America Is Getting the Make-Work Jobs It Needs

Services industries are doing the same or less with more people. It's like a full-employment program.

Don't just sit there. Do nothing.

Source: Daily Herald Archive/SSPL/Getty Images

A year ago, I argued that lots of people don’t just want material goods -- they crave the dignity that comes from working for a living. Even jobs that economists might deride as make-work can yield meaning, self-respect and social status. For this reason, I suggested that the government should establish a program to give work to everyone who wants it, even if that comes at the cost of a bit less economic efficiency.

But it’s possible that American society is already doing this on its own. For reasons not entirely understood, several big important industries are becoming less productive -- using more and more people to do less and less work. These industries may already be functioning as giant make-work programs for a society having difficulty keeping up with rapid changes in technology and trade patterns.

One of these industries is construction. The value added of the U.S. construction industry -- or the amount it adds to the economy -- hasn’t changed much since 1970. But the number of Americans working in the industry has roughly doubled over that time, from about 3.5 million to almost 7 million:

Doing Less With More

Number of people employed in the construction industry

Source: Federal Reserve Bank of St. Louis

This means the U.S. construction industry is only about half as productive as it was a half-century ago. As the McKinsey Global Institute reports, the problem is  a global one -- the whole world is seeing stagnant or falling productivity in construction  -- but the U.S. stands out as an especially poor performer.

Why is construction doing less with more? Free-market enthusiasts will be tempted to blame the Davis-Bacon Act and other similar laws that mandate wage floors for construction workers, while others look to high land acquisition costs. But the biggest problems have little to do with these factors. For one thing, the industry has failed to consolidate. But what stands out is that it has become more labor-intensive and less capital-intensive over time -- in other words, construction is using fewer machines and more human hands to get each job done.

The legendary Milton Friedman is said to have once joked that if you just want to give every construction worker a job, you should have them use spoons instead of shovels. By becoming less capital-intensive, the industry is effectively moving in that direction.

But construction is far from alone. A report by the Brookings Institution shows that productivity is falling in many services industries:

Productivity in Retreat

Average annual change in total factor productivity, 1987-2014

Source: "Why Is U.S. Productivity Growth So Slow?," Martin Neil Baily and Nicholas Montalbano, Brookings Institution

It’s tempting, but wrong, to blame these productivity drops on Baumol’s cost disease -- the tendency for the cost of labor-intensive services to rise as wages in the economy go up. Costs are supposed to go up because people are willing to pay more for these services as the economy grows. But this means the output of these industries is supposed to grow accordingly. For some reason, though, output is lagging in health care, education and other services even as costs rise.

Of course, these purely dollar figures don’t take quality into account. There is some evidence that the health-care industry is producing better outcomes for each dollar spent. And it’s at least theoretically possible that rising productivity in industries such as manufacturing and design is partly due to better legal infrastructure and education.

But what’s undeniable is that these sectors are employing an increasing share of the U.S. workforce:

Growth Industries

Share of U.S. workforce employment

Source: Federal Reserve Bank of St. Louis

Health care now employs almost 11 percent of the populace, and education 2.5 percent. In 1990 those figures were 7.4 percent and 1.5 percent. In other words, the U.S. economy is sending more and more people into the sectors where productivity is either growing slowly or even falling.

Why is this happening? There are many possible answers, and the reasons probably differ from industry to industry. In health care, everyone seems to agree that the U.S.’s employer-sponsored hybrid public-private health insurance system encourages overpayment for goods and services. In construction, an uncompetitive bidding process may play a role. Primary and secondary education are mostly government-funded, while colleges may be overspending on administrative costs.

But there’s a second, equally important question: Is the stampede of American workers into unproductive industries really a bad thing?

Most economists would answer “yes” -- if construction, health care, education and the rest became more productive, workers would be freed up to go do other, more productive things, perhaps in industries that don’t even exist yet.

But it’s also possible that some of these workers would otherwise just choose not to work -- to sit in their parents’ basements and play video games -- or to try to strike it rich in black-market sectors like drug sales. It’s also possible that the economic pressures of automation and trade, combined with the difficulty of retraining for new careers, would be sending some of these workers onto the welfare rolls instead of into new, better jobs. If there’s one thing economists have been surprised by over the past two decades, it’s how difficult it is for workers to adjust to big changes.

So it’s possible that construction, health care, education and other industries are now functioning partly as giant make-work programs. Instead of giving a few people obviously useless jobs, this make-work system hides little bits of useless work in everybody’s job. That could be preserving the dignity of work for thousands, or even millions, of men and women standing around on construction sites, filling out paperwork in hospitals, or filing briefs for frivolous lawsuits. And that dignity, in turn, could be saving the U.S. from greater social unrest than it’s already experiencing.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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