To Solve Unemployment we need more Jobs, not more Job Skills: November Update

Official data indicates that the economy is getting better. Unemployment in November 2012 was the lowest in four years, 7.7%. Also, the economy has generated 150,000 new jobs on average each month for the last five months.. However, that’s little consolation to the millions of people who are unemployed, and close to 1 million more who are so discouraged in their job search, they have dropped out of the labor market (and are no longer counted among the unemployed), or to the 8.1 million people who worked part-time in November 2012, because they cannot find full-time employment.

Workers who are fortunate enough to be employed still worry about their job stability. So it is legitimate to ask, how long will this situation last? In this article, I explore why the unemployment situation is so difficult to recover from. In the next article, I follow up with a look at what will happen in the future.

The Congressional Budget Office (CBO) is the most well-respected and objective economic policy analysis organization in the country. It forecasts that the employment level will not return to normal (meaning about 5.5%) until the end of the year 2015. The CBO’s forecast is not an outlier, because most economists make similar projections.

There are logical reasons for this pessimistic outlook, but there are also other factors, that are seldom considered. I argue that those other factors suggest that the labor-market pain may be shorter lived than expected. Below, I outline the reasons for the pessimistic outlook and why analysts feel it will take long to recover. My next article I explain some reasons why things may get better—sooner than anticipated.

Why is the labor market in such a funk?

The first reason is global competition! In order to regain their competitive edge, large corporations made drastic cuts to their workforce during the last recession. It is important to note that the 8 million people who lost their jobs during the “great recession” were not all victims of the slowdown in sales. Many were downsized as a byproduct of corporate strategic plans to become more globally competitive.

The automobile industry is perhaps the best example. One quarter-century ago, the three US auto manufacturers exercised unquestioned global dominance. By the start of last recession, there was a real concern as to whether the US would have more than one remaining automobile producer. Faced with the threat of extinction, the automobile companies responded in a manner that was similar to how other corporations did. They cut their workforce drastically, persons that remained on the payroll were forced to work much harder, large segments of the production process were outsourced to cheaper labor markets abroad, part-time workers (to whom benefits did not have to be paid) were used whenever possible to replace full-time workers, and finally radical changes were made to corporate supply chains.

The number of suppliers was cut significantly, and each remaining supplier was forced to provide greater value at a lower cost. As hundreds of large corporations took similar actions simultaneously, the result was an enormous increase in unemployment, far beyond what would have been the case ordinarily. The financial meltdown set in motion an opportunity for corporations to engage in “shock therapy” to readjust the size and cost of their labor force. Suddenly, Mr. Nice Corporate Guy disappeared!

If the first reason for the massive increase in unemployment was global competition, the second reason is also “global competition”! While US corporate leaders were sleeping at the wheel, and Wall Street financiers were devising elaborate schemes to redistribute wealth from one hand to the other (rather than investing in the creation of new wealth), the rest of the world was closing in on the US with a vengeance. Global competitors chipped away at the profitability of US corporations and at US world economic leadership. One quarter-century ago, production in the United States was so dominant that the pace of US growth dictated the pace of world economic growth. Today, at 19% of world GDP, America still accounts for the largest share of global output, but it is no longer in a class by itself.

China, India, and Russia together produce 26% of global output and China separately is expected to surpass the US by 2015. Furthermore, each country is growing at a pace that is several times faster than the rate of growth in the US. In sum, the fastest-growing new markets and most rapid global innovation are gradually shifting away from the sphere of US dominance. The shift is causing a slowdown in the rate of growth of domestic job creation.

The third reason for the growth in unemployment is most often cited, but its importance is greatly overstated. The argument is as follows. The US now faces unparalleled forces of global competition and as a result corporations need a more highly skilled workforce. Those who argue this position go on to conclude that the massive unemployment we are currently experiencing is structural in nature. That is, large numbers of the individuals who are unemployed simply do not have the skills that are demanded by the newly competitive labor market. As a result, the argument continues, unless those skills are upgraded one can expect long-term persistently high rates of unemployment to be lowered.

Without question, there is truth to this argument. But it is now being repeated as if it is religion. That is, the great unemployment problem is the “skills mismatch”!  I bought that argument until I looked at the issue in greater detail. Let me make a simple point that runs counter to this argument. Of the 6.5 million jobs that had not been restored between the bottom of the recession and the beginning of 2012, 2.9 million (or 44%) are in just two industries– construction and retail trades. If jobs were restored in those two industries, the labor market would not be in crisis.

In making this observation, I do not wish to dismiss the serious skill deficit that exists in the US workforce. Instead, I am simply arguing that the skills deficit has been with us for quite a while, but the unemployment crisis we now face has more dimensions. The crisis is not caused fundamentally by the lack of a skilled workforce. It is primarily caused by our inability to create enough jobs! To create jobs we need the housing market to function properly, workers to have enough income security to spend money, corporations to have enough confidence to invest money, and we need many more new innovative, high-growth small companies that employ large numbers of workers.

In the next installment to this article, I will argue that the abnormal employment gap is tied closely to the factors I cited above, and most especially to the behavior of large corporations. While their investment is picking up, they are still hoarding record amounts of cash, rather than investing. Were they to invest that cash, it would create supply chain opportunities for small and startup companies which in turn would employ large numbers of currently unemployed workers. Hence, the labor market recovery need not take as long as most expect it to.

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For  related post on the topic see:

 Black unemployment in the US and South Africa, Common Problems and Solutons

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To Solve Unemployment we need more Jobs, not more Job Skills: November Update
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Author: Thomas Danny Boston

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