Understanding The U.S. Economy: Lots Of Rotten Jobs
“It doesn’t make any difference whether a country makes computer chips or potato chips!”
—Attributed to Michael Boskin, Chairman of President George H. W. Bush’s Council of Economic Advisors
When U.S. unemployment is at a 50-year low, why do so many people have trouble finding work with decent pay and adequate predictable hours? A new economic indicator—the US Private Sector Job Quality Index (JQI)—gives the answer: we have lots of jobs, but they are increasingly low-quality jobs.
“The problem is that the quality of the stock of jobs on offer has been deteriorating for the last 30 years,” says Dan Alpert, an investment banker and Cornell Law School professor. The JQI is built and maintained by Alpert and his fellow researchers at Cornell University Law School, the Coalition for a Prosperous America, the University of Missouri-Kansas City, and the Global Institute for Sustainable Prosperity. (As to how the JQI is constructed, see the technical note below.)
So, when tomorrow morning at 8.30 a.m. EST, the Bureau of Labor Statistics announces the monthly official unemployment statistics and the administration trumpets “the best economy in history,” we will know why that isn’t true.
The quality of jobs today is not quite as bad as it was in 2012, but it’s much worse than it was in 1990s and the early 2000s. Overall, we are seeing a secular decline in job quality.
The JQI not only offers “a real-time read on the quality of U.S. jobs.” It indicates solutions to problems that economists have puzzled over for decades.
1. If Unemployment Is So Low, Why Don’t Wages Go Up?
Economists have long wondered: if unemployment is so low, why aren’t we seeing more rapid wage increases? In fact, median salaries have been mostly stagnant in the U.S. for the past several decades. The strong relationship between unemployment and inflation was based on data first observed by New Zealand economist, William Phillips in 1958 and the resulting ‘Phillips Curve,’ and is still part of the standard policy doctrine of most central banks.
Yet over the last decade, there has been an apparent disconnect between low unemployment and wage inflation. This has been attributed to lower participation rates among prime and younger workers. But that’s not the whole story.
“A far more substantial factor severing the earlier connections between unemployment and inflation, however, is the changed composition of the employment base itself,” states the JQI White Paper. “The channel through which this occurs is fairly simple: If a greater proportion of jobs produce incomes below the mean of all jobs (i.e. a reduction in the level of the JQI), than they did in the past, then an increase in the proportion of people working will have a lesser impact on household incomes—and therefore aggregate demand—than in the past… Despite central banks in the U.S., the Eurozone, Japan, and the U.K. having pumped more than $10 trillion into their collective economies over the past decade, aggregate demand remains tepid.””
2. Why Is Participation In The Workforce So Low?
Another perennial debate among economists is: why is participation in the workforce so low? Tens of millions of working-aged Americans are still not formally employed and have no apparent interest in sending out a resume. If the job market is so hot, why are so many people sitting on the sidelines? One frequently cited explanation is the growing proportion of older generation workers. Now we have another more important element. Workers don’t re-enter the workforce because many of the the jobs themselves are rotten.
3. Weren’t Manufacturing Jobs Replaced By Other Jobs?
The U.S. manufacturing workforce has declined dramatically in the past three decades from 23% of total US civilian employment in 1970 to just 8% in May 2019. Since overall unemployment is now so low, the lost manufacturing jobs must have been replaced by other jobs. But were they better or worse jobs? Now the JQI White Paper has the answer. “Lost manufacturing jobs were chiefly replaced by lower-wage/lower-hours service jobs.”
The decline in U.S. job quality over the past three decades is closely associated with the decline in manufacturing jobs. As the 1990s progressed, U.S. firms enthusiastically embraced the outsourcing of manufacturing to Asia, whilte the so-called Asian Tiger economies— Singapore, Hong Kong, Taiwan, and South Korea (all following the Japanese export model)—accelerated manuacturing at an enormous speed during the 90s. The U.S. manufacturing jobs were eventually replaced, but with low-value-low quality jobs.
4. Why Didn’t High Tech Didn’t Save the U.S. Economy?
Many looked to the category of jobs known as Professional and Technical Services as a path for the economy to “move to higher ground.” Professional and Technical Services were supposed to offer high pay, growth in employee numbers, and an opportunity to increase productivity. In fact, the JQI does report that employment is up 41% in this sector and the average weekly pay for non-managerial workers of $1,575 exceeds the pay of many other industries.
But that’s not enough to rescue what the economy lost in manufacturing. “The sector—with its 7.5 million non-managerial employees (7% of all private sector non-managerial jobs) is simply not large enough to weigh heavily in the national totals and the welfare of the labor force at large. Therefore, the ‘moving to higher ground’ hypothesis is far too slender a reed on which to build a national economic growth strategy for a nation of 327 million people.”
The idea of the ‘higher ground’ proponents was that the U.S. economy would take the high value work and become the idea and design base for the world’s great companies, while Asian economies would be left with the low-value ‘workshop,’ building the products.
“This theory has been proven to be incorrect,” says the JQI White Paper. “South Korea began that way in the 1960s, deferentially approaching leading US and European companies to learn about the latest manufacturing techniques. As time went on, it learned that designing the products and owning the brand names was far more lucrative. Today, South Korea is the world’s leading manufacturer of cellphones, televisions, and other consumer products. China, now the world’s manufacturing behemoth, hasn’t missed this fact… With other countries targeting what they see as high-value industries, the U.S. is not just in danger of, but actually has been, forced into greater reliance on low-value, low-growth industries, offering lower-wage, lower-hours jobs.”
5. Why Has U.S. Productivity Stalled?
Another standard economic puzzle has been the failure of productivity to increase over the past decade. Not really a surprise, says the JQI White Paper. “As more highly productive goods-producing jobs have declined over the past three decades, in favor of more, generally less productive categories of service jobs, it should be axiomatic that labor productivity gains would stall. And, comparing the trend of non-financial labor productivity growth from 1947 through 2009 to that from 2010 to date, then near-flatlining of productivity growth has been historic in its degree and duration.”
6. What Do The New Jobs Actually Look Like?
What do the new jobs actually look like? The JQI White Paper paints a grim picture. “The success of superstar companies like Google or Apple or Pfizer should not blind us to the fact that today Leisure & Hospitality is our largest sector with 14,7 million non-management employees. It’s a sector that pays such workers $16.58 an hour and the average worker works just 25.8 hours a week – resulting in average weekly income of $428. (Benefits like health insurance in the sector are small to nonexistent.)”
What were policy makers thinking while all th0se high-quality manufacturing jobs were being shipped to other countries? A clue comes from the remark attributed to Michael Boskin Chairman of President George H. W. Bush’s Council of Economic Advisors: “It doesn’t make any difference whether a country makes computer chips or potato chips!”
His flippant remark has proven tragically incorrect. “When all that a country has left is the domestic manufacture of processed foodstuffs,” concludes the JQI White Paper, “you end up with a lot of unhealthy and unwealthy workers who are in dire shortage of security, much less dignity. A republic that offers no better than this cannot long endure.”
Technical Note on the JQI
The US Private Sector Job Quality Index (JQI) measures the ratio of what the researchers call “high-quality” versus “low-quality” jobs. The JQI is the weighted ratio of the “high quality” jobs that pay more than the average weekly wage and tend to have more hours per week, and the “low quality” ones that pay less and offer fewer hours. The index is averaged over the previous three months to cut out the noise and adjusted to ensure inter-sectoral comparability.
Right now the JQI is just shy of 81, which implies that there are 81 high-quality jobs for every 100 low-quality ones. While that’s a slight improvement from early 2012—the JQI’s 30-year nadir—it’s still way down from 2006, the eve of the housing market crash, when the economy regularly supported about 90 good jobs per 100 lousy ones.
In effect, the US labor market has not fully recovered from the Great Recession. Worse, the long-term trend in the balance of jobs is even more ominous.
The intent is that the JQI will be updated and revised monthly, contemporaneously with the release of new data from the BLS, which normally occurs at 8.30am EST on the first Friday of each month. The JQI update and revision announcement will be released by 12:00 p.m. EST. The releases will highlight underlying causes of any material changes to the index and will note changes in trend direction as the they become evident.
“The JQI is filling a critical (and heretofore generally absent) piece of the economic puzzle,” say the authors. They “look forward to monitoring its periodic advances and rollovers as a forecasting tool. Further use of the JQI, in combination with other indicators, can better explain the failure of various factors—that have traditionally been viewed as directly having influence on one another—to perform as expected.”
The JQI White Paper indicates the areas of further work on improving the JQI. Clearly there are other dimensions of job quality beyond compensation and working hours. For instance, the current JQI does not include labor market security or the managerial quality of the workplace, elements that are included in the OECD approach of job quality. Nevertheless, the JQI is an important step toward understanding job quality and its central role in the U.S. economy.