By Ray Fisman
The recovery from the Great Recession of 2007-09 has been so anemic that the average American would probably be surprised to hear that the recession has officially ended. The National Bureau of Economic Research declared that it was over by June 2009, but the economy hasn't exactly come roaring back. In the 12 months that followed, GDP grew by a modest 2.5 percent, less than one-half of the bounce following the two previous recessions (in 1974-75 and 1981-82) that pundits often compare to the most recent one.
As to the cause of the slow recovery, there has been much finger-pointing: There is too little government stimulus; too much government stimulus; tax rates are too high; tax rates are too low. Erik Hurst, a macroeconomist at the University of Chicago, argues that_in contrast to earlier recessions, when the economy temporarily performed below its long-run capacity_the 2008 recession was a necessary corrective for an economy overheated and distorted by a credit-fueled housing bubble. If Hurst is right, we're now adjusting to a new normal, one in which there are fewer manufacturing jobs to go around and no housing boom to absorb all the unskilled workers who could have found work in a less globalized and computerized era.
While the recession reduced incomes and increased unemployment across all socioeconomic groups, the poor have been hit harder than anyone else. According to data from the U.S. Census Bureau, the bottom 20 percent of American families earned less in 2010 than they did in 2006, the year before the recession began. Every other income quintile is at least back at where they started, or even a little ahead. For the bottom quintile, this is just the most recent setback in a series of them: Their share of America's economic pie has been shrinking for decades.
There are two broad shifts that account for much of this decline: globalization and computerization. From T-shirts to toys, manufacturing jobs have migrated to low-wage countries like Vietnam, Bangladesh, and of course China. Meanwhile, many of the tasks that might have been done by middle-income Americans employed as bookkeepers or middle managers have been replaced by spreadsheets and data algorithms.
Hurst notes that fewer and fewer Americans with a high school education or less are finding employment in manufacturing. This is a trend that accelerated in the late 1990s. Some of those lost jobs resulted in twentysomethings exiting the labor force. But a great many were absorbed by a thriving construction sector. Between 1998 and 2007, the share of lower-education men employed in manufacturing fell from 15 to 10 percent, virtually a mirror image of construction, where the share increased from 15 to nearly 20 percent.
The wages of less educated men_which had been in decline since the 1970s_also enjoyed a brief reprieve in the late 1990s and into the following decade. Working with University of Chicago colleagues Kerwin Charles and Matthew Notowidigdo, Hurst found that these aggregate statistics for the United States as a whole have played out in miniature across the country, as one would expect if the housing boom were really behind the short-lived uptick in the employment and salaries for the bottom 20 percent. In regions where the housing booms were greatest, the employment prospects of low-skilled workers fared the best, while in places that the housing bubble passed by, the job prospects of such workers continued their inexorable decline. (The researchers also found that the increase in construction employment was only part of the explanation: Low-skilled service employment also went up in places with housing booms as local residents, feeling wealthier as a result of the increased value of their homes, spent more at restaurants, barber shops, and local retail establishments.)
Overall, Hurst and his co-authors estimate that roughly 40 percent of the increase in nonemployment (those who are unemployed but still looking for jobs, as well as those who have given up and exited the labor force entirely) since 2007 involves manufacturing jobs that were already lost during the earlier part of the decade. But the loss of these jobs was temporarily obscured by the housing boom that allowed low-skilled individuals to find work. (For the college-educated, there was at most a modest connection between the housing booms and employment.)
Do we expect the jobs that resulted from the housing boom to once again come to the rescue of low-wage Americans? Hurst doesn't think so. The run-up in home prices that triggered the jump in construction and local spending was relatively short-lived, and home prices have returned to the levels where one might expect them to be, based on the moderate price growth that has prevailed over many decades in just about every state in the Union. In New York, home prices grew at around 2.4 percent a year from 2000 to 2010, once you add up the 5 percent annual growth of 2000-07 and the bust that followed. This is not much different from the 2 percent annual growth that the state experienced from 1980 to 2000. Similarly, Nevada home prices declined slightly over 2000-10 despite the massive housing boom of the first half of the decade, just as they did during the years 1980-2000.
So just as we probably shouldn't expect home prices to come roaring back, don't hold your breath for a rapid recovery in employment_a lot of those jobs were already lost before the boom started, as a result of manufacturing's long-term decline. This presents a bleak future for low-skilled Americans: declining job prospects and wages with no obvious reversal in sight. This isn't anything new Hurst and his colleagues emphasize that the housing bubble merely provided a brief respite from this steady drop.
Few economists feel that there's much hope in propping up manufacturing businesses where they still exist_a lot of those jobs will continue to migrate to lower-wage locales. But at the same time, some leading labor economists are reasonably bullish on the long-term prospects for American workers if we make the right policy choices to prepare them for the new global economy.
While manufacturing jobs have long since departed for China and India, the U.S. economy continues to grow and even manufacture products that the world wants to buy we export more in dollar terms than we did a decade ago. But what we're sending (and how it's made) is drastically different today. As Enrico Moretti documents in compelling detail in a recently released book, The New Geography of Jobs, even if we don't assemble iPhones or sneakers in America, we supply their designs to those who do. And we do still make things_things like precision scientific instruments and jetliners. But the way we're producing them has changed as well: Even in sectors that have expanded production over the last decade, there are fewer jobs to be had the so-called productivity paradox. The reason? Production is increasingly automated, requiring more computers and fewer human beings.
All this adds up to an economy that generates just as much income, but with profits flowing into far fewer pockets than they did in the previous century. Moretti suggests that the prognosis for the average American worker need not be so gloomy if, as he predicts, America continues to thrive as a hub of knowledge generation and innovation. While the idea creators those who design iPhones and develop new drugs_will continue to be the drivers of prosperity, more than a few crumbs may fall to the workers who support them. For example, Moretti estimates that Microsoft alone is responsible for adding 120,000 low-skill jobs to the Seattle area, where the company is based. This is because of the support workers required to style the hair, cut the grass, and yes, build the houses, of all those Microsoft engineers and computer scientists. And they earn more doing it a barber in San Francisco earns about 40 percent more than his counterpart in Detroit or Riverside, Calif. So one way of boosting incomes of the bottom quintile would be to provide incentives for them to pick up and move from the rust belt to innovation hubs like Austin, San Francisco, and Boston.
Of course, if people actually start moving in significant numbers, the benefits of cutting hair or grass in Austin rather than Detroit will quickly evaporate_the price of low-income housing will be bid up, and the salaries of barbers bid down. In the longer run, the bottom 20 percent_indeed the bottom 99 percent will need to be retrained and re-educated to get a larger share of U.S. GDP. Eminent Harvard labor economist Larry Katz sees a future where many lower-skilled workers are employed in the service sector supporting America's innovative class. But he sees it as an open question as to whether these service jobs will be as sales clerks and lawn hands, or fashion consultants and landscape designers. Katz refers to these would-be consultants, designers, and other skilled service providers as forming the foundation of the New Artisan Economy.
If jobs are being lost to low-wage Indians and computer programs, then what today's worker needs is a set of skills that offers the personal touch and judgment that can't be provided by a machine or someone 12 time zones away. Katz argues that this will be crucial for those with only high school educations, who will need to learn a "high touch" trade_like personal trainers, kitchen designers, and home health aides_where personal interaction is critical. He makes a similar argument for the college educated as well: With many clerical and lower-level management jobs made obsolete by advances in information technology or lost to off-shoring, they'll have to reinvent themselves as, say, IT support professionals or consultants. (In making the argument that college graduates will also need to be retrained for the job market of the future, Katz points out that middle-income earners have gotten hammered the hardest in the past decade also part of a longer trend going back decades particularly in IT-intensive sectors.) Katz's hope for the new economy is a workforce whose skills make their services sufficiently desirable to Moretti's idea-creators that the bottom 99 percent do better than single-digit hourly wages in the job market.
An artisan economy can't be built overnight. We've spent the last decade funneling too many workers into construction jobs that may never come back. These workers now lack the skills required in Katz's economy of the future. And perhaps the most depressing statistic that Hurst points to in describing the plight of low-skill Americans is that, after falling steadily for 15 years, the fraction of men who stopped their educations by the end of high school went up by a few percent between 1997 and 2006, before resuming its decline. Why? Presumably more school looks less attractive to an 18-year-old if he can get a decent job doing construction. Not exactly a lost generation, but these are yet more young males who will need retraining to get decent jobs or even stay in the workforce.
Is America up to the task of retraining its workforce to be artisans rather than burger flippers? In recent congressional testimony, Katz is critical of current government training schemes like those funded under the Workforce Investment Act. He calls them "fragmented and difficult for many workers to navigate."
At the same time, Professor Katz maintains a glimmer of hope. As he observed in his testimony, there is emerging evidence that job retraining can be effective in teaching older workers new skills when done right. Amid the many failures, Katz points to some exceptional retraining programs that have demonstrated promise in helping workers to cost-effectively upgrade their earnings. For example, Per Scholas, a 15-week program in New York that provides training for installing and repairing computer networks, increased participants' annual incomes by nearly $5,000 within two years of beginning their training. Programs like Per Scholas produce these large effects through a combination of in-class instruction and on-the-job training, often with a post-training middleman to help with placement in a job where their skills are well-utilized. Katz calls for evidence-based funding that rewards programs that do well by their clients.
Realistically, it's going to be hard to transform an illiterate and innumerate burger flipper into an IT support specialist overnight Per Scholas, for example, will only take applicants with a high school diploma or GED who also test at the 10th grade level or higher in math and English. So Katz also sees improving basic education upgrading school quality and graduation rates, and channeling more graduates into post-secondary training as essential to building a new artisan economy.
Whether a gridlocked and partisan government can come together to develop a sensible agenda for skills development and job creation is an open question. But the future of the American worker depends on it.
Ray Fisman is a professor of social enterprise and director of the Social Enterprise Program at the Columbia Business School.