At first glance, the U.S. labor market looks in surprisingly good shape. The latest report from the Bureau of Labor Statistics shows that payroll employment has risen four straight months. And unemployment fell in August to 5.7%, a number that would have looked great during the late 1970s, '80s, and early '90s, when unemployment rarely dropped below 6%, even in good times.
But just as high stock prices in early 2000 concealed a troubled equity market, today's good employment numbers mask a fundamentally weak labor market. Unless something happens to alter the economic equation--such as an unexpected surge of growth--the next six months to a year are likely to see a sharp rise in unemployment, especially among the skilled and educated workers who were the prime beneficiaries of the 1990s boom. That's on top of the small raises and soaring benefit costs that are already hitting employees.
Here's why joblessness is likely to rise: Across the board, companies are facing an unholy trio of low profits, weak demand, and falling prices--with no relief in sight. Revenues for the companies in the Standard & Poor's 500-stock index are down 2% over the past year, adding to the pressure on businesses to cut costs by cutting workforces. At the same time, productivity is soaring at a rapid clip--a 6% gain over last year at nonfinancial corporations. That's allowing businesses to meet flat demand with fewer workers.
Even more distressing, some of the sectors where the job market has stayed relatively strong--including health, education, finance, and retailing, which together make up about 40% of the total workforce--are showing signs of cracking. And the already grim labor picture in the airline, energy, technology, telecom, and media sectors--some 7% of the workforce--keeps deteriorating.
There are plenty of indicators that the labor market is worsening. In the week ending Sept. 7, the number of initial unemployment claims hit 426,000, the highest level in more than four months, according to the Labor Dept. And even after more than a year of cutbacks throughout the economy, announcements of further layoffs keep coming. On Sept. 17, Charles Schwab & Co., the giant discount broker, said it will cut 1,800 workers, 10% of its staff. And already hard-hit companies such as Delta Air Lines Inc. and Lucent Technologies Inc. have announced that they, too, are considering more cuts. "A lot of companies that didn't make moves earlier are scrambling to meet their numbers by the end of year and are now letting people go," says Linda S. Paulk, president of Dallas-based Snelling & Snelling Inc., one of the country's largest employment agencies. Especially for mid- and senior-level execs, adds Paulk, "it's the worst labor market we've ever seen."
This is the dark side of the productivity boom. During the second half of the 1990s, output per worker rose, but soaring demand and revenues, driven in part by the technology and telecom boom, helped boost hiring and push down the unemployment rate below 4%. Wages and bonuses soared, and it seemed like a golden age for workers.
But rising productivity without rising demand is a recipe for disappearing jobs. If companies can't raise prices, the only way they can boost profits is to cut workers--and higher productivity makes that possible.
Moreover, because the slowdown is focused on industries that employ a highly educated workforce, most of the pain is being felt by professionals and managers rather than the blue-collar and service workers who absorbed the brunt in the past. The unemployment rate for managers and professionals has jumped to 3.1%, just below its peak level of the early 1990s, during the so-called white-collar recession. By comparison, the unemployment rate for unskilled blue-collar workers stands at about 8%, no higher than its average for the whole 1990s and far below the 11.6% rate it hit in 1992. Indeed, the number of blue-collar unemployed has fallen by 280,000, or 10%, since the beginning of the year. Workers with a bachelor's degree or some college education now make up almost 50% of unemployed workers 25 years and older. That's up from 37% in 1992.
Many of these workers are having a tough time finding new jobs. D. Scott Burton, 35, a corporate-finance consultant in Austin, Tex., was laid off from Internet consultant marchFIRST in March, 2001. He has spent the past 16 months following up job leads, with no success. "I'm petered out," says Burton. "You just survive lead to lead."
It could get a lot worse. The pool of educated workers is growing much faster than the supply of less-educated workers. Over the past two years, the number of college-educated Americans over age 25 has risen at a 3% annual rate, vs. 0.9% for the adult population overall. That means the economy must create a large number of new high-end jobs just to keep the white-collar unemployment rate from rising more.
What has kept the educated job market from falling off the cliff so far is continued hiring by some key industries. Health care has added more than 300,000 new jobs over the past year, while elementary and high schools took on 200,000 additional teachers as enrollments soared. Banks and mortgage bankers have added 60,000 workers to deal with the refinancing boom. And while retailing overall has shed jobs, the buying binge of the past year has led to the hiring of new salespeople and managers at home-supply and furniture stores and auto dealers.
But these sectors have probably hit their limit. Future education hiring will be constrained by tight state and local budgets as tax revenues fall off. And the latest projections from the Education Dept. suggest that enrollments for kindergarten through 8th grade have topped out, lessening the need for more teachers.
In financial services, banks are squeezed by soaring labor costs and damage from bad debts. In the past year, banking wages and benefits are up a stunning 6.7%, as strong earnings at many banks enable them to keep boosting pay. But banking giant J.P. Morgan Chase & Co. just announced that profits will miss forecasts due to big loan losses and shrinking trading volumes, suggesting bad news ahead for the banking sector and its employees. "Unfortunately, there will be more layoffs," says Alan Johnson, a Wall Street compensation consultant. "Business is a lot slower than [banks] hoped it would be."
Signs of danger are also apparent in retailing, which faces the specter of a weak holiday season and competition from Wal-Mart Stores Inc. (WMT ) and other discounters. Retailers are likely to curtail hiring, from supervisors to sales help. Even health-care companies may see slower revenue growth as customers try to hold the line on costs.
Nor is there any hope that tech or telecom will become sources of new jobs anytime soon. With capital spending still stagnant, tech companies are still in shrink mode. Cisco Systems Inc. has trimmed its head count by 5%, or 2,000 workers, in the past year, through attrition and a hiring freeze, still in effect. Weakness in Web advertising is hitting companies such as Yahoo! and CNET Networks Inc., which recently axed 10% of its workforce. And the telecom industry, still in trouble, "will continue to reduce labor until the market reaches equilibrium--and that won't be anytime soon," says F. Duane Ackerman, chairman and CEO of BellSouth Corp.
That doesn't mean there aren't bright spots. Stephen D. Newton of Russell Reynolds Associates Inc. in Houston, a headhunter who specializes in placing finance execs at energy companies, says he's seeing job opportunities at "mid-cap level" companies--those whose sales range from $500 million to $1 billion.
Still, that's hardly enough to keep the unemployment rate down. Unless the labor market perks up soon, it could be a long, cold winter for job hunters.
By Michael J. Mandel, with Emily Thornton in New York, Stephanie Anderson Forest and Andrew Park in Dallas, Ben Elgin in San Mateo, Calif., and Charles Haddad in Atlanta