Where Are the Jobs? 6 Theories for the Employment Crisis

By Derek Thompson

What's wrong with the U.S. market for jobs? In the last two years, U.S. economy has recovered faster than almost any country in the developed world. But employment has suffered much more than any G7 country since 2008. Two graphs tell the story (via Free Exchange):



What's going on here? The simplest way to think through these theories is: (1) Why were companies so quick to fire? and (2) Why are companies so slow to hire? So here we go...

Why were companies so quick to fire?

1. Weak unions. In a world where firms are afraid to fire workers thanks to strong unions, companies tend to "hoard" labor. As a result, we see falling productivity in recessions and rising productivity in boom times. Today, it's all backward. With weak unions, companies are freer to lay-off en masse and add back temporary workers on a part-time basis as they feel out the recovery. With companies adding back only the work they need on a week-to-week basis, we're seeing productivity jump during a recession without an equal jump in employment.

2. Executive compensation structure. From my grand unified theory of jobless recoveries: The share of executive compensation taking the form of stock options increased by 55% in the 1990s. That made the big suits particularly sensitive to downturns in the stock market, which has collapsed twice in the last decade. If executive pay depends on high stock prices, and high stock prices depend on high quarterly profits, executives are encouraged to slash costs (e.g. workers) while the economy suffers. That's why industries with the steepest declines in profits in 2002 had the largest declines in employment and largest increases in productivity in the most recent recession, according to economist Robert Gordon.

Should we blame the recession or the state of the US corporation for the jobs drought? Both, probably

3. The nature of the recession. Remember how in late 2008 some economists were predicting the end of the world? That kind of thing tends to scare companies who rely on ... well, the world for their profits. Other countries with similarly catastrophic housing busts, like Ireland and Spain, are facing fiscal Armageddon and 20 percent unemployment (respectively). It's so surprise that the United States reacted dramatically to a recession that nearly took down our financial markets.

Why are companies so slow to hire?

1. Firms expect a slow recovery. In the middle of the century, recoveries tended to be V-shaped. The economy would crash, and then it would bounce. But in debt-driven recessions, taking down interest rates is less effective and fiscal stimulus is more likely to be saved then spent. As a result, the holes in the economy take longer to fill and we get a protracted downturn. Cast yourself as a business exec. Why rush to hire workers when you don't expect demand to reach its pre-recession level for many more months?

2. Blame the modern world. In the 1980s, technological advances in IT and were nascent and off-shoring was hardly a phenomenon. Thirty years later, more jobs can be replaced by automation or overseas workers. Today, large and medium-sized corporations know they can make with less by turning to robots and Bangalore in a way they couldn't 30 years ago. What's more, the rest of the world has gained on U.S. companies in the last generation, which means U.S. companies are more cautious about risky expansions.

3. The nature of the recession and the stimulus. The bubblicious boom was built on overspending, overbuilding and overinvesting. In the bust, the bitten are twice shy about spending, building homes and lending money. As a result, the recovery has particularly ignored the construction and real estate industries, creating a semi-structural unemployment crisis where millions of jobs have potentially disappeared forever.
 
It's also important to point out that Washington's stimulus strategy was basically two-fold: (1) Save the banks and (2) Repair the holes in state and family budgets. It was a strategy to grow the economy for the purpose of growing jobs, not to grow jobs for the purpose of growing the economy. Washington did not follow the New Deal strategy to hire 300,000 people to build bridges (although we did hire 300,000 people to count Americans). Nor did we follow Germany's strategy to pay companies to reduce hours rather than fire workers. The United States got what it wanted. We have growth. What we don't have is the foundation of healthy employment.

This article available online at:

http://www.theatlantic.com/business/archive/2011/01/where-are-the-jobs-6-theories-for-the-employment-crisis/69787/