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Economy: Heal Thyself Is a Foolhardy Approach

by Jul 18, 2011, 3:38 pm ET

Following the release of the June unemployment figures, House Speaker John Boehner released a statement that began with: “The American people are still asking the question: where are the jobs?

Boehner is not alone. A lot of people of all political, economic, and social persuasions seem to be asking the same question. But because many of us have been exhorting for years that such a scenario was inevitable, the current job crisis should be no surprise. More importantly, it should be more than obvious that strategies that worked in the past would not work in the future. As Peter Drucker once said, “the greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.”

A new report released by McKinsey Global Institute seems to confirm that political rhetoric and populist driven strategies won’t be enough to see the United States return to full employment before 2020.

The report includes quite a few compelling statistics that I hadn’t seen before, at least not in these terms:

  • 7 million: decline in the number of U.S. jobs since December 2007
  • 21 million: jobs needed by 2020 to return to full employment
  • 40%: proportion of companies planning to hire that have had openings for six months
  • 1.5 million: estimated shortage of college graduates in the workforce in 2020.
  • 23%: drop in rate of new business creation since 2007, resulting in as many as 1.8 million fewer jobs; the number of employees per new business has been falling, from eight in the 1990s to fewer than six in recent years.
  • 20%: proportion of men in the population, not working today; up from 7% in 1970.
  • 1 in 10: the number of Americans who move annually, down from 1 in 5 in 1985.

All told, between 2000 and 2007, the United States posted a weaker record of job creation than during any decade since the Great Depression. Total employment from 2000 to 2007 increased by 9.2 million — and 1.2 of those jobs were in sectors directly fueled by the credit bubble. The current job crisis didn’t start with the recession. The recession only accelerated and exacerbated it.

Under several job-creation scenarios, McKinsey estimates that as few as 9.3 million jobs could be created to as many as 22.5 million. Unfortunately the low-job-growth creation scenario is too familiar and will be the result of continued contraction in manufacturing employment, continued automation and offshoring in administrative and back-office positions, and new automation in retail (such as more opportunities for self-checkout.)

To achieve a high-job-growth scenario, our economy will have to rely on the healthcare sector. If this scenario comes to fruition, another 5 million jobs might be created thanks to rising demand from an aging population and the addition of millions of newly insured Americans to the healthcare system. If this scenario is accurate, politicians and citizen movements calling for an end to the proposed healthcare plan could win one battle (health care) but lose another (new job creation). In addition to healthcare, continued growth in business services might add another 6 million jobs. A housing recovery could create another 3 million jobs.

To reemploy the millions of unemployed with less than a college degree, the high-job-growth scenario must become a reality. The catch-22 is that to fill many of the jobs in the high-job-creation scenario, candidates with college degrees will be required. McKinsey projects that by 2020, 56.5 million members of the workforce will have college or graduate degrees. But to fill all the jobs created, an additional 1.5 million workers with college degrees would be needed. On the other hand, 64 million workers will have a high school degree or less, leaving 5.9 million more high school dropouts than jobs available.

But job creation alone won’t solve the problem. Those job creation-job filling scenarios assume that the fields of study pursued by the workers matches the needs of the employer and economy. Unfortunately that’s a faulty assumption.

Based on current trends, t0o few Americans who attend college and vocational schools choose fields of study that will give them the specific skills that employers are seeking. Twice as many students in the U.S. will graduate with degrees in social sciences and business rather than the much-needed skills in science, technology, engineering, and mathematics (STEM). Potential shortages loom large for nutritionists, welders, nurse’s aides, computer specialists, and engineers.

This skill gap is no longer pending as 64 percent of companies interviewed for the McKinsey study reported they cannot find qualified applicants, with management, scientists, and computer engineers topping the list.

The report offers three recommendations to achieve full employment: (1) sustained demand growth; (2) rising U.S. competitiveness, and (3) better matching of U.S. workers to jobs. Two of the three strategies seem to be out of the control for all but maybe the large multinational organizations. Better matching of workers to jobs offers the single best solution — and maybe the only one — for businesses committed to hiring and retaining a skilled, competitive workforce.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  • Keith Halperin

    Thank you, Ira. You raised some excellent points. I’m going to read the full report.

    Some comments;
    1) The era of very low job creation 2000-2007 was during the period of Bush Era tax reductions. At least for these 7 years, lower taxes didn’t spark job creation, as the House Republicans would have us believe.

    2) I believe we may be in for a “lost Decade” similar to Japan’s
    a) We’re pretty much there already re: job creation, wage increases for the vast majority of American workers, etc.
    b) We still have some things to work out- the “New F-Bomb” as Harry Shearer calls it- the foreclosure crisis is going to take some additional years to work through.
    c) Even if we do raise the debt limit in time, the current and last-minute shenanigans being played do not inspire the confidence of the global investment markets.

    3) I think that the low-medium forecasts are most realistic.
    a) To achieve the high projection (21M new jobs by 2020) would require the uninterrupted creation of 200k+ jobs/mo STARTING NOW.
    b) When cash-flush companies believe they can expand, I believe they may take the course of the bailed-out banks, and grow through merger/acquisition rather than increased FT hiring. This would tend to dampen increased employment, rather than accelerate it.

    4) Skills mismatch- the U.S. higher educational system is slowly collapsing due to major funding cuts in most states-tuition hikes and program cuts are making it harder and harder for the kids of middle class kids to receive adequate, affordable educations. Budget cuts are also negatively affecting community colleges which provide much of the vocational training for many of the skills which are and will continue to be needed in 2020.

    5) I would encourage young people with (or likely to get) a college degree who aren’t part of the “Fabulous 5%” (that everyone wants to hire) to consider
    work/emigration to the wealthier OECD countries like Canada, Australia, New Zealand, or Northern Europe. (I don’t think it’s particularly easy for Americans to work in these places, but if you have an Irish grandparent, you might be able to do the Northern European option.)

    -Keith

  • http://sovren.com Robert Ruff

    Well, the job growth has been in China. The problem is TRADE policy, not TAX policy. We dithced FAIR TRADE policy in favor of FREE TRADE. Unfortunately, without tariffs to adjust the prices of imports, we force Americans to compete against slave wages, unsafe and unsanitary work conditions, and non-existent pollution controls. Both parties have been bought by internationalists who are the beneficiaries of this exploitation, at the expanse of our middle class.

  • Keith Halperin

    @ Robert:
    Nobel-prize winning economist Joseph Stiglitz points out similar concerns here:
    http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105.

    Cheers,

    Keith