Where the Jobs went and are going

Where the Jobs Went and where are they going
By Paul Herbig

What is going on here? Since the beginning of the recession, the United States has lost nearly 3 million manufacturing jobs. That alone is not unusual. However, the recession officially ended, according to Economists, nearly 2 years ago (2002), yet the typical pattern of jobs increase mirroring the economy has yet to be seen. (Job growth has averaged just over 100,000 per month since August 2003, half the pace of a normally growing economy). This “jobless recovery” has many (particularly those unemployed, under employed, or those who see the handwriting on the wall) nervous and asking why? At this point in a typical recovery, all the lost jobs should have been recovered and then some. But ‘tis not the case. Instead, lay-offs continue to be reported, unemployment rate is still uncommonly high, off-shoring has rejuvenated an usually passive electorate, and despite interest rates not seen for fifty years, jobs continue to be flat. Why?

Some clues can provide the answer:
1. Growth in productivity almost matches the rate of lost manufacturing jobs
2. Over the last few years, American workers have climbed well past the Japanese to claim the world title of average hours worked.
3. Global overcapacity in a host of industries
4. Soaring cost of employee benefits especially health care
5. Although the unemployment rate has fallen from 6.5% in June 2003 to 5.7% in March 2004, the labor force participation rate has dropped even lower to a level lower than that seen during the 90-91 recession (if it were included in the unemployment rate, the unemployment rate would have been 7.4%).

What does it all mean? The start of this jobless recovery and the ominous future it portrays for America can be traced, obviously, back to the Dotcom collapse in March 2000, the initial eventual recession, the 9/11 events and the deepening recession caused. But here the scenario differs from traditional recessions. Globalization over the last two decades has significantly increased as well as technology (internet, telecommunications, computing power) to bring the world closer together. Part of the effect of globalization has been increase in manufacturing capacity throughout the world. Growth exceeded even robust demand causing deflationary pressures throughout the system. This was great as long as the world economy was expanding—as was the case throughout most of the nineties. But when the recession of 2000-1 hit compounded by the 9/11 events, demand suddenly plummeted yet the capacity remained.

Producers found themselves in an obvious dilemma: they had to continue to grow, to show increased profits, to impress Wall Street and the stock market. However, the global overcapacity meant they could not grow by simply selling more units as usually the case. Furthermore, pricing increases were out of the question due to the overcapacity issue. Yet profits had to be made and continually increased. If you could not grow the business the typical way, by increasing sales or prices, the only other way was to cut costs. Profits, after all, are the difference between revenues and costs, and if one could not be raised, the other would have to be cut. Wall Street could care less as long as income rose. So costs it was.

Major cost cutting programs were implemented. The technology of the nineties was finally beginning to pay off and as costs cutting became foremost in executive minds, the productivity effects became obvious. In addition, management ranks were pillaged and any expendable workers were gone. Productivity means output per worker. In the past, productivity increases meant more output for the same amount of workers.. Productivity increases have been averaging between 3 and 4% per year (with last quarter of 2003 reaching an astounding 8+%), almost 2 percentage points higher on average than occurred during the 90-91 recession. But under this new world global order, demand was flat thus inhibiting any rise in output; instead it was the same amount of goods with fewer workers. Therefore, as has been seen, productivity increases meant a similar amount of job decreases (One percentage point of productivity growth can eliminate up to 1.3 million jobs per year). .

Now productivity is not all bad. Normally, the company shares the productivity increases with the employees, in the form of higher wages. Not in this cycle (Corporate earnings which are only 12% of national income have contributed 44% of the growth over the past year while workers’ wages, salaries and benefits, some 63% of income have accounted for only 36% of the gains). Companies soon learned that the supply shortage that evolved in 2000-2 had caused employees to be overly fearful over their jobs and future. That not only would they be glad to have their jobs at the same salary, but oftentimes would negotiate away part of their income to maintain their jobs. Which is why economists have found real weekly incomes fell in 2003 for most workers and overall labor incomes have been virtually stagnant for the last three years. At this point in a typical recovery, real labor compensation would be up by nearly 3 percent, instead it is down by a like amount.

Employers also found they could easily get workers to take on additional responsibilities. As they laid-off “non-essential” workers and burdened the remaining lucky employees with the workload, a funny thing happened. Work continued to get done at nearly the same pace. Workers did not quit. They just worked longer hours to get the job done. If you could browbeat John Doe into working his normal job and doing the work of his laid- off companion, why not get him to do the job of another as well. And so it went. America’s workers, uncomplainingly, worked longer and harder, without any increases, and sometimes with decreases, just to keep their jobs (the sorry fate of an employee forced to train his replacement, sometimes from India, before being summarily terminated clearly displays these fears). Best estimates are this overworking accounts for at least one percentage point of productivity increases and perhaps higher

Even in blue collar manufacturing you can see similar events. Instead of hiring additional workers, just add on the overtime. A new variable in the equation made this move logical and reasonable. Health care premiums and employee benefits kept climbing, often at double digit rates. From an employer’s perspective, it makes economic sense to pay overtime, even at double time, rather than hire another worker. Although a company may pay an employee $A in wages earned, by the time social security, unemployment compensation, health care benefits, pension, etc, are factored into the equation, often total compensation costs amount to $2A, costing the company double the wages the employee actually receives.

This phenomenon is directly accountable for another new factor on the employment scene: the rise in part-time and temporary employees. With the additional burdens of non-wage benefits, many employers are going to extremes not to hire additional full-time workers and, instead, are hiring part-timers or temps. Often, entire departments are terminated, only to be rehired back as consultants at the same pay but without any benefits. Or entire departments (IT, maintenance, food services are typical) are outsourced to other companies who are paid a flat fee for the services rendered. Therefore, the work is still accomplished but the burdens of additional employees are not present on the income statement..

What about off-shoring? Isn’t this where the jobs have gone? The answer is no, not right now. Even the most liberal estimates indicate fewer than a million jobs, probably closer to half a million, were off-shored during the last several years (2000-2003). Even if it were 500,000, this would have only explained less than one-fifth of the job losses seen. Clearly the cause of the job losses have been productivity—both technological and due to overworking. Off-shoring will be a concern for the future but it was not the primary cause of the past job losses (While just 5% of domestic IT jobs have been off-shored as of now, as much as 25% could be situated overseas by 2010.).

Are the jobs coming back? Will this jobless recovery end? Clearly as long as the global overcapacity remains, additional unit sales and price increases will be minimal. However, the good news is that with the growing economic power and needs of China, commodity markets are exploding (as the rising prices of steel, oil, and other basic needs of industry clearly show). Overcapacity in finished goods appears to be loosening somewhat as a result of the China factor. But China could well overheat its economy. I would predict a loosening in both rising units and prices before the end of this year.

Will productivity increases continue? The bad news is that technology will continue to play a vibrant role in keeping productivity around 2-3 percent (this implies a doubling of output or an equivalent halving of work force for the same output every 30 years—are we literally putting ourselves out of work?). The good news is that the human side of the productivity increases, those forced to work two and three jobs, will not continue. As soon as the economy begins to improve and other opportunities present themselves, those overburdened workers will be jumping ship. The employers will soon find out they cannot locate new slaves to replace the ones that have left and hence will have to find two workers for two jobs instead of one doing it all. That may happen by the end of 2004 but it certainly will break lose in 2005.

The benefits of productivity according to economic theory are higher profits, lower inflation, rising stocks, lower cost goods, and higher housing prices. Not to workers. Their real incomes have fallen. A review of jobs added or loss over the past year tells another alarming story: Temps and health care up nearly 200%, restaurant and bars up 163%, building and gardening supply stores up 50% and construction jobs up 123%. All of which have one great commonality: propensity for relatively low paying jobs (Leisure and hospitality industries, which have gained 285,000 jobs in the last two years, pay on average less than $9 an hour, almost half that of average manufacturing jobs lost). Mean while, manufacturing, telecommunications, and information technology are all severely down: these are well paying jobs. What we are seeing is a shift from middle-class paying jobs to working poor jobs. Then who are the winners? Corporations profits are up 25% with stock prices rising more so as noted by S&P 500’s 39.2% gain. Investors are doing great. Managers and Executives are up sharply. Homeowners got a double boost by low interest rates and rising housing prices. Since most middle class and working poor have little stock and low housing, it is obvious those who have gained the most from productivity are not the workers or low level managers but the corporate executives and investors.

The main problem in the coming years will be off-shoring. To date, although hundreds of thousands of jobs is nothing to ignore, it has been but a minor player in the overall jobless recovery. As productivity increases begin to slow down due to inevitable marginal returns and human limits, Its role will considerably increase in years to come, with major social and economic implications. The difference between off- shoring now and past is the types of occupations affected. White-collar jobs, professionals, highly educated positions are increasingly being off-shored A recent Wall Street Journal article describes the occupations that are currently being off-shored: medical transcriptionists, architects and drafters, analysts—legal and investment research, accountants and tax professionals, technical writers, insurance claims processors, desktop publishing, animators, claims processing for insurance and medical industries, customer-service, telemarketing, ticketing and reservations. All these positions are relatively well paying and contribute significantly to middle-class aspirations.

India is now eyeing a massive sector of Western economies, which basically includes anyone who works on-screen. That starts with the back office, dealing with data entry, account reconciliation and transaction reporting. It is now continuing through travel and expenses departments, order processing and even human resources, then into professional services and some of the top-earning jobs. If a process is digitized or routinized, it can be outsourced, probably done in India, and more cheaply. Pay rates can be one-tenth of those in the U.S. or Britain, and once other costs are factored in, overall savings tend to come out between 40-60%. For India, that next wave will be a much bigger bonanza than call centres. An American consultancy reckons that the value of off-shored business processing will rise from last year’s $1.3 billion to $24billion in 2007, meaning growth at 79% per year.

Estimates are that as many as 11% of the entire U.S. workforce is at risk to be off-shored (over 15 million jobs). One study indicates global outsourcing of computer software and services will grow at a compounded annual rate of almost 26% from about $10 billion in 2003 (7% of all IT spending). Forrester Research, a leading Massachusetts-based analyst firm, recently predicted that $136 billion in wages, or 3.3 million jobs, will move offshore in the next 15 years. Deloitte Research announced predictions that by 2008, 275,000 jobs in the telecom industry will be off-shored. That number accounts for five percent of the industry's 5.5 million member labor force. That is not the worse of it: Silicon Valley investors are pressuring entrepreneurs to shrink personnel costs by as much as 60 percent by sending jobs overseas. Within the past year, startups have taken the outsourcing trend to extreme lengths, migrating entire development teams to India, China, and Russia and leaving only skeletal crews in Silicon Valley and tech hubs such as Boston and Seattle.

What to do? The United States needs to add over 100,000 jobs per month merely to stay even with its population growth. Jobs being added appear to be primarily government and low paying retail and service (including health care). Meanwhile, the higher wage positions are being terminated, outsourced, or off-shored. The middle class has suffered the brunt of this jobless recovery by spiraling downward mobility while the upper class has gotten richer and more powerful. Over 40% of the unemployed have been out of work 15 weeks or longer compared with only 23% in 2000. The number of people unemployed for 27 or more weeks rose to two million from 1.9 million the last week of March. Unemployment for information technology workers 7.8% compared to 2.7% for managers.

Economists indicate productivity and off-shoring are good for the country (in the long run that is). Supposedly, the dynamic duo lowers costs and produces higher corporate profits that companies then can use to expand, to become more competitive, to spend more on R&D and create more and better products. Consumers gain from lower product costs. Jobs lost now will be more than made up during the next big thing, whether it be nanotechnology, biotech, or another yet to be determined technology. Yet, the problem is these new fields will create very few jobs for years—the IT industry that grew the economy so fiercely during the 1990s was an infant in the fifties and sixties and took at least 30 years to mature to the point to take up the slack left from the auto and steel debacles. Perhaps the new technologies will provide the badly needed jobs—but not until 2020 at the earliest and more than likely 2025. What are today’s workers suppose to do in the meantime: wait 15 years?. It is a short term (as if 15 years is short term for anyone except economists) dilemma that needs careful management today. Tata Consulting Services TCS chief for Britain and Ireland, AS Lakshminarayanan, told the London Sunday Herald the only functions that need to be kept near headquarters will be governance, managing customer expectations, quality assurance and strategy

The worst scenario and the most likely one is a continuation of the jobless recovery, job growth will remain sluggish, demand will eventually sag, incomes will be driven down by relentless off-shoring pressure by India and China heading for lowest common denominators (labor arbitrage as it is called, dragging down worldwide wage rates with it). The middle class gets off-shored and trades in their higher paying jobs for ones that pay half as much. In this scenario, the winners are the investors and executives while the middle class keeps drifting downwards in mobility. Constant job losses in the professional ranks and constant worries about further job losses will keep the labor pool in a constant state of stress allowing the overworked employees to continue being further overworked while the large labor pool will create downward pressures on the wages of those who remain employed. The eventual outcome is a dual class system of the upper class and the lower class—working and non-working.

Economists say today’s workers need to add skills and be retrained to more value added occupations. The official solution is to “move up the value chain,” training to do higher end functions while Indians do the grunt work. What few seem to have noticed is that Indians are already heading up the same chain. Basic programmers need to move up to software engineers and complex systems analysts. The former jobs are likely moving overseas while the latter ones will probably stay in the U.S. Yet the higher value added jobs require higher education, higher basic mental abilities, and skills levels, characteristics not all have. For every 10 programmers, perhaps one software engineer and one systems analyst are required: the simple fact is even if all programmers became software engineers and systems analysts, not enough higher value-added jobs would be available. So the question remains: where are the ones who cannot migrate upwards to go? And secondly, most middle class Americans are riding on the edge: living nearly paycheck to paycheck (as record bankruptcies, foreclosures, and credit card defaults can readily testify). If calamity comes, they are poorly suited to ride out the storm. To upscale requires education. Education requires time and money, neither of which luxuries the newly laid-off workers often have. For most workers, no matter if blue collar or white collar, new employment is mandated at whatever wage level is obtainable. And the last inevitable question a newly laid off professional asks is “For What do I retrain? What position will not be off-shored or downsized? “ For which, no one has a real answer.

What to do?

1) It is clearly obvious that existing safety net provisions are inadequate. Jobless benefits should be expanded to include all workers laid-off or off-shored, for a period of up to 2-3 years, and be of a living wage. Some of the corporate billions could easily go to helping their former employees. To those who say this is overdoing it, a little reminder of what happened to the last person who uttered ”let them eat cake” should suffice. I would encourage reconsideration of Milton Friedman’s negative income tax notion to provide a basic level of income for all.
2) Vocational training and additional education is mandatory to increase the skill levels of those off-shored or laid off. These should be free or highly subsidized. Emphasis should be given to those industries and professions where skilled workers are required or future industries. No, retraining to be a nurse’s aide at $7 per hour is not considered acceptable. All jobs should be those with annual incomes exceeding $35,000 or a middle class income.
3) With 15 million unemployed, underemployed (those part-time or temps who prefer to work full time), or those who have given up looking, it makes little sense to wink at the millions of illegals in this country and to accept the cross border traffic that occurs. The same goes for skilled foreign workers (H-1b Visa program). Until every citizen has a job that wants one, no foreign workers should be permitted. American companies who constantly seek foreign workers because they can’t find skilled American workers have not looked hard enough. The true tale is more than likely the companies can’t find American workers willing to work for what they are willing to pay. It is probably time to pay living wages and not use illegals or foreign workers as an instrument to lower wages for all.
4) The corporations have prospered during these past few years. Almost all the gains from the productivity and outsourcing have gone to corporate profits and not to the workers. It is time to share those gains with workers. An increase in the minimum wage to “liveable” wage levels would be a good starting point, indexed to inflation. In addition, overworked workers are slowly being worked to death with any gains going straight to the company and not to the worker being exploited or to the workers let go. Perhaps it is time to a restructuring of the wage structure. The last restructuring occurred during the thirties with the advent of the 5 day 40 hour week (when previously a 6 day 50 plus hour week was the norm). Cutting the work week to a 4 day 30 hour work week with double time (not time and a half) for overtime and extending the work week protection not just to hourly workers but to all salaried workers as well, could be just what the doctor ordered. No longer would it be permitted to have one man do the work of two.
5) Off-shoring is the element that could lead to the U.S. becoming a third world country within twenty years. It needs to be headed off at the pass. If all government expenditures at all levels (federal, state, county and municipal) were required to contract for services and goods only to companies that perform the work in the U.S. using American workers and American made components, the net effect of over $4 trillion would create many a new job and rejuvenate American companies to invest here instead of abroad. Tax breaks for off-shoring should be abolished and more strenuous conditions on off-shoring programs should be put in place (longer lead time, more monies per employee for retraining, etc). Kerry’s tax reform plan includes the removal of tax breaks for companies that create jobs overseas. These prized tax incentives allow U.S. companies to not only enjoy the substantially lower taxes levied on foreign income but also defer paying them until that income is brought back home. The U.S. tax laws for foreign income have become so complex over the years that loopholes can be readily found to escape taxes altogether. Kerry aims to scrap the system entirely and use the savings to spur domestic job creation. A good start.
6) One of the major factors behind the jobless recovery is the cost of hiring an additional worker has become prohibitive to many companies. This is not due to wages but to benefits, in particular health care premiums. A revised health care national policy is required to make health care available to all citizens. When over 40 million Americans are without health insurance and to many workers, what they fear more than losing their job is losing their health benefits, something needs to be done and quickly. Getting that expensive benefit off company books would be a good first step.
7) Encourage “buy American” programs and exporting of American goods. With a $500 billion trade deficit, every dollar spent not on an American made good is a dollar not spent towards an American worker. Tougher enforcement of existing trade provisions and increased pressure to protect intellectual property rights will assist in increasing American export dollars and as a result Jobs.
8) The rich are getting richer and the poor poorer. All the gains from the productivity efforts of the past few years have gone to the upper class, corporate executives and investors. While middle managers, skilled professionals, and blue collar employees were being laid off or off-shored, record bonuses and wages were being paid to the corporate elite. Unless reversed, this will eventually lead to a two-class system with serious social repercussions. Limits on corporate executive pay need be introduced. Wealth gained by the upper class must be shared with the rest of the country in some form.

In summary, the jobs lost are lost forever but are only the tip of the iceberg for the future with many times as many jobs yet to be lost. Good paying middle class professional jobs are going while their replacement jobs are retail or service jobs that pay half or less and are not livable wages. Serious considerations must be given to policy changes to righten the ship of the nation lest a brewing social unrest becomes manifest in ugly class conflict violence. I have provided a set of recommendations as a starting point to correct the ship’s course before it is too late. We do not have much time before the situation becomes irreversible. If one believes one is worse off now then four years ago, if unchecked, four years hence, today will seem a picnic comparatively.
















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