New unemployment numbers and the future of the economy

On Friday, December 4 2009, the Bureau of Labor released its quarterly jobs report. Results were greeted with muted enthusiasm; the President cautiously hailed the numbers and his advisers and spokespeople were generally upbeat. Of course, that is what to expect even if it is not entirely logical. A big part of the Presidents job is to maintain faith in the economy. Without faith and hope the economy would collapse and we would all be bartering our household items with one another instead of hoping to find a job or start a small business.

So what is the real situation? Is there anything to be optimistic about?

Well, yes, but maybe not the kinds of things the President and his cabinet are talking about.

The numbers released yesterday do not show that hiring is increasing. The President is celebrating the fact that jobs are disappearing less quickly. That's a good thing, of course, but nothing much to cheer about, really. The significant numbers, the ones that most of us are most affected by, involve the length of time people have been out of work. The portion of the unemployed who have been out of work for more than six months is now at 38%, an increase of 18% in the last three months. That is almost six million people, the most ever since 1948, both in terms of total numbers and portion of the unemployed. At the same time, the short term unemployed (less than 14 weeks) decreased by about 11% (BLS 2009; MSNBC 2009 December 12). Long term unemployed tend to stay unemployed while those who have been recently laid off have a much better chance of finding another job.

The real problem is not length of unemployment, however. That is only a symptom of several much wider and more troublesome trends. First, economists tell us that this recession is structural, meaning that fundamentals of the economy are changing (Rissman 2009; Groshen & Potter 2003). That means that entire sectors of the economy are undergoing change - maybe even disappearing entirely.

This has happened before, in the 1980's when transportation costs dramatically decreased thanks to container shipping, and again in the late 1990's when computers and the Internet combined to reduce costs of business. In the first case we transitioned form an industrial based economy to a service economy. The decrease in shipping costs, combined with cheap labor in Asia, effectively put American industries out of business. Suddenly people who had been employed in factories found themselves without jobs - and those jobs never came back. Production workers were forced into the service industry that paid a fraction of what they earned previously.

In the late 1990's computer programs started replacing workers who simply repeat known procedures. Bank tellers were replaced by ATM machines, full charge bookkeepers were replaced by QuickBooks and secretaries were replaced by Microsoft Word, for example. This was the beginning of the knowledge sector of the service economy. Simply repeating a process is no longer good enough; now workers must increase the value of a process by using their knowledge or intellect in ways that computers cannot (yet).

So, what can we expect this time around?

Most notably, look for an increase in nontraditional employment arraignments. The future economy will probably not be as stable as it has been in the past, meaning that business will be cautious about hiring permanent workers and workers may be looking for new ways to ensure economic security.

Lakshman Achuthan and Anirvan Banerji, both on Time magazine's Board of Economists and principles of The Economic Cycle Research Institute, recently wrote an analysis for National Public Radio predicting an increase in business volatility (Achuthan, L. & Banerji A. 2009). In other words, they think there will be more frequent minor recessions that will hold the unemployment rate at high levels. That means that the numbers of long term unemployed will likely increase, and that many will never go back to traditional jobs.

Companies will likely hire temps over permanent workers, at least in the early stages of recovery. However, this might also be a long term trend. Temporary workers insulate businesses from fluctuation in demand, and it might be a long while until all sectors of the economy stabilize. Littler Mendelson, a law firm specializing in labor law recently released an analysis predicting that at least 30% and as much as 50% of the future US labor force will be made up of contingent workers (Speizer 2009 December 1). This could mean that half the labor force would work in ad hoc networks, similar to the film industry - specialists working together for the duration of specific projects, without health insurance or job security, and for a much lower wage than that of the pre-Great Recession era. Government sponsored health and unemployment insurance might be the grease that allows such a system to run smoothly.

However, this future will not be limited to people on the bottom end of the labor scale.

Asia has been building top notch universities for the last twenty years and produces world class professional scientists, engineers and business analysts. In the 1980's heavy industry got outsourced to Asia, and now anything that can be digitized and sent over the Internet is fair game of Asian labor. In the same way that creative works like songs and movies lend themselves to distribution through file sharing, knowledge work lends itself to global distribution via the Internet. Businesses of the very near future can hire an engineer in India or the Philippines using the Internet without the hassle of H1B visas or the expense of health insurance and quarterly withholding. Of course, since the standard of living is lower in those countries wages are lower as well.

This means that education is not the cure all for unemployment. Even before the recession a glut of educated professionals was emerging. Community colleges have been moving towards requiring instructors to have PhDs for the last couple of years, and have no trouble filling vacancies. Traditional employment sectors of the highly educated -- science and education - no longer need more employees, yet there are still record numbers of students in the pipeline for these degrees.

If the future of the economy involves wide use of temporary workers it is inevitable that professionals will join the ranks of the contingent workforce as well. From the perspective of business this is more economical because it allows the expertise of expensive professionals to be applied for only as long as it is needed. For tasks in which personal attention is required - managing focus groups as part of marketing or strategic analysis, for example - this would be an advantage for professionals became it allows them to target their expertise to those things they are particularly skilled and to charge a correspondingly high rate. However, unlike lower status workers temporary work is familiar to professionals because it is much like consulting. We may see educated people creating professional consultancies at a much greater rate than ever before.

What will the future economy look like? Impossible to say for sure, but maybe it will be more localized and entrepreneurial. It may be that large organizations are an artifact of industrial economies, and following that stage a service and knowledge orientation emerges that is more receptive to entrepreneurship. For most of our economic history people have been self employed as farmers and shopkeepers - maybe that is a natural economic state. Instead of farming and shop keeping maybe the drivers of the economy of the future will be knowledge and service - things that can be digitized and done remotely, but also delivered more intimately depending on the specific need. Maybe success in the future economy will involve entrepreneurial contract and consultancy work addressing specialized tasks that must be done personally.

At any rate, the future is full of possibility and promise, even though the immediate outlook might be awfully bleak. It is important to remain positive, look to the future, and seize opportunities inherent in change.
Vic Napier

References

Achuthan, L. & Banerji A. (2009). Analysis: Good News On Jobs, But Will It Last? NPR.org. Available at: http://www.npr.org/templates/story/story.php?storyId=121087285

BLS (2009). Employment Situation Summary. The Employment Situation -- November 2009. Available at: http://www.bls.gov/news.release/empsit.nr0.htm

Groshen, E. L., & Potter, S. (2003). Has Structural Change Contributed to a Jobless Recovery? . Current Issues in Economics and Finance 9(8), 7.

MSNBC (2009 December 12). A Deeper Look Behind Jobless Numbers. Available at: http://www.msnbc.msn.com/id/34280589/ns/business-stocks_and_economy/

Rissman, E. R. (2009). Employment growth: Cyclical movements or structural change? Economic Perspectives, 2009(4Q), 18.

Speizer, I. (2009 December 1). Special Report on Contingent Staffing. Workforce Management. Available at: http://www.workforce.com/section/06/feature/26/84/06/index_printer.html