It's Broken

The machinery that creates jobs in America is broken. After over a trillion dollar bailout of the banking industry undertaken with the hope of freeing up money for loans that would reenergize industry in general and the housing industry in particular; after over a trillion dollars in stimulus projects, the official unemployment rate hangs stubbornly at 9.1%. The more realistic measure, U-6 that includes discouraged workers who have just given up stands at a depression era level of 16.1%. These are the worst numbers in 30 years and there is no indication they are going to get any better anytime in the near future.

The reasons for this situation are complex and interrelated. First and foremost is a lack of demand. When surveyed, employers almost always give, lack of demand as the primary reason they are not hiring new employees. It is easier to focus on improving the productivity of existing employees or scheduling a little overtime when absolutely necessary. Stimulus and bailout money intended to break our economy out of what Keynesian economists term a liquidity trap, didn’t work. Although, these expenditures have increased our national debt by a few trillion dollars, they did not increase demand. In fact the news of this very day announced American consumer confidence has hit a historic low. Unemployed people can’t buy all that much stuff. People with a job are frightened. For the first time in nearly 30 years the personal savings rate is in a multi-year upward trend. People are paying down their personal debts. Apparently we are learning that buying things we don’t need with money we don’t have is a bad idea. Unfortunately this new found sense of responsibility is not helping the unemployed find work.

The demand for Government employees is also dropping not so much from a lack of demand, as a lack of resources. States like California, New York, New Jersey, Illinois, and Rhode Island are facing bankruptcy. For the first time since the great depression, cities and counties are going into bankruptcy court and receivership. As much as these entities might want to hire new policemen or teachers, there is simply no money available.

Threatened and actual changes in taxes and regulations are given by employers as a reason they fear hiring many new employees. Personally, a friend of this blog has told me when Obamacare kicks in he will have to layoff some of his employees. He simply cannot pass the additional cost on to his customers. Surprisingly, the threat of additional taxes and regulations is not currently perceived as that large an impediment to new hires.

So much has been written about the loss of 20 million American factory jobs to countries such as China, there is no point in repeating that story in this article. However, there is some new information from What’s Wrong With America’s Job Engine, by David Wessel. During the past decade, “the multinationals cut their U.S. work force by 2.9 million and increased it abroad by 2.4 million.” Two reasons are now being given for this trend, the traditional reason of lower wage scales and less regulation and a new reason, their new customers live in these countries. Consumption of Buicks, Coca Cola and Kentucky Fried Chicken is increasing—in China!

Likewise much has been written about automation in the factory and computers in the office that has simply eliminated millions of job. This sort of structural loss, termed “creative destruction” by some economists is unavoidable. Industries rise and fall. The personal computer and word processing software has replaced the typewriter. There was no longer much call for buggy whips after the Model T Ford made its debut. This sort of change, while painful, is unavoidable. Our society has been hit with too many technological revolutions over the past 30 years. The cultural adjustment has been hard and painful. The average employee with just a high school diploma is in trouble. In 1960 a man willing to work 40 to 50 hours a week in a factory could reasonably expect to support a wife and a couple of kids in middle class comfort. That is no longer the case. Today far too many two job couples struggle just to make ends meet.

There is another disturbing trend in American employment. Wessel notes, “Executives call it structural cost reduction or flexibility. Northwestern University economist Robert Gordon calls it the rise of the “disposable worker,” shorthand for a push by business to cut labor costs wherever they can, to an almost unprecedented degree.

I believe this trend began with “just in time” inventory techniques pioneered by organizations like Toyota and Walmart. By keeping inventories of parts and products at a bare minimum and working with suppliers to constantly lower prices, these organizations became two of the largest most profitable corporations in the world. It isn’t that much of reach to apply the same principles to people. This is nothing new. When I want a bathroom remodeled I don’t hire a fulltime handyman. I bring in a contractor for a few days. Then he goes on to the next job. Employers have always used temps to smooth out big seasonal jumps in demand. However, more and more work is being contracted out. GM no longer hires cafeteria workers. Instead they contract that work out to a restaurant services contractor at considerably less cost. They have also divested themselves of the unprofitable parts supply houses like Delco. In order to survive in the global economy, those employees have lost job security, pay, and benefits.

Microsoft is notorious for the use of “permanent temps.” Most of their workers are not permanent employees that share in the great wealth generated by that once in a century natural monopoly. They work for as long as the law allows. Then they are laid off until the law allows them to be rehired. Companies who engage in this sort of practice avoid a great deal of the wage and benefit costs associated with permanent employees. It is also much easier to dismiss a temporary employee for any cause, legitimate or not.

When I worked in factories, I observed the human costs of unemployment. Every time there were significant layoffs, crime, alcoholism, and especially domestic violence would increase. The only jobs available in those days were entry level positions that paid less than a living wage. Traditionally these were jobs for teenagers. Now those jobs are disappearing. The news is reporting that teenaged unemployment has past 50% in the District of Columbia. The situation is much worse than that, since only those actively seeking employment are considered unemployed. How many young people are just not trying because they know the job they want does not exist?

Michael Saltsman, research fellow at Employment Policies commenting on this appalling unemployment rate observes, “Young people are facing more competition for fewer jobs, a lingering consequence of the recession and wage mandates that have eliminated entry-level opportunities. The consequences for this generation of young people missing out on their first job are severe, including an increased risk of earning low wages and being unemployed again in future years.”

May God have mercy on our Nation.