This is the 2nd installment of our 3-part series looking at income inequality, lack of job creation, and tax policies on the top earners. In the first piece, we identified a rapidly growing income disparity that threatens the fabric of American society. In this section, I worry about the continuing high unemployment rate in this country, the poor prospects for job creation, the disappearance of many traditional middle class positions, and the impact on the U.S. economy of this stagnation.
Corporate Profits are Soaring, but Job Creation remains Anemic
Corporate profits are up, stock prices are soaring, and most banks and industries are flush with cash. So why isn’t anyone hiring?
Well, it turns out they are, but they are hiring overseas where sales are surging and the pipeline of orders is fat. For example, more than half of the 15,000 people that Caterpillar hired this year were outside of the U.S. Same for UPS. Sales in international markets are growing at least twice as fast as domestic ones. This helps explain why the stock market is soaring and U.S. companies are performing well (all but 4% of the top 500 U.S. corporations reported profits this year).
But the jobs are going elsewhere. U.S. companies are creating more jobs overseas than at home, leaving our unemployment rate at a discouraging 9.2%. We know that American jobs have been moving overseas for over two decades, but it used to be making clothes and toys. Now those jobs have become more sophisticated – think semiconductors and software. Companies today are getting top talent in the emerging economies. In addition, needs for these skills are growing dramatically in emerging markets like India, China and Brazil, while consumer demand in the U.S. has been subdued.
For example, Caterpillar’s Asia-Pacific sales soared 38% in the first 9 months of the year, compared to 16% in the U.S. DuPont now sells less than a third of its products in the U.S. The company said the number of employees in the U.S. shrank by 11% in the last year, but its workforce grew 54% in the Asia-Pacific countries. Coca-Cola is aggressively courting the emerging middle class in Africa, China, and India where a billion consumers are expected to emerge. This strategy isn’t restricted to the large American companies. Entrepreneurs in the technology, retail, and the manufacturing areas hire globally from the start.
Job growth in the U.S. has effectively stopped, and wage growth as well. The fraction of the American population now working (58.2%) is near a 25-year low—lower that it was when the recession officially ended in June of 2009. Further, for the first time since WWII, there has been a decline in aggregate wages and salaries over the past two years. These problems are likely to persist.
Even if job growth miraculously rebounded as it did during the late 1990’s—averaging 325,000 new jobs a month—the unemployment rate wouldn’t fall below 6% until 2016. With the need to reduce our skyrocketing debt, it is unlikely that sufficient funds will be pumped into the economy, from private or government sources, to provide any kind of a boost for job creation.
Mort Zuckerman laments these discouraging trends. He points out that despite the most stimulating fiscal and monetary policies in our history, there have been no net increases in full-time jobs (Mort Zuckerman, “Why the jobs situation is worse than it looks”, US News and World Report, June 20, 2011). Over 14 million people are now unemployed, more idle men and women than at any time since the Great Depression. Zuckerman fears that the disappearance of jobs is not cyclical, but structural—they will not reappear.
Zuckerman adds that throughout this fragile “recovery”, over 90% of the growth of output has come from increased productivity, not job creation. In fact, companies are demanding more and paying less—and getting it—from the workers.
Many companies are eliminating middle management and supervisory positions. Others are demanding more “productivity” from this group. For example, a large (but struggling) hotel resort in the Reno area recently sent a memo to its salaried management staff, suggesting they consider 50-60 hour work weeks as normal. Other firms have eliminated many mid-level positions, viewing their role as superfluous or not worth the cost. The same is happening in many industries across the U.S.
Even the most successful companies in the U.S. are using the pressures of the recession to become even more productive—by deploying more automation technologies, software, outsourcing, and robotics. “Anything”, Tom Friedman notes, “they can use to make better products with reduced head count and health care and pension liabilities” (Tom Friedman, “The Start-Up of You”, the New York Times, July 12, 2011). Freidman points out that the top companies in the most dynamic sector of the U.S. economy, Silicon Valley, are fast-growing Internet/social networking firms. But here is what’s worrisome—you could put all the employees of all these firms in Madison Square Garden and have plenty of room left over. They are hiring, yes, but selectively and for only the most highly qualified who can “invent, adapt and reinvent their jobs ever day”, Freidman adds.
Hey, anyone seen workers out on strike? Not in a heck of a long time. They are just happy to hold on to their jobs, even with stagnating pay and decreased benefits. Many are watching carefully for any openings in the public sector, where compensation—pay, retirement and health benefits—have risen or stabilized, especially for fire and police positions. While efforts are being made to rein in unsustainable compensation packages for government employees, especially at the local level, these jobs are still extremely attractive.
The latest jobs report is dismal. With the economy expanding only 1.9% in the first quarter, unemployment has steadily risen. In June employers added only 18,000 jobs—about 125,000 are needed each month just to keep up with population growth and twice that many to rapidly reduce unemployment. Ain’t gonna happen! According to a WSJ article, this portends increasing long-term employment for many, especially older and more educated workers. The harder it is for them to find jobs, the more they just give up, and that translates into permanent productivity losses and higher health/unemployment costs for the government (Sara Murray and Phil Izzo, “Job Search Stretches Past a year for Millions”, WSJ, July 22, 2011).
Many observers would be quick to indicate that the core issue is that we are not producing a sufficient number of individuals with the education and skills needed for their jobs. This is true, but the problem is not one of capacity. There is ample room for American youth to enter these technical and entrepreneurial fields in our universities, but they don’t. These are not fields that are captivating our youth, as they are in the rapidly developing regions. Thus American universities have increasingly turned to offering admission for foreign students to fill space. The irony is that we attract foreign students to come here for an American-taxpayer subsidized education to help fill space in our classrooms because of a lack of interest on the part of our populace! Then, of course, our immigrations laws are such that these bright, young entrepreneurs then are not permitted to stay here and apply their skills and enthusiasm in our own economy!
At the K-12 level, it is true that our education system is failing in many respects—graduation rates are worrisome, demonstrated capabilities in math and science are alarmingly low, and the ability to effectively use communication and language skills are a major concern. However, I would assert that the primary problem is the student population itself and the environment from which they come, placing a burden on a struggling K-12 system that cannot overcome the lack of English skills, behavioral problems, and an absence of commitment to learning on the part of the kids it must serve.
Is there a solution? None that I can see.
So we have an ironic situation: American companies are flush with cash, their stocks are rising, and executive compensation is soaring. Yet they are not hiring, job creation is anemic, and the average compensation for middle Americans is actually falling. Philippe Dauman at Viacom pulled in $84.5 million last year, but the company is trimming its payrolls. Howard Schultz of Starbucks was awarded $21.7 million, in part for his key role in turning around a company that was headed downhill, but some would say on the backs of millions of “baristas” working for minimum wages.
While companies and the very wealthy may be sitting on hordes of cash, most Americans are not. The formerly well-off are now plunging into despair, many saddled with a huge debt overload. Some estimates are that the bust of the housing bubble has led to a loss of more than $14 trillion of personal wealth. In the face of this rise in personal debt and perceived loss of wealth, American workers’ compensation is declining. The typical worker today actually makes less than he did in 1969 (adjusted for inflation), but lucky if he has a job!
We are in a vicious cycle in which job and wage losses will further reduce Americans’ willingness to spend. This portends further declines in consumer spending, the primary force behind American economic growth in recent years. With corporate America reluctant to hire and consumers afraid to spend, the near term outlook for job creation looks bleak.
Anyone have any bright ideas as to how to rectify this crisis?
Tyrus W. Cobb
Minister of Enlightenment, the NSF