s, which was in the range of 3-4 percent. Even from an international, comparative perspective, U.S. productivity growth has been extraordinary low. In 2012, output per hour in the U.S. increased at only 0.2 percent, which was lower than in Europe (where it was 0.6 percent) or the OECD as a whole (about 1 percent). In fact, there are only two years in post-WW-II U.S. history that productivity growth was even slower – 1974 (-1 percent) and 1982 (-0.8 percent).

So what’s going on here? There are a few possible explanations for this slow productivity performance in recent years:

1. Slow growth in equipment – In a typical year, U.S. businesses increase the capital services obtained from equipment and software by around 3-4 percent. In contrast, capital services in 2009-2012 have roughly increased only half of that amount, and the pace of improvement is very slow. Without an acceleration in investment, it is difficult to raise labor productivity quickly, as most of it would solely come down to total factor productivity (TFP) growth, which is the growth in output after accounting for the growth of all inputs, including machinery and software.

2. Relaxing a little – As they fought for survival, many companies were stretched too thin in recent years, and now that profits are higher, they are adding new workers, which will reduce productivity growth.

3. Cheap labor and low productivity – Taking advantage of very low compensation levels, on the margin, many companies are incentivized to add more workers, rather than invest in new equipment and technology. As a result, output per worker will slow down.

4. A long tail of less productive small and medium sized enterprises – Many SMEs, who survived the worst of the recession, may have decided to hang in there until times get better by keeping their (often local) people on the payroll at even lower wages. These actions took the solid productivity growth of large businesses down.

5. The “new normal” for productivity growth is only around 1% – Productivity already slowed since 2004, but the hardship many companies experienced during the Great Recession forced them to exhaust all the potential for technological and organizational improvements. Now they are left with fewer opportunities to improve efficiency, and, moving forward, there isn’t enough technological progress out there to drive strong productivity growth.

It’s hard to single out any one of those explanations as most significant, as all or some may have contributed to the story. Yet, while the first four are more transitory issues, the last explanation may be the most worrisome, as slow technological change and innovation could be a longer term concern. Indeed, when looking at the TFP growth estimates, as published by the San Francisco Federal Reserve, and adjusted for cyclical factors, not only labor productivity, but also the TFP growth trend, has been clearly slowed down since the mid-2000s.

The debate about technological change and its impact on the skill distribution and the job market has become very contentious in the past year. Pessimists like Tyler Cowen and Bob Gordon would argue that there is little new technology present right now that will help accelerate the long term productivity trend. However, neither of them would argue that less technology would be of much help to job creation. Others, notably Brynjolfsson and McAfee, are arguing that the latest developments in IT will significantly reduce the job multiplier (the number of additional jobs created for one tech job), if not make it negative. Others argue – at least historically – that the number of “unanticipated” growth opportunities that arise from technology booms are so large, one really cannot tell what’s around the corner, and some optimism seems justifiable.

Technology and TFP are not just enemies of jobs. While it’s not difficult to imagine that robots can substitute for jobs, they can also be very helpful in making jobs much more productive, and freeing up the resources for new jobs that currently don’t get done right. The impact of new technology may stretch far beyond the manufacturing sector to other parts of the economy, including the health care and education sectors, where we likely need more, rather than less, help from technology.  Moreover, as labor force participation will be reducing even further as our population ages, we will need the additional help down the road.

Whatever the relationship between technology and jobs, as slow as it currently is, TFP growth doesn’t seem the biggest threat to job creation. For now, more productive jobs create the best opportunity to push GDP growth beyond the dismal 2 percent trend we are currently on. While much faster, economy-wide TFP growth may slow job creation, nobody can really predict by how much, as we don’t know what new opportunities are around the corner. What we can predict, however, taking history as a guide, is that by not having sufficient productivity growth, the current pace of job growth will be unsustainable, as GDP growth will get too slow to carry it. Without productivity growth, we can also expect wage growth to slow across the board with few exceptions, and reduce incentives for firms to invest in training their people. Productivity growth also creates room to strengthen the tax base, raise revenue, reduce debt, and create room for more government investment.

One of America’s traditional economic strengths has been its ability to grow productivity. There have been times, when productivity accelerated rapidly, that one could get worried about “jobless growth,” but that’s not the case this time around. America now needs its productivity engine reignited to keep the labor market on a healthy growth path.

 

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  • About the Author:Bart van Ark

    Bart van Ark

    Bart van Ark is the outgoing chief economist of The Conference Board, a global business research think tank headquartered in New York which includes 500 of the top-2000 global comp…

    Full Bio | More from Bart van Ark

  • About the Author:Gad Levanon, PhD

    Gad Levanon, PhD

    Gad Levanon is Vice President, Labor Markets for The Conference Board, where he oversees the labor market, US forecasting, and Help Wanted OnLine© programs. His research focuses on trends in…

    Full Bio | More from Gad Levanon, PhD

     

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