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Monday, April 04, 2005

The Coming Explosion

The latest payroll figures, as reported by both The Washington Post and The New York Times on Saturday, are pretty dismal. Although the official unemployment rate declined from 5.4 percent to 5.2 percent for this past month, only 110,000 new jobs were created for the same time period.

The unemployment figure is actually a deceptive measure of the number of people out of work, however, because it is only a count of those still collecting unemployment insurance and actively looking for a job. Discouraged workers who have given up and are no longer looking for employment and who no longer qualify for unemployment benefits are not counted. So, most economists put the actual number of jobless Americans at a much higher rate than the official figure. Some have estimated it to be as high as 7 or 8 percent.

In addition, there is a troubling demographic shift in the employment rate. The amount of 55 to 64 year olds holding jobs has increased by 3.4 percent while the number of 25 to 34 year olds who are employed has decreased by 2 percent. As Gary Burtless, a labor economist with the Brookings Institute, points out, that trend does not bode well for the future earning power or economic vitality of younger workers.

In addition, I think it has serious ramifications for America’s political stability and security. That is a topic I will get back to. But first, we need to consider some of the reasons for the stagnant job growth.

It is puzzling to many economists because at the same time that jobs are not being created, the Gross Domestic Product (GDP), which is a measure of the country’s economic output, has been expanding at a healthy clip, averaging about 3 to 3.5 percent growth a year. Business is growing and the demand for goods and services is rising. So why the perplexing stagnation of job expansion?

Economists and business leaders blame it on a host of factors, including the rise of medical insurance costs, higher fuel prices, inflation, and the falling value of the dollar. Also, many businesses are simply reluctant to hire after the last bruising recession. Some still have an excess capacity of both goods and labor to wring out.

I think all of those are probably valid explanations for why the payroll increase has not kept pace with the robust growth of the economy and the strength of businesses, which are recording healthy profits. However, I think there are two other reasons for job stagnation that economists are not discussing, at least not in the two articles that I’ve just read. But these causes have been around for a while and have gotten plenty of coverage elsewhere in the business press in the recent past. They are outsourcing and productivity.

Outsourcing still accounts for a small percentage of the stubborn unemployment problem, but it is a significant if not large source of the current problem. And it is expected to grow as a factor in coming years, so it’s worth noting and paying attention to. America’s political and business leaders have to find ways to make it profitable to keep jobs at home, not just to prevent misery and political discontent but also because the growing trade deficit is going to come back to hurt business too. America’s demand for goods manufactured overseas has not abated despite the falling dollar. Of course, even if we all wanted to buy American made products to save our own jobs, where would we find a pair of shoes, a handbag, a shirt made in the U.S.? It’s impossible. We now make so little over here that reversing the trade deficit is going to prove to be a stubborn problem that individual consumers can’t solve even through organized “buy America” efforts anymore. We are going to need the government and business leaders to make a concerted effort to bring manufacturing back to our own shores.

But it is a real blow to America’s morale that even high tech, well paying service jobs are now leaving our shores. Everybody, by now, knows that the crisp American accent they hear from their customer service representative on the phone is really coming from somebody in Bangalore, India making a lot less than the person in Iowa or Georgia used to earn.

Although all of that hurts our economy and our people, there is a more stubborn, systemic reason for the lack of job growth. That is the productivity of the American worker. The truth is for years now Americans have been working harder and producing more goods and services with fewer employees. Higher output of goods and services with lower labor costs have translated into greater profit for companies. In theory, as they become more profitable, the businesses should expand, thus needing more labor. With this increase in demand, should come more jobs and higher pay.

Unfortunately, that hasn’t worked out. The whole law that higher productivity raises the worker’s standard of living along with the business owner’s economic well-being may be obsolete. Increased automation and high tech solutions may be taking the place of human labor. As one example, when was the last time you called a business for service and got a live human being rather than a recording on the first try? Or on any subsequent selections of the automated menu? More business transactions are taking place on the Internet. All of that is raising productivity for businesses while lowering labor costs for them. And that, unfortunately, has taken a greater chunk out of the labor market than outsourcing. Nor is it going to change any time soon. In fact, automated services will probably increase as more people get comfortable with self-service check out lines at supermarkets and discount stores.

All of this has also led to wages being flat for years. As The New York Times observed, in a glutted labor market, workers have little leverage or bargaining power to get higher pay. So their very productivity and efficiency are hurting them.

All of this is creating a dangerous and destabilizing trend, as I noted above. During the Twentieth Century economic turmoil in South America, Europe, Africa, and the Middle East, was soon followed by revolutions, coups, or other violent political upheavals. Of course, there are probably exceptions to this rule, but it’s been true in enough cases that it’s worth worrying about, especially if the demographic trend noted above that younger people are more apt to be jobless than their elders is true.

Nothing is more destabilizing to a nation than a large population of educated and unemployed or underemployed young males. When these young men see clearly that they are the losers in a system that handsomely rewards a small, elite investor-business class, while devaluing the worth and dignity of work for the vast majority, the way is clear for a wrenching societal resentment to flare up like a fire in the gut of these youth, coiling up until it hits the dynamite cap of violent ideology that explodes into a dead-end revolutionary movement.

Indeed, right now, such economic dissatisfaction is the very fuel of modern terrorist movements, whether it is Skinheads on the march in Germany, recruits for al Queda increasing in the Middle East and Europe, militias festering in the hills and valleys of Idaho and Montana, or drug lords and gangs duking it out in deadly turf battles and drive-by shootings in America’s inner cities. The coming explosion will be set off by the sparks of discontent from intelligent young men whose skills are under utilized in productive business enterprises and whose sense of self-worth is undermined by lack of meaningful employment.

In such an upheaval, it would be foolish for the rich to think that they alone could escape its consequences. With their jet-set lifestyles and their international conglomerates, they may believe that they could fly themselves out of harms’ way. But a rising tide of greed and globalism is sinking the hopes and dashing the aspirations of young people all over the world. Soon there will be no place where even the wealthy can flee to and no place where they will be safe from the wave of terrorism that will rise to drown them.

America needs a job and a pay raise. And the world needs a break from the debilitating effects of selfishness, greed and free trade run amuck. We all need to rise to the top again, rather than race to the bottom.

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