Why Job Gains are Still So Modest - and it Could Get Much Worse

The economic recovery is now four years old -- the anniversary comes this month – yet job growth remains a big problem.  Since the recession technically ended in June 2009, American businesses have expanded their workforces at an average annual rate of 1.4 percent, creating some 6.1 million new jobs.  The good news is that we’re creating new jobs at twice the rate seen in the first four years of the last expansion.  Nevertheless, the job gains are much smaller than those seen in the early years of the expansions of the 1980s and 1990s.   So, is this ongoing problem simply a feature of the slower economic growth of this cycle, or have American businesses lost some of their storied capacity for generating new jobs?  The answer is, some of both – and over the next decade, new technologies could further aggravate the problem.

To get at why this is happening, you have to first take account of the character and basic features of these economic cycles.  For example, job creation bounces back more sharply after a deep recession than following a milder downturn.  So, we start by comparing the job gains seen over the last four years, following the Great Recession of 2007-2009, with those following the deep downturn of 1981-1982.  The gap is very large:  The 1.4 percent annual growth in private employment over the last four years is 61 percent less than the 3.6 percent annual job gains seen during the first four years of the 1982-1989 expansion.   We see a similar disparity between job creation in the first four of the two most recent expansions that followed more moderate recessions.  The 0.7 percent annual rate of job growth over the first four years of the 2002-2007 expansion was 68 percent less than the 2.2 percent annual job gains seen in the first four years of the 1991-2000 expansion.   Something has changed.

The most obvious change is that every successive expansion since the 1980s has seen progressively lower rates of economic growth, especially in the early years.  U.S. GDP grew by an average of 5 percent per-year in the first four years of the 1980s expansion, followed by 3.4 percent annual gains in the first four years of the 1990s expansion, 3.0 percent growth per-year in the early years of the 2002-2007 expansion, and just 2.3 percent average annual growth over the last four years.  As Keynesians have insisted, the slower economy should explain much of the recent slowdown in job gains – although not all of it.

We can calculate roughly how much of the slowdown in job gains can be traced to the slower economy by adjusting the rates of job creation for the rates of overall growth.  Those calculations suggest that if the economy had grown as fast over the last four years as it did in the first four years of the 1980s expansion, we could have seen 3.0 percent annual job gains instead of just 1.4 percent average job growth.  Since jobs actually grew in the early 1980s by an average of 3.6 percent per-year, as much as 80 percent of the current slowdown in job creation may simply reflect slower economic growth.  So, while recent austerity measures – the sequester, increases in payroll and income tax rates, and so on – do not explain all of the slowdown in growth, their apparent impact on jobs is powerful testimony to how misguided those measures have been.

Thinking through job creation in this way, then, tells us that some 20 percent of our current employment problem, and perhaps more, is “structural.”  Put another way, U.S. businesses now respond to economic growth by creating fewer jobs than they used to.

Technological advances, of course, are one of the driving forces at play here.  The countless applications of information technologies (IT) across every industry and economic activity have created considerable wealth, but they also displace more jobs than they create.  Consider our manufacturing workforce, which contracted nearly 28 percent over the last two decades, falling from 16,480,000 positions in 1992 to 11,951,000 in 2012.  All of these job losses can be accounted for by workers with high school diplomas or less, whose number in manufacturing declined by more than 40 percent.  The picture is different for workers with the skills to operate in an IT-dense workplace:  Over the same 20 years, manufacturing jobs held by college graduates increased by 2.4 percent and the number with graduate degrees jumped 44 percent.

The latest threat to jobs, according to many technologists, is coming from robotics, the application of information technologies to new forms of kinetic hardware.   Today, businesses worldwide employ some 1.4 million industrial robots, mainly in automobile and electronics assembly.  Those numbers appear to be rising quickly.  For example, FOXCONN, the Taiwan-based giant that assembles 40 percent of the world’s consumer electronics -- and employs 1.2 million workers around the world -- has announced plans to purchase 1 million new robots over the next three years.

A new report from the Atlantic Council  catalogues the growing number of large-scale, public-private R&D programs underway.  The U.S. effort is led by DARPA, NASA and firms such as Raytheon and iRobot, with grants from the NSF National Robotics Initiative playing a venture capital role.  In Japan, the FANUC Corporation and the Ministry of Economy, Trade and Industry have taken the lead.  In Korea, the Ministry of the Knowledge Economy is working with LG and Samsung.  And in Europe, the European Network of Robotic Research is collaborating with companies such as Philips and the ABB Group.

No one can predict the direction or dimensions of robotics a decade from now.  Nevertheless, the next generation of the technology will be able to draw on important recent developments, such as the first, open source Robot Operating System as well as advances that allow robots to retrieve and manipulate objects outside the structured environment of an assembly line.  In the last year, for example, Willow Garage released a new personal robot that can fold laundry and pour beer, the French firm Robotsoft showcased robots that monitor elderly patients, Italian and Swedish firms offered robotic landscapers, a Japanese company unveiled its new robot teachers, and South Koreans developed robots to assist firefighters and provide basic child care.  The first large-scale application of the technology may well involve transportation.  Drone technology could force early retirement on thousands of pilots, and future variations of Google’s driverless car could displace tens of thousands of teamsters, cabbies and bus drivers.  In any case, our structural problems with job growth are likely to worsen.

This post was originally published in Dr. Shapiro's blog