Global: America’s Job-Quality Trap
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By Stephen Roach (New York)
Morgan Stanley
Jul 09, 2004
In many respects, the state of the US labor market has been the defining issue of the current macro debate. An unprecedented hiring shortfall has crimped the economy’s income generating capacity as never before. Lacking in organic growth of purchasing power, the American consumer has turned, instead, to riskier sources of support — namely, the combination of tax cuts and the debt-intensive extraction of home equity. The hope all along was that a standard cyclical recovery in job growth would finally kick in, thereby putting the US on a more solid recovery path. While there has been some improvement on the hiring front in recent months, the quality of such job creation has been decidedly subpar. Unless that changes, the risks to a sustainable economic recovery will only intensify.
Perspective is key in understanding the unique character of the current hiring cycle. For the first 27 months of this upturn, America was mired in the depths of the worst jobless recovery of the post-World War II era. Then, at long last, the magic seemed to be back. Hiring rebounded with a vengeance in March and April 2004, only to decelerate again in May and especially in June. Nevertheless, looking through the month-to-month volatility, fully 1.024 million jobs were added to total nonfarm payrolls over the past four months, the sharpest increase since early 2000. While that increment stands in contrast to the net loss of 594,000 jobs in the first 27 months of this recovery, it hardly breaks the mold of the weakest hiring cycle in modern history. Indeed, from the trough of the last recession in November 2001 through June 2004, private nonfarm payrolls have now risen a paltry 0.2%. This stands in sharp contrast to the nearly 7.5% increase recorded, on average, over the same 31-month interval of the six preceding recoveries.
Nor is there much reason to celebrate the quality of the jobs that have been created over the past four months. In scanning the detailed industry breakdown of this recent pick-up in job creation, the leading sources turn out to be restaurants, temporary hiring agencies, and building services. Collectively, these three groupings, which comprise only 9.7% of total nonfarm payrolls, accounted for fully 25% of the cumulative growth in overall hiring from February to June 2004. Moreover, hiring has accelerated in other industries at the low end of the job hierarchy — namely, clothing stores, couriers, hotels, grocery stores, trucking, hospitals, social work, business support, and personal and laundry services. Collectively, this latter group of industries, which makes up 12% of the nonfarm workforce, accounted for another 19% of the total growth in business payrolls over the past four months. Putting these segments together, low-end jobs accounted for about 44% of total hiring over the February to June interval, double their share in the workforce. Consequently, to the extent there has been any improvement on the job front over the past four months, the impetus has been concentrated at the low end of the quality spectrum.
That’s not to say there hasn’t been any improvement at the upper end of the US labor market. In the goods producing sector, construction has led the way, while manufacturing has continued to lag. Collectively, these two segments make up 16% of the total nonfarm workforce; over the past four months, they basically maintained their share by accounting for 17% of total job creation. Similarly, there have been signs of improvement in several of the higher-end professional services categories — namely legal, architecture and engineering, computer systems design, consulting, credit intermediation, the brokerage and securities industry, and private education. Collectively, this latter group of industries, which makes up another 8% of overall employment, accounted for about 12% of total job growth over the past four months. All in all, as seen from the standpoint of this industry-by-industry breakdown of the US job structure, there can be no mistaking the bifurcation of the improved hiring dynamic over the past four months: The contribution of lower-end jobs (44%) was about 50% greater than that of higher-end jobs (29%). In my view, that qualifies as a decidedly low-quality improvement in the US labor market.
An even more dramatic picture of the quality of recent job growth emerges from the survey of households. According to the US Bureau of Labor Statistics, the count of nonfarm persons at work part time — both for economic and non-economic reasons — increased by 495,000 over the February to June 2004 interval. That amounts to an astonishing 97% of the cumulative increase of 509,000 in total nonagricultural employment as captured by the household survey over this period. By this metric, as the hiring dynamic has shifted gears in recent months, the bulk of the benefits have flowed largely to contingent workers. That’s yet another indication of the low quality to the latest strain of job creation. Finally, the occupational breakdown contained in the household survey provides yet another read on the character of the recent hiring upturn. Since these data are not seasonally adjusted, year-over-year comparisons provide the most accurate metrics. On this basis, it turns out that fully 81% of total job growth over the past year was concentrated in low-end occupations such as transportation and material moving, non-professional services, sales, and the installation, maintenance, and repair grouping. At the upper end of the occupational hierarchy, increases in the construction-worker and professionals groupings were partially offset by sharp declines in production workers.
Consequently, from these three different vantage points — employment breakdowns by industry, occupation, and degree of attachment — the same basic picture emerges. Yes, there has been a pick-up in the pace of US job creation over the past four months. But the bulk of the impetus — albeit an unusually anemic one by cyclical standards of the past — has been concentrated at the low end of the quality spectrum. The Great American job machine is not even close to generating the high-powered jobs that typically provide the major impetus to income generation and personal consumption.
Needless to say, this conclusion has important economic and political implications. In response to the income shortfall, overly-extended consumers can be expected to go further out on the risk curve in order to defend their lifestyles. The Fed, for its part, will be more wary of normalizing monetary policy if that means higher interest rates will threaten the asset-driven dynamic to US consumption. For those reasons, alone, low-quality job creation poses a serious risk to sustained economic recovery. And, of course, in this political season, any legitimacy to perceptions of worker angst could easily become one of the biggest issues in the upcoming US presidential campaign.
America is not used to such a decidedly subpar employment experience. And with good reason — it’s never before persisted for 31 months into an economic recovery. A decade ago, the US went through its first so-called jobless recovery. But after a painful and unusual wait of 19 months, the hiring cycle turned sharply to the upside in late 1992 and then never looked back. The current experience is far more extreme on a variety of counts — overall hiring, the quality of jobs, and the ongoing compression of real wages (see my 6 July dispatch, “Growth Risks”).
We hear repeatedly that the disconnect is all about lags or productivity. I don’t buy it. Instead, I believe that a new force has come into play that is now altering the fundamental relationship between domestic demand and domestic employment in the United States. I call it the global labor arbitrage — the IT-enabled efficiency tactics that allow US companies to substitute high-wage domestic workers with like-quality low-wage foreign workers in goods producing and services-providing functions, alike. The lack of pricing leverage in today’s climate makes this arbitrage an increasingly urgent competitive imperative. In my view, the global labor arbitrage is likely to be an enduring feature of the macro climate — raising the distinct possibility that subpar job creation in the US could well be here to stay for the foreseeable future.
Hiring cycles will always come and go. But as we can see full well in the experiences of Europe and Japan, new structural forces can come into play that have a lasting and profound impact on job creation. Globalization remains the most powerful economic force of the modern era. It was only a matter of time, in my view, before the IT-enabled globalization of work had a major impact on the US labor market. That time is now. The character and quality of American job creation is changing before our very eyes. Which poses the most important question of all: What are we going to do about it?
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