Commentary: Jobs: The Lull Will Linger

Structural shifts across several key sectors make the robust job growth of the 1990s unlikely to return anytime soon

Remember when the U.S. was a big, mean job machine? The 1990s saw the creation of 22 million jobs, the equivalent of adding another California and New York to the national labor market. Even after the 2001 recession and the September 11 terror attacks sent employment reeling, most economic observers -- including this one -- were confident that the job slump was just temporary. In fact, the employment market didn't turn up until August, 2003, and its performance since then has hardly been riproaring. In September only 96,000 jobs were created -- the fourth disappointing month in a row. And while the economy has added 1.7 million jobs in the past year, that's still 500,000 less than the 2.2 million average annual gain in the 1990s. True, the shortfall may be reduced a bit when the Bureau of Labor Statistics revises its data in early 2005. But there's little doubt that job growth has slowed significantly from the glory days of the '90s.

That sluggish performance is also starting to raise questions about the economy's underlying strength. Tepid job growth weakens household incomes and makes the economy more vulnerable to negative shocks, such as more bad news out of Iraq. That's why some economists have started lowering their gross domestic product forecasts for the fourth quarter and beyond.

What's holding back job creation? Many believe the problem is short-term in nature, caused by such factors as this year's unusually active hurricane season, political uncertainty, and the spike in oil prices. Others blame more persistent influences, such as high health-care costs and intense global competition.

Yet the data clearly suggest that the job machine may have developed a long-term stutter for other reasons. The current shortfall in job growth, in fact, is heaviest in a few surprising sectors, such as retailing, education, and health care; telecommunications is a big culprit as well. A comparison of how many jobs these sectors added over the past year with the average number they added annually during the 1990s indicates that these laggards, for the most part, are undergoing structural changes that make a return of robust job growth unlikely anytime soon.

The hardest-hit has been retailing, squeezed by low-cost Wal-Mart Stores Inc. (WMT ) and high-productivity online retailers. Retail jobs rose by only 94,000 during the 12 months ended in September, far lower than the annual average gain of 210,000 jobs in the earlier decade. Next on the list is education, where the slowdown in growth of K-12 enrollment has dramatically reduced hiring. Other job laggards, such as telecom and health care, face severe pressure to reduce costs. And the arts, entertainment, and recreation sector, which created 65,000 jobs per year in the 1990s, added only 10,000 over the past year. One explanation: upheaval brought on by new technologies in areas such as the music industry.

The story in manufacturing, especially recently, is a bit more complicated. Manufacturers were not contributors to the job boom of the 1990s, with factory employment falling by 400,000 annually, on average, over the decade, and continuing to plunge in 2001, 2002, and 2003. Thus, the 9,000-job increase in manufacturing over the past year, however small, marks somewhat of an improvement.

Overseas Shift

Still, gains in manufacturing employment should have been a lot bigger thanks to the recent jump in retailing productivity. How so? The logic is simple: Lower costs and higher productivity help retailers hold down prices. Lower prices, in turn, enable consumers either to buy more from that company or to spend elsewhere. That creates a greater demand for services and other manufactured goods.

But while gains from higher retailing productivity are boosting demand for goods, the resulting factory jobs are showing up in other countries. Retail sales rose by a strong $62 billion over the past year, measured in 2000 dollars. But guess what? Imports of consumer goods, motor vehicles, and foods and beverages rose by exactly that amount. So rather than creating 100,000 or more manufacturing jobs in the U.S., that $62 billion in spending only hiked job growth elsewhere.

Given the continued pressures, it's unlikely that the forces holding down job growth are going to abate in the near term. The newfound productivity boom in retailing underscores the point. Until recently, much of retailing had been stuck in the productivity doldrums. From 1990-2002, output per hour rose by only 1.7% per year in department stores and motor-vehicle dealers, and a meager 0.2% per year at food and beverage stores, including grocers. Together these industries account for over 40% of retailing employment.

Over the past year, though, a combination of job cuts and new technology, from improved inventory-management systems to wireless computers that allow shoppers to cut checkout time by scanning their own groceries, have led to much bigger productivity gains in these industries -- 4% or more, according to estimates by BusinessWeek. But these retailers will still have to hold down hiring if they hope to compete with Wal-Mart and an ever-more-efficient set of online rivals. Published data show that online retailers boosted productivity by 16% in 2003, while BusinessWeek estimates suggest that productivity growth accelerated yet a further 20% by the middle of 2004. Inc. (AMZN ), for example, boosted its workforce by 8% in the year ended in June, 2004, but its sales were up 34% compared with the previous year. That translates into a 24% gain in sales per worker and explains why online retailers added only 12,000 in the past year. The bottom line: Retailing isn't likely to soon regain its prominence as a job creator.

The same is true in education, where slowing job growth is driven mainly by demographics. During the '90s, elementary and secondary enrollment rose by an average of almost 700,000 students per year, generating huge demand for new teachers. Today, the Education Dept. estimates that the increase in the student population is much slower, with enrollment growing by only 160,000 in 2004.

An Eye on Telecom

Partly as a result, the education sector added only 135,000 jobs over the past year, compared with an annual average of 240,000 in the 1990s. The BLS recently reported that the number of people working in education, training, and library occupations hadn't risen at all over the past year despite gains in most other occupations. Since teaching and related professions almost all require a college degree, such stagnation in education-related jobs is also one factor in explaining why the college-educated job market continues to remain troubled. That's a critical difference between the 1990s and today.

Given these demographic changes, it's unlikely that a rebound in education hiring to the levels of the 1990s is on the horizon. The only thing that could change the equation would be enough additional government money to significantly lower teacher-student ratios in K-12 schools or to significantly boost enrollments at the college level.

The long-term job situation is not all gloomy, however. Consider telecommunications, which was a moderate job creator in the 1990s, adding about 30,000 per year. Now, of course, the sector is in slash mode, cutting 40,000 jobs over the past year, with more to come. On Oct. 7, for example, AT&T (T ) announced plans to shrink its workforce by an additional 7,400 jobs on top of what it had already announced. But in the long run, telecom could again become a net generator of jobs as new services are developed and the need for workers to install and maintain broadband connections -- more temperamental and finicky than ordinary phone lines -- keeps growing. Both Presidential candidates have voiced support for an expansion of broadband connections.

Then there's health care, which added 280,000 jobs in the past year. That's a big number, but not as many as the annual job gain of 340,000 in the 1990s, with much of the shortfall coming in nursing homes and home health care. However, here demographics are a plus. As the population ages, health-care employment will likely accelerate.

The lesson here is that the days of prolific job creation are over, at least until another breakthrough innovation such as the Internet comes along. In the 1990s, the wind was at our backs, and jobs were easy to come by. Today job creation is much tougher for many reasons -- and for now that's just a reality we have to live with.

By Michael J. Mandel

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