Let’s Talk Jobs, Part 1

Stephen DeAngelis

October 07, 2010

Back in January of this year some analysts still held out hope that the job market would dramatically improve as the year progressed [“Why a job-rich American recovery is still plausible,” by Robert Barbera and Charles Weise, Financial Times, 11 January 2010]. Barbera is the chief economist, investment technology group, and economics department fellow at the Johns Hopkins University. Weise is chairman and associate professor of economics at Gettysburg College. In their op-ed piece, they acknowledged that others were “warning of a ‘jobless recovery’ of the kind that followed the last two recessions, in 1990-91 and 2001” but, back in January, they believed that a jobless recovery didn’t need to be the case. They explained:

“The conventional wisdom now has it that the message embedded in Friday’s December US jobs report – a seeming end to firing but little evidence of net new hiring – will turn out to be a precursor to similar news on jobs that will dominate throughout 2010. We believe that these meagre expectations will turn out to be wrong, in large part because they mischaracterise how employment has swooned over the past two years. The scenario of a jobless recovery is founded on two propositions. First, that the crisis has left a damaged economy incapable of generating robust growth in demand. Second, that many employers responded to the recession by permanently restructuring their businesses and, in so doing, irrevocably reducing their payrolls.”

Unfortunately, the naysayers proved to be correct and Barbera’s and Weise’s hopes proved unfounded. Their “more optimistic outlook [was] based on a different theory of why payrolls were cut so aggressively.” They continued:

“Because of the turmoil in financial markets in autumn 2008, companies faced a severe cash crunch. As a result, they attempted to hoard cash in any way they could: they slashed order books, ran down inventories at an unprecedented pace and cut short-term borrowing. And they slashed payrolls. The drastic reduction in inventories and payrolls was not, in other words, a result of restructuring: it was symptomatic of panic, the same panic that caused the massive sell-off in equities, corporate bonds and mortgage-backed securities.”

Because policy decisions made by panicked business executives are much more easily reversed than structural decisions, Barbera and Weise believed executives would reverse their decisions and begin rehiring employees. As we now know, that hasn’t happened. Inventories remain low, cash is still being hoarded, and jobs haven’t returned. Unemployment in the United States still hovers perilously close to double-digits. To be fair, some jobs have returned. In a press conference in mid-September, the President announced that some three-quarters of a million jobs had been created in 2010 — far less than the eight million jobs lost during the recession. And many jobs that are available go wanting for lack of skilled workers [“Factory Jobs Return, but Employers Find Skills Shortage,” by Motoko Rich, New York Times, 2 July 2010]. Rich reports:

“Factory owners have been adding jobs slowly but steadily since the beginning of the year, giving a lift to the fragile economic recovery. And because they laid off so many workers — more than two million since the end of 2007 — manufacturers now have a vast pool of people to choose from. … [However,] manufacturers who profess to being shorthanded say they have retooled the way they make products, calling for higher-skilled employees. ‘It’s not just what is being made,’ said David Autor, an economist at the Massachusetts Institute of Technology, ‘but to the degree that you make it at all, you make it differently.’ In a survey last year of 779 industrial companies by the National Association of Manufacturers, the Manufacturing Institute and Deloitte, the accounting and consulting firm, 32 percent of companies reported ‘moderate to serious’ skills shortages. Sixty-three percent of life science companies, and 45 percent of energy firms cited such shortages. … Employers say they are looking for aptitude as much as specific skills. ‘We are trying to find people with the right mindset and intelligence,’ said Thomas J. Murphy, chief executive of Ben Venue, a contract drug maker for pharmaceutical companies]. … Leaders worry that the skills shortage now will be exacerbated once baby boomers start retiring. … ‘The new worker of tomorrow is in about sixth grade,’ said John Gajewski, executive director of the advanced manufacturing, engineering and apprenticeship program at Cuyahoga Community College in downtown Cleveland. ‘And they need training to move into manufacturing.'”

For more on some of the concerns that people have about the workforce of the future, see my posts entitled Is America Undergoing a Creativity Crisis? Part 1 and Update on Education in America. Rich provides some anecdotal evidence that children exposed to high-skills jobs can be attracted to them.

“At Astro Manufacturing and Design, a maker of parts and devices for the aerospace, medical and military industries, Rich Peterson, vice president for business development, recently gave a tour to a group of eighth graders. He showed off surgical simulators and torpedo parts, saying he wanted them to see the ‘cool’ things the company makes. By the end of the tour, more than a third of the students said they might consider working at a place like Astro, which is based in Eastlake and has five plants in the Cleveland area. For now, the company urgently needs six machinists to run what are known as computer numerical control — or CNC — machines. An outside recruiter has reviewed 50 résumés in the last month and come up empty. The jobs, which would pay $18 to $23 an hour, require considerable technical skill.”

In a post entitled Innovation and Child’s Play: Those Wild and Crazy Engineers, I provided several examples of organizations that are trying to encourage young people to gain the necessary skills to fill jobs in highly technical economic sectors. Rich concludes:

“Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed. … As unlikely as it would seem against this backdrop, manufacturers who want to expand find that hiring is not always easy. During the recession, domestic manufacturers appear to have accelerated the long-term move toward greater automation, laying off more of their lowest-skilled workers and replacing them with cheaper labor abroad. Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency than was previously required of the typical assembly line worker. … The increasing emphasis on more advanced skills raises policy questions about how to help low-skilled job seekers who are being turned away at the factory door and increasingly becoming the long-term unemployed. … How many more people would be hired if manufacturers could find qualified candidates is hard to say. Since January, they have added 126,000 jobs, or about 6 percent of those slashed during the recession. The number may understate activity somewhat, as many factories have turned to temporary workers.”

An increasing number of analysts believe that the future belongs to highly-skilled workers [“Future hiring will mainly benefit the high-skilled,” by Christopher S. Rugaber and Michael Liedtke, Washington Post, 5 September 2010]. Rugaber and Liedtke agree with Rich on the following points:

— Whenever companies start hiring freely again, job-seekers with specialized skills and education will have plenty of good opportunities. Others will face a choice: Take a job with low pay – or none at all.

— Job creation will likely remain weak for months or even years. But once employers do step up hiring, some economists expect job openings to fall mainly into two categories of roughly equal numbers:

– Professional fields with higher pay. Think lawyers, research scientists and software engineers.

– Lower-skill and lower-paying jobs, like home health care aides and store clerks.

Rugaber and Liedtke then ask rhetorically ask about the future of “those in between.” Their answer: “Their outlook is bleaker. Economists foresee fewer moderately paid factory supervisors, postal workers and office administrators.” They continue:

“That’s the sobering message American workers face. … Not until 2014 or later is the nation expected to have regained all, or nearly all, the 8.4 million jobs lost to the recession. Millions of lost jobs in real estate, for example, aren’t likely to be restored this decade, if ever. … Even when the job market picks up, many people will be left behind. The threat stems, in part, from the economy’s continuing shift from one driven by manufacturing to one fueled by service industries. Pay for future service-sector jobs will tend to vary from very high to very low. At the same time, the number of middle-income service-sector jobs will shrink, according to government projections. Any job that can be automated or outsourced overseas is likely to continue to decline. The service sector’s growth could also magnify the nation’s income inequality, with more people either affluent or financially squeezed. The nation isn’t educating enough people for the higher-skilled service-sector jobs of the future, economists warn.”

For the unemployed the message is getting louder and clearer, if you don’t have skills don’t expect to find work. That message begs the question: What kind of skills? Rugaber and Liedtke continue:

“‘There will be jobs,’ says Lawrence Katz, a Harvard economist. ‘The big question is what they are going to pay, and what kind of lives they will allow people to lead? This will be a big issue for how broad a middle class we are going to have.’ On one point there’s broad agreement: Of 8 million-plus jobs lost to the recession – in fields like manufacturing, real estate and financial services – many, perhaps most, aren’t coming back. In their place will be jobs in health care, information technology and statistical analysis. Some of the new positions will require complex skills or higher education. Others won’t – but they won’t pay very much, either.”

To help answer the question about what kinds of skills are going to be required to fill the 15.3 million new jobs that the government forecasts are going to be created over the next decade, Rugaber and Liedtke provide a industry by industry overview of the sectors likely to grow the fastest. They begin with health care.

“The sector is expected to be the leading job generator, adding 4 million by 2018, according to Labor Department data. An aging population requires more doctors and nurses, physical therapists, home health aides and pharmacists. Many of these jobs will pay well. Physical therapists averaged about $76,000 last year, according to the department’s data. Others pay far less. Home health care aides earned an average of just $21,600. Home health care and personal care aides are expected to add about 900,000 jobs by 2018 – 50 percent more than in 2008. Jennifer Gamboa of Body Dynamics Inc., an Arlington, Va.-based physical therapy firm, says the drive to reduce health care costs should benefit her profession, which can treat pain less expensively than surgery. Gamboa plans to add two employees in the next year.”

As I noted in a post entitled Shortages of General Practice and Family Doctors are Impacting Emergency Health Care, many of the tasks that now fall on the shoulders of general practitioners are likely to be activities performed by physicians’ assistants and nurse practitioners. I suspect that many of the new jobs created will be in the area of helping close the primary care gap. Rugaber and Liedtke next turn to the information technology sector:

“Technology could be an economic elixir as computers and online networks expand ways to automate services, distribute media and communicate. Companies will need people to build and secure those networks. That should boost the number of programmers, network administrators and security specialists by 45 percent to 2.1 million by 2018, the government forecasts. Most of these jobs will provide above-average pay. Technology pay averaged $84,400 in 2008 – nearly double the average private-sector pay of $45,400, according to an analysis of the most recent full-year data by the TechAmerica Foundation, a research group.”

Since Enterra Solutions is involved in the IT sector, I know from experience that the sector is likely to grow and the skills required to succeed in the sector will constantly change as new technologies emerge. The kinds of technologies we are creating at Enterra Solutions weren’t possible a decade ago. That’s a good segue to the final sector discussed by Rugaber and Liedtke — new industries.

“Deepak Advani, an IBM executive, has a title he says didn’t exist five years ago: ‘Vice president of predictive analytics.’ Companies and government agencies have amassed data on behavior ranging from shopping habits to criminal activity. Predictive analytics is the art of determining what to do with that data. How should workers’ time be deployed? How best to target customers? Such jobs could grow 20 percent by 2018, the government predicts. Still, economists say more will be needed to boost job growth. The answer may be some technological breakthrough akin to the personal computer or the Internet. ‘Most big booms come from a particular sector that moves the rest of the economy,’ said Richard Freeman, a Harvard labor economist. Technology spurred job growth after the 1982 and 1991 recessions. The PC became revolutionary in the early 1980s. Internet use exploded after the Mosaic Web browser was introduced in 1994. Housing eventually lifted employment after the 2001 dot-com bust. ‘There’s a lack of clarity on what the next big thing is going to be this time,’ said David Card, an economics professor at the University of California. Until there is, many people will have to lower expectations and living standards as they enter fields with less pay and less job stability, said Dan Finnigan, CEO of online employment service Jobvite.”

The best way to find the next big thing is by fostering an environment that encourages entrepreneurs to begin start-ups [“To Create Jobs, Nurture Start-Ups,” by Steve Lohr, New York Times, 11 September 2010]. Lohr reports:

“Modern tools of data analysis — fast computers, smart software and vast troves of digital information — often open the door to new insights. Consider the subject of jobs in America. For decades, the assumption has been that small business is the economy’s dynamic engine of job generation. Look at the numbers broadly, and that is the irrefutable conclusion: two-thirds of net new jobs are created by companies with fewer than 500 employees, which is the government’s definition of a small business. But research published [in August 2010] by three economists, working with more recent and detailed data sets than before, has found that once the age of the businesses is taken into account, there is no difference in the job-producing performance of small companies and big ones. ‘Size plays virtually no role,’ says John C. Haltiwanger, a co-author of the study and an economist at the University of Maryland. ‘It’s all age — start-ups are where the job-creation action really occurs.’ Start-ups account for much job destruction as well. Within five years, half of these businesses have folded. Yet the survivors are prime candidates to join the young, dynamic companies that make an outsize contribution to innovation, productivity gains and job growth, Mr. Haltiwanger says. So any serious discussion of job creation, it seems, should look at the business tactics and policy steps that are most likely to nurture more of these promising corporate upstarts.”

In a post entitled Not All Small Businesses are Created Equal, I wrote: “The real entrepreneurial heroes are those that create high growth companies that provide employment for people beyond the entrepreneurs, their families, and a handful of others. These are the so-called small business superstars [“Small businesses: Measuring their power and their problems,” by Edmund L. Andrews, The Fiscal Times, 1 August 2010]. Andrews reports that these superstar firms ‘constitute only 2 or 3 percent of the nation’s companies.’ … The fact that pinning down exactly what constitutes a superstar (other than a high growth rate) makes targeting policy decisions that support them extremely challenging.” Lohr agrees that finding approaches to nurture the right kind of start-ups “can be tricky.” As a result, “government small-business initiatives are often misguided.” He continues:

“According to Josh Lerner, a professor at the Harvard Business School. Government programs to stimulate bank lending … are not geared to entrepreneurial start-ups. Those new companies need equity investment to fund risk-taking, free of the financial burden of paying interest on loans. … Most young companies make precious little income during their first few years, and their leaders are focused on hitting it big, not on tax rates.”

Lohr provides an example of a company that could be considered a superstar start-up: Carbonite.

“It grew out of the observation that few people make backup copies of digital photographs, personal records and documents that they have stored on their computers — and often lose them if a hard disk crashes or a notebook machine is lost or stolen. So [David Friend, a founder of six companies over the last three decades,] and his co-founders set out to build an easy-to-use online backup service for consumers and small businesses. It stores their information remotely and offers unlimited storage for $55 a year. Carbonite’s revenue is doubling annually, to an estimated $40 million this year, Mr. Friend says. Its employment in the United States, largely engineers and marketing staff, has more than tripled in the last two years, to 132.”

Another superstar start-up, SecondMarket, was created by Barry Silbert. The company “began with 5 employees and now has 150.” Lohr reports that SecondMarket now “plans to expand abroad in Asia and Israel.” Lohr continues:

“Five years ago, as a young investment banker, Mr. Silbert recognized the growth in restricted stock issued to corporate managers. This stock cannot be traded on public exchanges, so he wanted to set up a new marketplace to trade those shares. Mr. Silbert began in a tiny office in New York City with five people, two telephones and a few desktop computers. Their trading technology consisted of Excel spreadsheets, he recalled. It was a ‘lean start-up’ before that term was widely used. ‘But that meant we were profitable almost from the start,’ says Mr. Silbert. … Today, SecondMarket is best known for dealing the private shares of fast-growing tech start-ups like Facebook, Twitter and LinkedIn. These companies have not yet gone public, but former employees and others often want to sell their shares.”

Silbert “like many other entrepreneurs, … advocates granting more residence visas to skilled immigrants, especially those who attend American universities.” This is a subject that is raised time and again in articles about how to keep America the most innovative country on earth. Lohr concludes:

“‘The best and the brightest from other countries come here, and then we’re not letting them stay,’ [Silbert] said. ‘That will damage innovation and job creation in the United States.’ Foreign-born entrepreneurs have long played a big role in American start-ups. A study that tracked technology and engineering start-ups from 1995 to 2005 found that one quarter of them had a foreign-born chief executive or head technologist; by 2005, the surviving companies generated $52 billion in sales and employed 450,000 workers. There are signs that policy makers are looking to accommodate highly skilled workers and entrepreneurs, says Robert Litan, an economist at the Kauffman Foundation. As one example, he points to legislation proposed this year by Senators John Kerry, Democrat of Massachusetts, and Richard G. Lugar, Republican of Indiana. Called the Start-Up Visa Act, it would grant visas to immigrant entrepreneurs who create jobs in the United States. ‘In this economic environment, I think job-creating ideas that don’t cost money are going to get a fair hearing,’ Mr. Litan says.”

In today’s economic environment, common sense dictates that we should be encouraging anybody who can help create jobs. Keeping some of the world’s brightest people in the United States is one way to keep America competitive [“The Global Jobs Competition Heats Up,” by Martin Neil Baily, Matthew J. Slaughter, and Laura D’Andrea Tyson, Wall Street Journal, 1 July 2010]. Baily and company focus on multinational corporations headquartered in America rather than on small businesses or start-ups. They report that these corporations, “although they comprise far less than 1% of U.S. companies, … account for about 19% of all private jobs, 25% of all private wages, 48% of total exports of goods, and a remarkable 74% of nonpublic R&D spending.” They continue:

“Despite the common allegation that multinationals simply ‘export jobs’ out of the U.S., research shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2007, employment in foreign affiliates rose to 10 million from 4.8 million. During that same period, employment in U.S. parent companies rose to 22 million from 17.7 million. But there is no guarantee that the past will be prologue. McKinsey conducted in-depth interviews with senior executives from 26 of America’s largest and best-known multinationals. Their message is sobering: Today the U.S. is in an era of global competition to attract, retain and grow the operations of multinational companies that it’s never faced before.”

Although “all of the business leaders interviewed for this study agreed that U.S. tax policy has a ‘major impact’ on their competitiveness and investment decisions,” many of them also “said that policies like limits on skilled immigration handicap their companies.” In the words of one executive, tax considerations are “often one of the largest line items in the investment projection.” The bottom line for jobs is that “U.S. multinationals will not aggressively invest and hire here at home if they can’t realize attractive returns from doing so.” Baily and company continue:

“There are several deep challenges now facing the U.S. economy in the wake of the financial crisis. Perhaps most importantly, U.S. companies have yet to resume vigorous job creation. … U.S. multinationals are uniquely positioned to help America meet these challenges. But this will require far-sighted policy initiatives like liberalizing trade and protecting intellectual property. These firms are now the canaries in the U.S. economic coal mine. Will our lawmakers pay attention?”

As Baily, Slaughter, and Tyson note, there are a lot of allegations and heartburn about outsourced jobs going overseas. Tomorrow I will conclude this discussion of jobs and look at what some so-called experts indicate should be done to create jobs in the United States.