December 11, 2011 6:58 pm

Can America regain most dynamic labour market mantle?

By Edward Luce

Is America working

Last week, Barack Obama went to Osawatomie, Kansas, to kick off a more populist phase in his 2012 re-election bid. “This is a make-or-break moment for the middle class,” declared the US president, who chose the same venue that Teddy Roosevelt used in 1910 to call for a new progressive era. “I believe that this country succeeds when everyone gets a fair shot.”

Saying everyone should get a “fair shotalways makes political sense – particularly at a time when US income inequality rivals that of Mark Twain’sGilded Age”. But it might have been a stretch for Mr Obama to suggest the American middle class is facing a uniquemake-or-breakmoment. In reality, the labour force has been polarising for most of the past generation in a trend that has sharply accelerated since 2000.

America used to be exceptional. Postwar, it maintained lower unemployment than the Europeans and a higher rate of jobs turnover, enabling it to get away with more meagre benefits; “a fair day’s work for a fair day’s pay” was within the grasp of most. That gave America a booming middle class that until recently was the most important engine of global demand.

No longer. Today, somewhat remarkably, US joblessness is higher than in much of Europe. And the US consumer is mired in high personal debt. As the jobs crisis deepens, so too does US political polarisation. Allegations of “class warfare” are a staple of Washington debate. In contrast to the 1960s, dominated by protests for peace and civil rights, today’s battles are economic. Yet there are few signs that either policymakers or economists are closer to finding answers.

Nothing Mr Obama has been able to accomplish since 2008 – including staving off a second Great Depression and pushing through an overhaul of the healthcare systemappears to have resolved that underlying structural challenge. Indeed, the signs are that the problem is intensifying. In the words of David Autor, a leading labour economist at Harvard University, the labour force is suffering from a growingmissing middle”.

In short, the middle-skilled jobs that once formed the ballast of the world’s wealthiest middle class are disappearing. They are being supplanted by relatively low-skilled (and low-paid) jobs that cannot be replaced either by new technology or by offshoring – such as home nursing and landscape gardening. Jobs are also being created for the highly skilled, notably in science, engineering and management.

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For the remainder of the workforce, including college graduates, it is both increasingly hard to find a secure job and tougher for those who do find jobs to be paid in line with inflation. Most people know that median US income has declined sharply since the late 1990s. Fewer are aware that real incomes also fell sharply in the same period for those with degrees. Only those with postgraduate qualifications, particularly PhDs, saw net gains (for some spectacular).

The jobs crisis has many worrying manifestations, of which three are worth highlighting. Perhaps the most troublesome is the waning dynamism of the market. People used to describe the US labour market as Schumpeterian, after the Austrian neoclassical economist who depicted the cycle of “creative destruction”. Jobs might be lost rapidly in a downturn but were swiftly reallocated to more productive sectors when economic growth resumed. That is not now the case.

According to McKinsey, the consultancy, it took six months for the US economy to recover its pre-recession jobs level after the 1982 downturn. Following the 1991 recession, that had risen to 15 months. After 2001, it took 39 monthsmeaning that the economy required almost the full business cycle to regain the jobs total bequeathed by the previous one. Following the Great Recession of 2008, McKinsey forecast that the economy would take 60 months to reach the pre-downturn jobs level.

That now looks optimistic. In December 2007, the US economy employed 146m people. Four years later, it languishes at 140m. At the current rate of job creation it will take another two and a half years to regain 2007 levelstaking the replacement cycle to as much as 78 months. This is destruction minus the creativity. Even that understates the problem, since in that time the population will have risen by more than 10m.

“I know companies that employ senior engineers whose only job is to find ways to reduce the headcount,” says Carl Camden, chief executive of Kelly Services, a booming staffing agency based in Michigan. “The name of the game everywhere is to reduce permanent headcount and we are still only at the early stages of this trend.”

The second problem stems from the first America is employing a decreasing proportion of its people. At the start of the recession, the employment-to-population rate was 62.7 per cent. The rate is now 58.5 per cent. Last month, unemployment fell from 9 per cent to 8.6 per cent. On the surface, this looked like a welcome leap in job creation. In reality, more than half of the fall was accounted for by a decrease in the numbersactively seeking work. The 315,000 who dropped out of the labour market far exceeded the 120,000 new jobs.

According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent. Some have moved from claiming unemployment benefits to disability benefits, and have thus permanently dropped out of the labour force. Others have fallen back on the charity of relatives. Others still have ended up in prison. In 1982 there were just over 500,000 in jail; today there are 2.5m more than the combined population of Atlanta, Boston, Seattle and Kansas City, according to the Economic Mobility Project of the Pew Center, a Washington-based think-tank.

Finally, a growing share of whatever jobs the economy is still managing to create is in the least productive areas. Of the five occupations forecast by the Bureau of Labor Statistics to be the fastest growing between now and 2018, none requires a degree. These are registered nurses, “home health aides”, customer service representatives, food preparation workers and “personal home care aides”.

Manufacturing is nowhere in the top 20, and such jobs cannot replace the pay and conditions once typical of that sector. “The food preparation industry cannot sustain a middle class,” says Dan DiMicco, chief executive of Nucor, one of America’s two remaining big steel companies, whose company motto is “a nation that builds and makes things”.

The tides are not with Mr DiMicco. According to a study this year by Michael Spence, a Nobel Prize-winning economist from Stanford University, and Sandile Hlatshwayo, all net job creation since 1990 has been in the “non-tradable sector”. Between 1990 and 2008, the US added 27.3m jobs, of which almost every one was in services. Almost half were in healthcare or the public sector – both areas in which productivity growth is virtually zero. Conversely, manufacturing’s impressive productivity growth has tracked its shrinking headcount.

If there is an explanation as to why middle-class incomes have stagnated in the past generation, this is it: whatever jobs the US is able to create are in the least efficient sectors – the types that neither computers nor China have yet found a way of eliminating. That trend is starting to lap at the feet of more highly educated American workers. And, as the shift continues, higher-paying jobs are also increasingly at risk, argue Prof Spence and Ms Hlatshwayo.

What, then, can be done to revitalise the increasingly sclerotic jobs market? If the answer were simple, it would have been on everyone’s lips a long time ago.

Unfortunately, there is no precedent for the challenges America faces, and thus little consensus among economists or policymakers on the best remedies. However, almost everyone agrees on how to ensure the situation does not deteriorate. Top of the list is a better education system for all stages of life.

Alas, rebooting an increasingly mediocre school system is easier said than done. Nor is permanent reskillling realistic for large chunks of the workforce. There may be lessons to be learnt from nations such as Germany, particularly on vocational education, but there is little federal appetite to apply them. “Every American is going to have to get used to the idea of a completely different work style,” says Mr Camden, whose company farms out hundreds of thousands of temporary workers around the world, from lawyers to office assistants. “What you learnt in college five years ago may already be obsolete.”

Perhaps inevitably, given the fiscal climate, education and training budgets have gone in the wrong direction in the past few years. State schools and vocational community colleges derive much of their funding from local property taxes. That model brings two big disadvantages. First, it means community colleges are victims of “zip code apartheid” – the lower the property values in an area, the less money there is to train the workforce or educate the children.

Second, it deprives communities of the fiscal stabilisers that they need during a prolonged home foreclosures crisis. The areas worst hit by the housing crisis have experienced some of the steepest education cuts. By contrast, some of the best community colleges have kept their heads well above water. But most budgets have taken a nosedive at a time when demand for retraining has surged. “It is absurd that we withdraw support from the community colleges just when they most need it,” says Prof Autor.

Economists also agree on the need for a panoply of other measures – from higher spending on infrastructure, with the quality of roads and airports now rapidly approaching second world status, to a more sensible immigration policy that encourages the most talented foreign students to remain in the US. Most also call for far higher public spending on research and development, as well as better private incentives. The US now has one of the least generous R&D tax credits in the developed world.

Taken together, these reforms would have an impact – but few believe they would transform the picture. “The truth is that we don’t know how to fix the US labour market – we are in uncharted territory,” says Peter Orszag, Mr Obama’s former budget director, now a vice-chairman of Citi. “It would help to spend more on retraining and on infrastructure and to have a more rational immigration system. But these wouldn’t fundamentally transform the situation for the middle class ... It is not yet clear what, if anything, could.”

Case study: Michigan

How many electricians does it take to change a lightbulb? None. They are too busy emptying your bedpan.

That may sound far-fetched. But in Michigan, where hundreds of thousands of mid-career men have lost their jobs in the car plants, nursing is one of the few alternatives on offer.

Healthcare provides the state with by far the largest (and fastest growing) source of new jobs – as it does for America as a whole.

“My friends taunted me all the time after I said I was going to be a nurse,” says Kenneth Swint, a 44-year-old electrician who used to work at General Motors. The teasing had no impact on him.

“Those jobs, you know, where you didn’t have to work very hard, and you earned a hundred grand a year, have gone for good,” he tells his friends. “Now, if that’s your preference, you can sit around and wait for the tooth fairy to visit, or you can wise up.”

The decision came to Mr Swint after his wife was diagnosed with breast cancer. There was nothing he could say to console her: “I was helpless to do anything about it.” Then he observed how effectively the nurses lifted her spirits. The prognosis turned out to have been too bleak and she is now in remission. He went into nursing because he wanted to help people who had “fallen by the wayside”.

Mr Swint says too many of his friends still hang around at home, not knowing what to do with their lives. “We are still going to need electricians,” says Mr Swint, who jokes that he never wants to change a lightbulb again. “But a lot of them are going to have PhDs.”

Markets Insight

December 12, 2011 1:03 pm

Why the eurozone deal will fail

By Stephen King


The eurozone deal reached last week won’t work.

Demanding that governments take fiscal responsibilities seriously is all very well but we already know from the UK experience that golden rules tend eventually to turn to base metal. And even if countries were to behave themselves fiscally, there is no guarantee that they would enjoy lasting economic and financial stability. Good fiscal behaviour can still be associated with huge imbalances and massive economic dislocation.

Last year, Germany ran a balance of payments current account surplus of 5.7 per cent of gross domestic product, even bigger than China’s, which stood at 5.2 per cent of GDP. These surpluses need to be recycled somewhere else in the world. A current account surplus, after all, represents no more than an excess of domestic savings over domestic investment.


A country running a current account surplus must, by definition, be acquiring foreign assets. Yet, in doing so, it may add to cross-border economic problems.

For the most part, the Chinese have recycled their excess savings into US assets, primarily via their ever-rising foreign exchange reserves. Over the last decade or so, this led to tremendous demand for Treasuries, pushing yields to extraordinarily-low levels. Private investors looked elsewhere for higher returns, leading to a massive rise in demand for mortgage-backed securities that ultimately paved the way to the sub-prime crisis.

The eurozone deal will fail because it offers no explanation of how, precisely, the German current account surplus will be recycled if the southern European nations head down the path of fiscal righteousness.

Maybe, in their dreams, European policymakers hope the German surplus will come down of its own accord. In reality, however, there are only two ways in which the surplus can decline: Either German exports have to fall relative to imports, or imports rise relative to exports.

The first of these options will most likely occur should southern Europe succumb to deep recession. Taken together, Italy and Spain are a more important destination for German exports than the US. Fiscal virtue in the south is all very well but the collateral damage associated with ongoing austerity will eventually hurt Germany and other northern European exporters. It’s not something anyone would seriously wish for.

The second option will only happen if Germany accepts the need to boost domestic demand growth over and above what we’ve seen in recent years. If, however, demand is higher, there’s a good chance that German inflation will also be higher.

For the eurozone as a whole, that would be a good thing: lower-than-average inflation in the southern nations accompanied by higher-than-average inflation in Germany and other northern eurozone nations would allow competitive adjustments to take place without the threat of a descent into deflation in aggregate. While it’s a neat solution, it’s not obvious that Germany, with its hatred of inflation, will play ball.

And what if neither balance of payments adjustment option transpires? How, then, would Germany recycle its savings? While investing elsewhere in the world remains a possibility, Germany has shown in recent years that it prefers to keep its investments mostly within the eurozone, opting for the “safety” of investing in a common currency.

If, however, southern European nations are no longer in the business of issuing unlimited government paper, what other assets might German investors acquire? Perhaps we’ll see the titans of German industry building new factories in Spain, Portugal or Greece. But Germany’s excess savings might be invested in southern European real estate or, even worse, newly-created pieces of paper uncannily similar to mortgage-backed securities.

Countries which have virtuously delivered fiscal surpluses have, too often, succumbed to financial crisis. In the late-1980s, the UK ran a budget surplus alongside a current account deficit. Only as the economy began to collapse did policymakers begin to recognise that imbalances within the private sector could be just as damaging as those within the public sector. The UK economy wilted in the face of a rapidly deflating housing bubble.

Then there was Asia in the mid-1990s. For years, policymakers argued in favour of a continued Asian miracle as a result of fiscal prudence accompanied by private sector endeavour. Following the Thai baht crisis, we suddenly learnt all about crony capitalism. It turned out that achieving a fiscal surplus was no guarantee of lasting economic health.

Even if eurozone countries achieve fiscal salvation, they may still find themselves succumbing to economic and financial crises. Until and unless Germany’s current account surplus comes down, the risk of repeated crises will remain very high. The fiscal compact so desired by northern European nations may eventually come through. It is, however, not the right answer. That’s because no one in eurozone policymaking circles bothered to ask the right question.

Stephen King is group chief economist at HSBC and the author of Losing Control (Yale)

Copyright The Financial Times Limited 2011.

The British “Non”

Harold James


LONDON – At the just-concluded European Union summit, British Prime Minister David Cameron vented decades of accumulated resentment stemming from his country’s relationship with Europe. Europeans were appalled at how the last-minute injection of finicky points about bank regulation could stymie what was supposed to be a breakthrough agreement on the regulation of EU countries’ budgets. Cameron’s supporters in Britain cheered and portrayed him as a new Winston Churchill, standing up to the threat of a vicious continental tyrant.

The United Kingdom’s view of Europe has always been both emotional and ambiguous. A Conservative government wanted to join the European Economic Community in the early 1960’s, but was rejected by French President Charles de Gaulle. The General mocked the British ambition with a rendition of Edith Piaf’s song about an English aristocrat left out on the street, “Ne pleurez pas, Milord.” In the end, Britain came in from the cold, but British leaders always felt that they were not quite welcome in the European fold.

At two critical moments in the past, a Britishno” had a decisive impact on European monetary developments. In 1978, German Chancellor Helmut Schmidt and French President Valéry Giscard d’Estaing proposed an exchange-rate arrangement – the European Monetary System (EMS) – to restore stable exchange rates in Europe. Initially, the Germans and the French negotiated trilaterally, with the UK, in meetings that were slow, cumbersome, and unproductive.

In fact, the talks were sabotaged by British Prime Minister James Callaghan, who started conferring with US President Jimmy Carter about the challenge that the European plan posed to the United States, and how the Anglo-Saxons could respond to the continental threat. As he put it, according to the transcript of one of the phone calls, “with the strength of the German economy, it could be extremely serious, and I don’t know, Jimmy, how to obviate it.”

Callaghan and Carter were right to worry, but they should have worried about themselves rather than the Europeans. At the time, Britain and the US had much greater problemsmore radically unstable government finances and feebler economic growth – which ensured the ineffectiveness of their efforts to impede the European negotiations. Once Britain dropped out of the talks, a bilateral Franco-German deal was easily arranged. The EMS became a device for improving French policy and opening up the French economy.

The French position became a model for a new vision of how central banks could operate politically to enhance economic stability. Within a few years, France faced a major challenge when François Mitterrand’s experiment in radical socialist economics collapsed in 1983. When Jacques Delors, Mitterrand’s finance minister and the architect of his U-turn from nationalization and other socialist policies, later became EU Commission President, he was one of the most effective advocates of European monetary union.

The idea underlying the French strategy of tying the currency to German strength, the franc fort, was that it would limit or constrain domestic policy. Mitterrand had to wrestle with a fractious range of coalition partners. On the left, there were Communists, whom he wanted to marginalize politically, as well as Jacobin socialists who wanted a national path of economic development. Some of the most important industrial leaders also pleaded – in secretnight visits” to the presidential palace – for a national path involving devaluation and a weak currency.

The complex European way of constraining domestic opposition never appealed to British politicians. In the early 1990’s, Prime Minister John Major negotiated an opt-out from the Maastricht Treaty’s provisions on monetary union, but was proud that the pound was a stable and – as he saw it central part of the EMS. In September 1992, a speculative attack on the pound led to Britain’s departure.

The subsequent nine months saw a spectacular collapse of the European monetary order, as speculators worked over one country after another. Spain, Portugal, and the Scandinavian countries followed Italy and the UK out of the EMS, before France itself came under attack – the last of the falling dominos.

The crises that wracked Europe from September 1992 to July 1993 laid the foundation for the final drive to the establishment of European monetary union. Britain was left on the sidelines, and fiscal discipline was to be imposed externally. The major problem, of course, was that in some cases, discipline was not enforced.

As in 1978 and 1992, British obstructionism today may be a blessing in disguise for the rest of Europe. In particular, it opens the way to a Europe of variable geometry, in which only those countries willing to accept stability criteria will go forward with deeper integration. Institutionally, this may be more complex than an EU-wide treaty amendment, but the result can be tailored and crafted more appropriately to the real situations of rather diverse countries.

By contrast, for Britain, the legacy of its heroic defiance of Europe has been much bleaker. In both 1978 and 1992, the immediate aftermath was a substantial period of economic and political turmoil. Monetary shocks led to geopolitical irrelevance.

Today, as in 1978, the UK and the US are in a parlous fiscal state, and schadenfreude about European problems is no substitute for embarking on a strenuous path of reform.

Cameron, in particular, should not allow comparisons to Churchill go to his head. No one would include James Callaghan and John Major in the ranks of great British leaders. Cameron, too, could one day be remembered as a barely relevant and largely discredited figure.

Harold James is Professor of History and International Affairs at Princeton University and Professor of History at the European University Institute, Florence. He is the author of The Creation and Destruction of Value: The Globalization Cycle.