JOBS, JOBS, JOBS--EVENTUALLY
Revolutions are always bloody, and the productivity revolution is no exception. As companies large and small embrace new technologies and eliminate jobs, millions of workers are finding that their old careers are becoming obsolete. In just the past year, even as the economy grew by some 2.6%, more than 500,000 clerical and technical positions disappeared, probably forever. And better information systems are eliminating the need for lots of middle managers. It's no wonder that so many Americans are distressed: They see their paychecks lagging inflation, and they worry about joining their families and friends in the ranks of the unemployed. To these folks, the productivity revolution is a threat, not a boon.
Yet history offers striking evidence that technological revolutions eventually create many more jobs than they destroy. For every horse-carriage manufacturer or linotype operator sidelined by technology, new industries and job skills have been created. That has certainly been true for innovations such as electricity in the 19th century and the automobile in the early 20th century, which brought forth vast new industries employing millions of people. "Over the past 200 years, there's been no tendency toward rising unemployment because of people being kicked out of jobs by machines," says Joel Mokyr, an economic historian at Northwestern University. "It hasn't happened--not here, not in Europe, and not in Japan."
This reassuring historical perspective offers cold comfort for an unemployed manager or secretary who has to somehow meet the next mortgage payment. For the short run--that is, in the next several years--the employment picture is mixed. With companies such as Aetna Life & Casualty Co. and Sears, Roebuck & Co. using new technology to slice back-office employment, the economy is unlikely to produce a bonanza of new jobs. Few economists expect the unemployment rate, which is now stuck at 7%, to drop sharply until 1994, at the earliest.
Still, the productivity boom of the 1990s is already spawning the beginnings of new job-creating industries. The first signs of employment growth are visible in computer-related areas. The number of jobs at companies that supply software and data-processing services has grown by 120,000 over the past four years. And corporate customers, hungry for help in reorganizing their businesses around the latest information technology, are boosting employment at management consultants such as Andersen Consulting, which has grown by about 30% since 1989.
SPENDING POWER. The computer and software industries will supply only a small part of the new hiring, however. Rising productivity eventually will spur job creation in a broad swath of industries, ranging from entertainment to education to scientific research. The reason: Faster productivity growth means that per-capita income will start increasing again after years of stagnation. Consumers will enjoy rising real incomes and will be able to spend more on nonessentials, such as entertainment and travel. Companies, flush with higher profits, will be able to invest more in research and development. And more money will be available to address such pressing social problems as pollution and decaying schools.
The productivity bonanza won't stop there. In a classic example of a virtuous cycle, automobile companies, steel manufacturers, and drugmakers will be able to turn out products more efficiently and thus hold down price increases. Stable prices should dampen inflationary pressures and keep down interest rates, spurring long-run investment. And U.S. goods and services will become more competitive in world markets, creating new export opportunities.
All this economic activity could generate millions of new jobs. Restoring the long-term productivity growth rate to its 1960s levels--around 2% annually--would boost national output by 10% more than it would otherwise grow over the next decade. That would give the U.S. an additional $600 billion or so to spend each year. To get an idea of the number of jobs this sum could produce, look at state and local governments. They spend $850 billion annually today and employ about 16 million people.
MOVIES AND MUSEUMS. One big winner from higher productivity and rising affluence could be the entertainment and recreation industries. Consumers with annual incomes over $50,000 devote nearly 6% of their spending to entertainment, compared with 4.5% for average Americans. So as overall incomes rise, a whole range of leisure-time industries may expand sharply. That has already started. Over the past four years, employment in the movie-production industry has jumped by almost 30%, to 170,000, far outpacing any other sector of the economy (chart). Real spending on recreational activities such as participant sports has risen by about 9%, almost double the rate for all other consumer spending. Walt Disney Co., which spans the whole range of leisure-time businesses, has by itself added 19,000 new workers since 1988.
The same economic calculus applies to cultural activities, which are luxuries a poor economy can't afford. Spending on books, adjusted for inflation, has gone up sharply, by more than 16%, over the past few years, as has employment in bookstores. The number of people who are employed as writers, musicians, and artists has risen by some 20% since 1988, to 535,000. Museums and other cultural institutions, too, have been adding new workers throughout the recession far faster than the rest of the economy has.
The education industry, too, will likely do a lot of hiring in the years to come. As the rising productivity boosts per-capita income, people will become even more willing to spend on education: According to the Labor Dept.'s Consumer Expenditure Survey, spending on schooling rises faster than any other category as income goes up. Older workers will return to school to get the computer skills they need in the new economy. In addition, K-12 enrollments are anticipated to rise by 10% over the rest of the decade: Already, increasing school enrollments have generated 700,000 new education jobs since 1989.
As hard as it may be to believe at a time of government budget cuts and increasing taxes, rising productivity will also enable the U.S. to afford more public spending on the environment, education, and scientific research, which will generate a whole new set of jobs. This could reverse the trend of the past two decades, when stagnant incomes sapped popular support for public investment and social programs. "With an additional $630 billion per year, we could substantially increase support for all areas of scientific inquiry, even as we consume more and address any number of serious social problems," says Paul Romer, an economist at the University of California at Berkeley who specializes in growth.
SHUTTERED WALLETS. There's a rub, however: Most of the new jobs won't be created until Americans start feeling rich enough to open their wallets. So far, that isn't happening. Despite the recent gains in productivity, real wages and salaries have stagnated for the past four years (chart), with high unemployment making it hard for workers to push for pay raises. Indeed, according to the latest figures from the Bureau of Labor Statistics, executives and managers have actually absorbed a decline in earnings, adjusted for inflation, over the past year.
For now, productivity improvements are being reflected elsewhere--in slower inflation and lower long-term interest rates, and in higher corporate profits and a record-high stock market (table). In the past, when profits rose high enough, "prices fell and real wages rose," says Albert M. Wojnilower, senior adviser at First Boston Asset Management. This time, he adds, "it isn't happening."
So far. If history is a reliable guide, rising productivity will eventually lift the living standards of most Americans, not just those of software engineers or stock market investors. It took time for companies to finally figure out how to use new technologies in ways that dramatically boost output and lower costs, and it may take time for these gains to show up as higher wages and better jobs. But when the payoff comes, it will have been well worth the wait. Michael J. Mandel and Christopher Farrell in New York