The State of Employment In America

McKinsey Global Research just came out with a study dealing with jobs in America, “An Economy That Works: Job Creation and America’s Future.” McKinsey loves to put put these big studies. It gives them the imprimatur of Big Thinkers and attracts clients. But in this case especially, they repackage the conventional wisdom and layer on top of it a lot of data and some Big Conclusions.

Like many of these reports coming out of large institutions it misses the mark widely in terms of what is the cause of unemployment. But there are some good insights into the labor force and some of the basic problems with our labor pool. It also has a lot of good data and charts. So I will share the interesting parts with you and if you wish you can consult the study on your own.

1. Jobless Recoveries

 The United States has been experiencing increasingly lengthy “jobless recoveries” from recessions in the past two decades. It took roughly 6 months for employment to recover to its prerecession level after each postwar recession through the 1980s, but it took 15 months after the 1990–91 recession and 39 months after the 2001 recession. At the recent pace of job creation, it will take more than 60 months after GDP reached its prerecession level in December 2010 for employment to recover.

 They had some interesting observations about this loss of employment.

One they refer to as the “relentless pursuit of efficiency.” This refers to the innovations in technology as the backdrop, but more specifically to the desire of firms to become leaner and efficient in a weak economy.  

Sixty-five percent of the companies we surveyed—and 75% of the large companies in this group—said they had made operational changes during the recession to reduce their need for more employees. Although some companies report that they have increased the hours of remaining employees, many other have used automation, process redesign, peak scheduling, and more part-time or temporary employees to meet demand without adding to permanent payroll. In addition, one-third of companies with more than 1,000 employees said they have offshored core jobs in the past two years.

Another factor is that homeownership has increased over time and because of the weak housing market, workers are less mobile, and older, not wanting to give up their perceived equity, which translates into workers being less willing to relocate to places where jobs are more plentiful.

The next significant factor is that new firm formation has dropped off 23% during the recession, roughly 100,000 less firm starts per year.

This last point gets more to the heart of the matter. One might inquire why new firms are not being formed or why employers are not hiring, or why consumer demand is weak. Or, as they point out, why is job formation increasingly less robust through time as we continue to suffer these boom-bust economic events. Of all the data in this report, this issue is not satisfactorily answered. 

But there is an answer to these questions and it has to do with the destruction of real capital that has occurred with increasing devastation with each cycle.  We have discussed this issue many times at the Daily Capitalist, and it is the most relevant factor that defines our economy today. The lack of formation of new real savings/capital is the reason our economy is not expanding and thus employment is not growing. Real capital comes from the production of things, either the profits saved from production or savings from wages of workers engaged in production. For a discussion of real saving/capital please see the article, “Why The Economy Is Stagnating,” by Ludwig von Mises, published last week. 

The current boom-bust cycle and the 2001-2004 cycle were very destructive of real capital and not enough new real capital has been created to sustain economic growth and employment. Thus our economy stagnates and unemployment remains high. The issue is far more complex than presented here, but we are coming soon out with an article on this topic with some evaluation of the status of the economy and its potential recovery.

2.  21 Million Jobs Needed

The United States will need to create a total of 21 million new jobs in this decade to put unemployed Americans back to work and to employ its growing population. We created three possible scenarios for job creation, based on sector analyses, and find that they deliver from 9.3 million to 22.5 million jobs. Only in the high-job-growth scenario will the United States return to full employment in this decade.

3. Sectors of Potential Growth

Six sectors illustrate the potential for job growth in this decade: health care, business services, leisure and hospitality, construction, manufacturing, and retail. These sectors span a wide range of job types, skills, and growth dynamics. They account for 66 percent of employment today, and we project that they will account for up to 85 percent of new jobs created through the end of the decade.

Part of this conclusion is not encouraging. It is hard to see us keep up in a world where health care for an aging population, tourism and restaurant, and shopping are the mainstays of our economy. 

They also make a point that, workers’ skills are less matched to job needs. A lot of this is due to the need to retrain workers to the task. They suggest that the problem is more about the transmission of information rather than a structural defect. That is, workers don’t know of the opportunities that await them or the training programs that are available.

4. Failure of Education

Under current trends, the United States will not have enough workers with the right education and training to fill the skill profiles of the jobs likely to be created. Our analysis suggests a shortage of up to 1.5 million workers with bachelor’s degrees or higher in 2020. At the same time, nearly 6 million Americans without a high school diploma are likely to be without a job.

Moreover, too few Americans who attend college and vocational schools choose fields of study that will give them the specific skills that employers are seeking. Our interviews point to potential shortages in many occupations, such as nutritionists, welders, and nurse’s aides—in addition to the often-predicted shortfall in computer specialists and engineers.

5. The McKinsey Solution

Progress on four dimensions will be essential for reviving the US job creation machine: develop the US workforces’ skill to better match what employers are looking for; expand US workers’ share of global economic growth by attracting foreign investment and spurring exports; revive the nation’s spark by supporting emerging industries, ensuring more of them scale up in the United States, and reviving new business start-ups; and speed up regulatory decision-making that blocks business expansion and new investment.

These all sound great but the real cure is closer to the last point, and that is for government to get out of the way of business. Let bankrupt banks and financial institutions fail, let bad real estate, residential and commercial, be deleveraged (a roundabout way of saying foreclosed), raise interest rates immediately and stop the destruction of savings through price inflation, and let the economy rebuilt itself. It always has.