Why the American Jobs Machine Is Broken

The June employment report was decidedly weak, and serves as the latest blow to the V-shapers – if any are even left. It once again left me feeling that something is very, very wrong at the heart of the American economy, something that is much more structural than cyclical. Consider too that US policymakers appear completely unable to adequately address the latter problem, now hampered by fear of deficit spending and the threat of the invisible bond vigilantes. Yet the structural challenges are even more daunting, and I fear that the Washington establishment is simply incapable of the paradigm shift necessary to address these challenges. 

Only one word describes the American labor market outcome of the last decade – abysmal. Not only is job growth well below trend, but the quality of jobs is in question. The jobs deficit is even more striking considering the supposed gains in productivity over the past 15 years. Job growth should not stagnate. Resources – including labor – released via higher productivity are supposed to be channeled into expanding sectors. Moreover, productivity growth is supposed to yield improved economic outcomes via higher real wages. Yet as spencer famously shows, labor’s share of output has been steadily decreasing since the early 1980s. This downward trend was interrupted by gains evident during the tech bubble of the mid-1990s. Apparently, only during that brief, shining moment of generational technological change did the productivity story work as we believe it should, at least since the early 1980’s. 

Why has the American jobs machine failed so spectacularly? This should be the most pressing issue facing economists and policymakers. Are either up to the task? 

Yves Smith directs us to an intriguing piece by Andy Grove, former CEO of Intel. Rajiv Sethi follows up and summarizes:  

The piece is long, detailed and worth reading in full, but the central point is this: an economy that innovates prolifically but consistently exports its jobs to lower cost overseas locations will eventually lose not only its capacity for mass production, but eventually also its capacity for innovation…  

I think the Yves-Sethi conversation is remarkably important, and should lead one to reexamine the importance of the manufacturing sector. I admit that in past years I tended to dismiss the manufacturing sector, seeing its relative decline as simply a transition to more productive knowledge-based work. Alan Blinder, discussing the potential for offshoring services sector jobs, claims:  

The relative shrinkage of the manufacturing sector in the US (and elsewhere) from about 30-35% of total employment then to under 10% now was somewhat painful, especially in places where manufacturing was concentrated; it fostered some protectionist sentiment and some protectionist measures, and it induced a variety of other ill-considered policy responses. But, broadly speaking, the adjustment did not precipitate any major economic or social convulsions. This experience suggests that a similar-sized labour force adjustment can, once again, be handled by the market system – with some help from government. 

If Groves is correct, then Blinder’s conclusion regarding the lack of “major economic or social convulsions” too readily dismisses the very real consequences of manufacturing’s decline, and likewise underestimates the impact of further offshoring of service sector jobs. The loss of manufacturing capacity in the Groves scenario critically impacts the potential growth of the nation. I think there is a tendency to downplay the relative decline in manufacturing jobs because we do not often distinguish between two stages of the decline in manufacturing. The first stage was a relative decline as service sector job growth exceeded that of manufacturing. The second stage, beginning in the early 1980s was a relative and absolute decline in manufacturing jobs: (Click to enlarge)

Read full article here.

 http://seekingalpha.com/article/213280-why-the-american-jobs-machine-is-broken?source=dashboard_macro-view

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