Where Are The Jobs?

Economic growth is very strong, but America isn't generating enough jobs. Many blame outsourcing. The truth is a lot more complicated

Americans live in a faith-based economy. We believe deeply in education, innovation, risk-taking, and plain hard work as the way to a better life. But that faith is being eroded. The link between strong growth and job creation appears to be broken, and we don't know what's wrong with it. Profits are soaring, yet no one is hiring. Angry voices are blaming Benedict Arnold CEOs who send jobs to India and China. If highly educated "knowledge" workers in Silicon Valley are losing their jobs, who is really safe?

The truth is that we are living through a moment of maximum uncertainty. The economy is at an inflection point as new forces act upon it. Yet the shape and impact of these forces remains unknown. Outsourcing looms large as a potential threat because no one knows how many jobs and which industries are vulnerable. And productivity seems problematic because it's hard to see where the rewards for all the cost-cutting and hard work are going. Meanwhile, the Next Big Thing that is supposed to propel the economy and job growth forward after the Internet boom isn't obvious. As a result, CEOs are reluctant to place big bets on the future. Workers hunker down. And those laid off are at a loss trying to retrain. How can they, when they don't know where the new jobs will be and who will be hiring? It's not even clear what college students should major in anymore. No wonder this feels like a new age of uncertainty.

THE REAL CULPRIT. Yet there are things we do know. The real culprit in this jobless recovery is productivity, not offshoring. Unlike most previous business cycles, productivity has continued to grow at a fast pace right through the downturn and into recovery. One percentage point of productivity growth can eliminate up to 1.3 million jobs a year. With productivity growing at an annual rate of 3% to 3 1/2% rather than the expected 2% to 2 1/2%, the reason for the jobs shortfall becomes clear: Companies are using information technology to cut costs -- and that means less labor is needed. Of the 2.7 million jobs lost over the past three years, only 300,000 have been from outsourcing, according to Forrester Research Inc. People rightly fear that jobs in high tech and services will disappear just as manufacturing jobs did. Perhaps so. But odds are it will be productivity rather than outsourcing that does them in.

We know also where the benefits of rising productivity are going: higher profits, lower inflation, rising stocks, and, ultimately, loftier prices for houses. In short, productivity is generating wealth, not employment. Corporate profits as a share of national income are at an all-time high. So is net worth for many individuals. Consumer net worth hit a new peak, at $45 trillion -- up 75% since 1995 -- and consumers have more than recouped their losses from the bust.

We know, too, that outsourcing isn't altogether a bad thing. In the '90s, high-tech companies farmed out the manufacture of memory chips, computers, and telecom equipment to Asia. This lowered the cost of tech gear, raising demand and spreading the IT revolution. The same will probably happen with software. Outsourcing will cut prices and make the next generation of IT cheaper and more available. This will generate greater productivity and growth. In fact, as venture capitalists increasingly insist that all IT startups have an offshore component, the cost of innovation should fall sharply, perhaps by half.

We know something about the kinds of jobs that could migrate to Asia and those that will stay home. In the '90s, the making of customized chips and gear that required close contact with clients remained in the U.S., while production of commodity products was outsourced. Today, the Internet and cheaper telecom permit routine service work to be done in Bangalore. But specialized jobs that require close contact with clients, plus an understanding of U.S. culture, will likely remain.

America has been at economic inflection points many times in the past. These periods of high job anxiety were eventually followed by years of surging job creation. The faith Americans have in innovation, risk-taking, education, and hard work has been sustained again and again by strong economic performance.

There's no question that today's jobless recovery is causing many people real pain. The number of discouraged workers leaving the workforce is unprecedented. Labor-force participation is down among precisely the most vulnerable parts of the workforce -- younger and nonwhite workers. Some are going back to school, but many are simply giving up after fruitless searches for decent jobs. If the participation rate were at its March, 2001, level, there would be 2.7 million more workers in the labor force looking for jobs. This would push the unemployment rate up to 7.4%, not the current 5.6%.

History has shown time and again that jobs follow growth, but not necessarily in a simple, linear fashion. America has a dynamic, fast-changing economy that embodies Joseph A. Schumpeter's ideal of creative destruction. We are now experiencing the maximum pain from the wreckage of outmoded jobs while still awaiting the innovations that will generate the work of the future. While America's faith in its innovation economy has often been tested, it has never been betrayed. Given the chance, the economy will deliver the jobs and prosperity that it has in the past.

By Bruce Nussbaum

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