Jobs and Skills: the Current Mismatch

For at least 18 months, I have been arguing that the United States economy is going through a transition period that is more than just a cyclical slowdown and recovery. My argument has been that the economy is going through a period of restructuring that will take an extended amount of time to work out all the changes that are necessary.

As a consequence, “blunt-edge” efforts to stimulate jobs by means of the fiscal policy of the federal government will not achieve a great deal of success.

The reason for this in many cases is that the fiscal stimulus of the past 50 years has caused companies to keep aging physical capital in use and has resulted in these companies hiring people to perform jobs related to “legacy” technology.

The evidence I have provided for this is the increasing amount of unused capacity in the manufacturing realm and the growth in the number of employable Americans that are under-employed. To be under-employed, one is either unemployed, not fully employed and looking for full-time work, or discouraged and not seeking a job.

I have argued that this is not unlike the 1930s when the United States economy was going through a transition period in which jobs and employment were shifting from rural and agricultural areas to cities and industrial areas. The restructuring that took place accelerated during World War II and did not really calm down until the 1950s and 1960s.

Two reports came out toward the end of last week that support my claim of an economy that is in the process of restructuring. The first was an article by Motoko Rich that appeared in the New York Times on Friday July 2, with the title “Jobs Go Begging as Gap is Exposed in Worker Skills.” (http://www.nytimes.com/2010/07/02/business/economy/02manufacturing.html?_r=1&scp=2&sq=motoko%20rich&st=cse) Rich writes that “Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed.” The subheading to the article reads that “Shifts in Manufacturing are Leaving Many as Unemployable.”

The second report came from the Labor Department on Friday, July 3. Although the unemployment rate declined in May to 9.5 % from 9.7% in April, this was because the labor force shrank as more people left the labor force than were added to payrolls: the labor force shrunk by 0.3% while the number of individuals employed dropped by only 0.2% (due to the loss in jobs connected with the collection of Census data).

The official statistics report that the “underemployment” rate has been in the 17% range for the past year or so. I estimate that, currently, about one out of every four or five individuals that are in the employable age group are under-employed. The reason is that there is a tremendous mis-match between what employers need to be competitive in the future and the pool of skills and experience that are available in the labor market. Products are being made differently now than they were several years ago and this trend will continue. The current downturn has provided additional justification for manufacturers to make the changes that they need to make.

Why do they need this added justification?

Well, over the past 50 years, every time there was a recession (and even in periods when there was not a recession), the federal government provided fiscal stimulus to get people “back-to-work.” Back-to-work, however, meant putting people back into jobs that they were in before the workers were laid off. This is what the government wanted to happen.

However, putting people back to work in “legacy” jobs did not contribute to modernization and improved productivity. It did increase employment and reduce unemployment which is what the federal government wanted to achieve.

Now, businesses can use the excuse of the extreme downturn in the economy to justify the changes in who is hired to meet the reality of changes in training, skill levels, and experience that have occurred. And, this transition will not be completed overnight.

We see the same thing in the use of physical capital in the United States. Since the 1960s, the capacity utilization of manufacturers has declined steadily. As with the increase in the underemployed, the employment of the physical capital in the United States has fallen over time.

In January 1965, American manufacturers were working at 89.4% of capacity. The next peak in manufacturing usage (capacity utilization is very cyclical) came in February 1973 at 88.8% of capacity. The following peaks were: December 1978 at 86.6% of capacity; January 1989 at 85.2% of capacity; December 1997 at 84.7% of capacity; and April 2007 at 81.7% of capacity.

Note that the troughs of the cycles in capacity utilization also fell since the 1960s. In December 1982, manufacturers in the United States worked at 70.9% of capacity and in June 2009, they worked at 68.2%. Currently, manufacturers are working at 74.1% of capacity.

In essence, businesses in the United States have been utilizing less and less human and physical capital over the past 50 years relative to the amounts of these productive factors that have been available. And, the policy makers just don’t seem to get it.

From Rich, in the article cited above, “Christina D. Romer, chairwoman of the Council of Economic Advisers, said the skills shortages reported by employers stem largely from a long-term structural shift in manufacturing, which should not be confused with the recent downturn. ‘I do think that manufacturing can come back to what it was before the recession,’ she said.” So, manufacturing will return to the new, lower level of capacity utilization that was achieved at its previous peak level, roughly 82% of capacity. And, this is good?

My guess is that capacity utilization will hit, maybe, 80% at the next peak. We are still talking about 20% of the manufacturing capital of the United States being underemployed, right in line with the 20% to 25% of employable labor in the United States being underemployed.

The fiscal stimulus proposed by “fundamentalist” Keynesian economists will not do the job. Additional, “blunt-edge” governmental expenditures may alleviate some of the current worker distress, but at the cost of postponing the adjustments that need to be made to restructure the economy, the restructuring that is now going on.

The problem with the “fundamentalist” Keynesian view is that it is constructed from a short term perspective. The basic attitude is that which is attributed to Keynes: “In the long run we are all dead.” This approach leads to a focus on only “current” problems. What is not explicitly stated is that we will deal with the longer-term problems when they become current problems.

The difficulty with this: the longer-term problems may require a different “medicine” than did the short-run problems.

Well, one could argue that the longer-term problems have become current. The short-term solution of forcing many companies to continue to employ people in “legacy” jobs and to continue to use “legacy” plant and equipment has resulted in higher and higher rates of worker under-employment and lower and lower rates of manufacturing capacity utilization.

Just more of the same does not seem to be an adequate answer.

The Two-Sided Recovery

The stories continue to come in that the recovery is proceeding. Just looking at the morning papers gives one a feeling that things are on the mend. Note these three stories that appeared in the Wall Street Journal today.

• Construction of Single-Family Homes up 1.5%: http://online.wsj.com/article/SB20001424052748703444804575071003242087756.html#mod=todays_us_page_one.
  
• Fed’s Minutes Show a Rise in Confidence in Economy: http://online.wsj.com/article/SB20001424052748703444804575071542235270442.html#mod=todays_us_page_one.
  
• Factories Get Set to Hire: http://online.wsj.com/article/SB20001424052748704398804575071652158793106.html#mod=todays_us_page_one.

One can even look at the charts of financial data from the Federal Reserve Bank of St. Louis and observe that the Great Recession ended in July 2009!

Yet, there is another side to the recovery that keeps us uncomfortable about where we are going. And, it is this other side to the story that creates the uncertainties of what will ultimately take place over the next five to ten years. It is this uncertainty that, I believe, is currently preventing many to commit more aggressively to the future.

This other side, the dark side, is perplexing government policy makers and sending off mixed signals to the private sector. The economy is recovering, but we need more fiscal stimulus, maybe another $100 billion package, to speed things along the way. The Federal Reserve needs to begin selling securities into the open market and just get back to a portfolio of US Treasury securities, but the banking system…well at least the small- and medium-sized banks…still has major difficulties to overcome, and, the economy is still proving extremely fragile. Starting to tighten up on monetary policy could produce major problems for the banks and for the economy recovery: when should the Fed begin removing excess reserves from the banking system.

Giving into the dark side, however, presents other problems. The federal deficit is projected to be more than $1.0 trillion per year for quite a few years, but this does not include any additional stimulus that might be approved and it assumes that a health care program will not add “one dime” to the deficit. Furthermore, it does not include major environmental programs, energy programs, and other initiatives that the Obama administration wants to “stay the course” on.

Also, questions remain about the Federal Reserve’s “undoing”. With more than $1.1 trillion in excess reserves in the banking system, concern still remains that these excess reserves can be removed before the banking system generates a lending bubble and excessive growth in money and credit. And, this “undoing” is to take place during a decade in which the federal debt may grow by $15 trillion! There is no historical precedent available to give us comfort that the Federal Reserve can “undo” what has been done and what apparently will be done without inflation raising its ugly head.

Yet, inflation is the prescription for the easing of debt burdens, and there certainly are enough debt burdens around. Greece, Spain, Italy, Portugal, and other sovereign nations have garnered a lot of press in recent weeks about their debt burdens.

But, we don’t stop there. Closer to home, news about debt problems continue to surface. Over the past month, more and more stories have hit the newspapers about the fiscal problems that states are having meeting their debt obligations. More and more information is coming out about the difficulties that municipalities are having. Note in the Wall Street Journal this morning, “Muni Threat: Cities Weigh Chapter 9”: http://online.wsj.com/article/SB20001424052748704398804575071591602878062.html#mod=todays_us_money_and_investing?mg=com-wsj. Bankruptcy is certainly a way to deleverage!

Deleveraging continues in the private sector. Businesses and households continue to reduce debt loads, willingly or unwillingly, through foreclosure or bankruptcy or by paying down debt as cash flows allow. The bad news is that this deleveraging still seems to have quite a ways to go before it comes to an end. The good news is that this deleveraging is working itself out without major disruptions to the financial system. Most institutions recognize that a major debt problem still exists and that means, hopefully, that there will not be any surprise shocks in the future.

This brings us back to the problem of sovereign debt. The bind here is that nations do not believe that they can begin a process of slowing down debt growth let alone deleverage when their economies are still fragile and in need of fiscal stimulus.

It is here that we get into the conflicting “views of the world” that are clouding the decision making at the present time. The reigning philosophy in governmental circles, as well as in the academic and intellectual world, is that government spending and debt creation is needed to sustain the economic recovery and regain more robust growth in the future. Others are not convinced that this is the case. In this latter view, arguments are made that the current path being followed by many governments, ala’ Greece, are not sustainable and are, ultimately, self-destructive.

For now, for the United States, the betting is on continued fiscal stimulus, substantial deficits, and a Federal Reserve that is unable to “undo” what it has already done. This will be the foundation of a credit inflation that will be consistent with the economic policies of the federal government for most of the past fifty years or so. These policies are the ones that brought about an 83% decline in the purchasing power of the dollar over this time period.

But, as I continue to argue, following this kind of policy has created other problems for the United States (and other Western countries). It has resulted in the growth of under-employment and unused industrial capacity. And, it has resulted in a growing bifurcation of the society.

On this point, the latest edition of The Economist magazine contains the review of an interesting book: “The Pinch: How the Baby Boomers Took their Children’s Future—and Why They Should Give it Back” by David Willetts.” The book focuses on the chasm that has been developing in society over the past 50 years or so, a chasm between the older part of society and the younger part, between the more educated and the less educated, between those that have accumulated assets, primarily housing, and those that have not. .

Willetts argues that the “Baby Boomers” had a “piggy bank”, their own home. Though government help or subsidy or inflation, the “Boomers” were able to own a home (and possibly a second home), build up wealth by means of rising housing prices, and then even borrow against their homes to finance a comfortable old age. The “Non-Boomers” and the younger generation have not been able to access this “wealth machine”, have been unable to finance many of the things the older generation were able to finance, including more education, and face the fact that they may have to work later into life. These individuals, especially the less educated, have had to remain in “legacy” jobs and industries. The bottom line is that these structural problems will have to be addressed, sooner or later.

My concern is that although the economic recovery seems to be proceeding. The forces driving the recovery are not going toward reducing or eliminating the imbalances that have been built up in the economy over the past 50 years. Furthermore, the policymakers seem to be putting themselves into boxes that have very negative implications for the future. As a consequence, we are, at best, heading into an economic and financial future that is not different from the past: credit inflation, and further underemployment, unused economic resources and societal divisions.