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October 18, 2003

Why the Jobless Recovery?

A few high level views of what's behind the odd situation of continued "economic growth" (statistically measured) combined with continued high unemployment:

From Morgan Stanley's Stephen Roach:

I see it, what’s special is an increasingly powerful global labor arbitrage between domestic and foreign labor input that has given rise to a surge in offshore outsourcing. The result is a jobless recovery built on an increasingly tenuous foundation of “imported productivity.”...

If that presumption is correct, then as much as a third of the so-called productivity bonanza of this recovery can be attributed to a shortfall in domestic hiring. Absent that windfall, productivity growth over the first six quarters of this expansion actually would have fallen well short of its typical recovery profile...

[T]his shortfall of internally driven income generation could end up spelling serious trouble for the overly indebted, saving-short American consumer. In short, there’s good reason to doubt the sustainability of a recovery built on a foundation of imported productivity.

The flip side of this saga is, of course, quite beneficial to Corporate America. Sourcing demand through low-cost, offshore labor input has become an increasingly important tactic to enhance the operating efficiency of US businesses...

Or this from an interview with John Challenger, chief executive officer of Challenger, Gray & Christmas, Inc., an international outplacement firm in Chicago:
A few months back, Challenger predicted that the job market would start bouncing back late this year.

His thinking now, though, is that the bounce will be relatively small -- and awfully slow. He doesn't expect a real boom until maybe 2008.

Why? Companies spent so much on technology during the Y2K scare that they made themselves far more efficient, so they don't need to rehire workers even as the economy improves.

"We're still digesting that technology," Challenger said in an interview. "They don't need more people this time around."

There were seven months of job losses while the economy was growing and worker productivity was exploding," he said.

Challenger said the gross domestic product grew at an annual rate of 3.1 percent during the second quarter, and economists expect it to improve.

But he pointed out that we're also at a time when more than 2.1 million people who want to work have been unemployed for 27 weeks or longer -- the highest level of long-term unemployment since November 1983.

"We're into a period of time that might be called a jobless expansion," he said.

Are some jobs getting added? Of course. But they tend to pay less than what many unemployed workers are used to.

The message of these kinds of analyses is that the tech boom of the 90s was real; it's just that the jobs that fueled the deployment of the technology are less needed now that most companies bought their initial round of investments.

And they are using that technology to eliminate older jobs that the technology made redundant, or using new communication technology to coordinate work overseas in ways that just would not have been possible before.

All of this fuels more efficient production and nominal economic growth, but leaves Americans with fewer and often poorer paying jobs.

Update: Louis Uchitelle argues the problem is just old-fashioned overcapacity:

Not since the severe recession of the early 1980's has capacity use in manufacturing stayed so low for so long, government data show. Production as a percentage of total capacity fell precipitously in the aftermath of the last recession, which ended in 2001, and 23 months into the recovery, the upturn has still not come. On average, manufacturers are using less than 73 percent of their capacity.

Posted by Nathan at October 18, 2003 02:09 PM